Elimination of AMP CAP for Medicaid

Implications of AMP Cap Removal and 3 Questions All Plan Sponsors Should Ask their PBM

July 18, 2024

Recent regulatory changes to the process state Medicaid pharmacy programs receive rebate payments from drug manufacturers are having significant implications for managed care pharmacy. At first glance, these changes may appear small and only concern Medicaid plan stakeholders. However, the broader industry response to the removal of manufacturer rebate caps has triggered a chain reaction that is affecting many stakeholders, including self-funded commercial plans and their patientsIn this article, we will detail three questions every pharmacy plan sponsor should discuss with their PBM regarding the potential impacts AMP cap removal will have on their plan.   

Background on Average Manufacturer Price (AMP) and Medicaid Rebate Caps

The Medicaid Drug Rebate Program (MDRP) helped establish a pathway for drug manufacturers to provide additional rebate payments to federal/state governments in exchange for coverage of their drugs on Medicaid formularies. Since 2010, a rebate cap has been in effect that limits MDRP rebates at 100% of the quarterly average manufacturer price, or AMP, for any given drug.  This cap offered added protection for drug manufacturers, as the inflationary component of AMP for a drug whose price increases quickly could cause the rebate payment to be in excess of their drug’s AMP. 

In March 2021, President Biden signed the American Rescue Plan Act which included a provision that eliminated the cap on Medicaid reimbursements effective January 1, 2024. While this policy change is projected to save the federal government more than $17 billion over the next decade, the projected savings would mainly come at the expense of drug manufacturer revenue. Consequently, the drug manufacturing industry response to the removal of the rebate cap and subsequent ramifications should prompt every plan sponsor to ask three important questions to their PBM.  

Question 1: How will the AMP Cap removal impact my plan’s formulary, state PDL, and/or member access to treatment options?

To mitigate the potential liability for increased Medicaid rebate payments, some drug manufacturers are opting to reduce their drugs’ list prices or in some cases choosing to discontinue certain products entirely.  Last year, major insulin manufacturers Novo Nordisk, Eli Lilly, and Sanofi announced significant list price reductions for their popular insulin products. By lowering their product’s list prices, these manufacturers are protected from the possibility of paying Medicaid rebates in excess of their drug’s AMP. However, insulin products have long been a significant contributor to total payer rebates, as many PBM formularies would offer manufacturer’s preferred placement in exchange for substantial rebates off their drugs’ list price. Following the list price reduction, and subsequent reduction in rebate payments, many PBMs are beginning to adjust their formulary strategies. OptumRx, for instance, announced the inclusion of eight preferred insulin products on Tier 1 of their standard commercial formularies.  

While this may enhance access to some products through formulary placement, there may be negative consequences for other patients. For example, Novo Nordisk announced the discontinuation of their insulin product, Levemir, by the end of 2024.  Additionally, GSK announced they will discontinue Flovent to focus on producing an authorized generic, which they will control without the history of price increases that would have triggered an increased rebate liability following the AMP cap removal. The Flovent authorized generic is still expected to be considered a brand, and therefore may not be covered on every plan’s formulary.  It is crucial for plan sponsors to inquire about both positive and negative changes to their formularies and drug access that may be indirectly linked to AMP cap removal.  

Question 2: What impact will the removal of AMP Cap have for my plan’s rebates this year and in the future?

Another important factor to consider amid manufacturers lowering specific drug list prices is how this practice will impact overall payer rebates. Diabetes treatments, particularly insulin products, are typically the primary therapeutic category generating substantial rebate payments for plan sponsors. Plan sponsors should anticipate the removal of AMP cap will likely indirectly lead to reduced rebate payouts in the future, which will greatly impact future fiscal planning cycles for stakeholders expecting rebates to remain stable.   

Whether a plan will ultimately benefit from the lower list prices and the loss of rebates depends on their specific drug mix and utilization within the plan, which may make accurate budget prediction challenging for plan sponsors in the future. 

Question 3: How is the PBM planning to address any potential rebate shortfalls?

PBMs frequently provide a minimum rebate guarantee to plan sponsors as part of their contractual agreements. The recent elimination of insulin rebates was largely unforeseen by the PBM industry and likely not accounted for during earlier payer contract negotiations. It is crucial for plan sponsors to discuss whether their PBM will uphold their current minimum rebate guarantees or address any resulting shortfalls. 

It is possible some PBMs may choose to invoke their Reservation of Rights Clause, which permits adjustments to contractual obligations in response to unexpected market changes. As pharmacy benefit contracts expire or are renegotiated, plan sponsors should anticipate that their PBMs will likely reassess their future guarantees to reflect the altered rebate landscape. Plan sponsors should engage their legal teams in these discussions to ensure a comprehensive understanding of their PBM contract language and any new amendments 

Future Payer Implications

Plan sponsors should anticipate more potential pricing strategy changes by drug manufacturers for additional drug classes, as insulins may represent the proverbial “canary in the coalmine.” Generally, brand drugs with significant price increases over time are the most at risk for changes. Furthermore, it is possible some drug manufacturers might opt to set higher initial prices for new drugs rather than gradually increasing prices over time with inflation. Ultimately, these potential pricing strategy changes could have a significant financial impact for plan sponsors given today’s robust drug pipeline. 

The Growing Importance of PBM Oversight

The AMP cap removal highlights yet another aspect of the growing complexity in managing pharmacy benefits. Often, changes in one area of the market can have indirect, but far-reaching, implications in another seemingly unrelated area. Therefore, it is more important than ever for plan sponsors to have a robust pharmacy payment integrity plan and a trusted partner to help them optimize the performance of their PBM. Ongoing monitoring solutions, like HDS’s Claim Scan, provide near real-time PBM performance tracking to contractual guarantees (including quarterly rebate reconciliations), as well as claim-level visibility into 100% of adjudicated prescriptions. With Claim Scan and HDS pharmacy analytics professionals, plan sponsors have a second set of eyes, highlighting potential underperformance or adjudication errors during the plan year.  

The HDS pharmacy team continually works with clients to augment our library of claim scanning rules to ensure the evolving complexity of pharmacy can be simplified, organized, and distilled into actionable insights for plan sponsors. To learn more about how Claim Scan ongoing pharmacy benefit monitoring can help protect your pharmacy benefit performance and prepare your plan for the constantly evolving pharmacy benefits landscape, set up a discovery call with one of our business development reps today. 

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