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Medicaid Inflation Penalty

Medicaid Inflation Penalty

Medicaid Inflation Penalty is a rebate that a pharmaceutical manufacturer pays to Medicaid when the price of the drugs grows faster than the rate of inflation. This rebate came into effect in the first quarter of 2017.

At a first glance, this penalty seems to affect only manufacturers with aggressive pricing strategy.

In reality, however, the Inflation Penalty affects all manufacturers and must be taken into account seriously.


Inflation penalty is calculated on an NDC-9 level and becomes a component of Unit Rebate Amount (URA).

It relies on a Base Average Manufacturer Price (AMP) – the product AMP taken at the Base Quarter.

The Base Quarter is calculated as a formula of the product Market Date, reported to DDR. Brand and generic products have different formulas for the Base Quarter. For more details, please check CMS Manufacturer Release #101, “Clarification on the New Additional Inflation-Adjusted Rebate Requirement for Non-Innovator Multiple Source Drugs”.

If AMP for a current quarter grew faster than Consumer Price Index (CPI) grew over the same period of time, the difference between the current AMP and pro-rated Base AMP is the Inflation Penalty.

If the inflation Penalty is negative, it is reset to zero.

If the sum of Basic URA and the Inflation Penalty is greater than AMP, then the total rebate is equal to AMP.

What Can Go Wrong?

Here we will review two serious issues.

1. Great AMP Variance

The first problem occurs when product sales during the Base Quarter happen to be low, and rebates and credits earned by customers during previous quarters have noticeably lowered the AMP even after the mandatory smoothing was applied.

This situation can happen if a key account with an annual volume rebate paid annually terminated the relationship and was paid the rebate at a later date. This rebate will be allocated to remaining customers and even with smoothing in place will greatly lower the AMP.

Once the Base AMP has been calculated low, the manufacturer is pretty much stuck, with no way out. The Base Quarter depends on the Market Date and cannot be changed. Re-calculating AMP will produce the same results, unless the company’s Government  Policy is changed – which is not an ordinary step to take.

How bad can this be for the company?

Very bad!

The CMS release states that the total URA, which is the sum of the quarter URA and Inflation Penalty, can be no greater than the product AMP!

For generic drugs, URA equal to AMP means a sevenffold growth of Medicaid rebates from 13% to 100% of AMP, due to the Inflation Penalty!

Paying Medicaid rebates with URA equal to AMP means, that “product sales to Medicaid” should rather be called “giving free goods to Medicaid”.

Unfortunately, this situation happened in the real world. In all cases, manufacturers had no option except to terminate the drugs in question.

2. Deflation

The second issue happens when CPI for the current quarter happens to be lower than for the Base Quarter. This scenario also took place recently.

As the pro-rated Base AMP becomes lower than the current AMP, the Medicaid Inflation Penalty kicks in and raises URA even though the manufacturer did not raise drug prices!

Interestingly, that URA does not decrease when the price of the drug remains below the pro-rated Base AMP.


Medicaid Inflation Penalty rebate affects all manufacturers: those who raise prices for their drugs and those who do not.

For new products, manufacturers have to reserve sufficient inventory for the Base Quarter, and give minimal discounts. Avoid short-dated sales during the Base Quarter!

When preparing Government Pricing Policy, ensure that all significant rebates, chargebacks and other price concessions are smoothed over twelve months.

For multi-year rebate agreements with customers, stipulate that partial rebate payments happen on a regular basis, and preferably, more than once a year.



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