This is part of our Medicaid Concepts series, in which we provide a high level overview of key concepts in the Medicaid industry today.

What do we mean by Medicaid Drug Discount Programs?

One of the main ways that Medicaid agencies can control spending on drug benefits is by entering into rebate agreements with drug manufacturers. These rebate agreements offer Medicaid programs a discount on drug pricing in exchange for allowing drug manufacturers access to the very large markets of Medicaid membership. States can participate in the national Medicaid Drug Rebate Program (MDRP) and receive the discounts.

The other major drug discount program in the Medicaid space is the 340B program. This program allows “covered entities” to purchase drugs at a discount, and then resell those drugs at normal prices (thus keeping the difference).

What role does Medicaid play?

The national MDRP is managed by federal HHS. When states choose to participate, they must allow all drugs that have been negotiated at the federal level. States can also enter into “supplemental agreements” with manufacturers, which in effect provide preferential placement on a state’s drug formulary.

While the 340B program was designed to allow smaller hospitals and other providers to purchase drugs more cheaply, it has evolved into a way to generate increased revenues. States have noticed this and have begun to “take back” management of the drug benefit from health plans in order for the state to obtain these revenues.