Thursday’s budget hearing raised an eye-opening fact about the impact of increasing pharmaceutical prices on New York’s Medicaid program: Rebates reduce the state’s bottom-line cost by almost half.

Manufacturer rebates – some mandated by federal law, others negotiated by the state – currently average about 45 percent of the program’s gross drug costs, state Medicaid director Jason Helgerson testified.

Despite the size of the rebates, officials commonly use pre-rebate figures when discussing drug spending, which exaggerates the impact of price hikes.

Governor Cuomo’s budget briefing book, for example, said Medicaid’s “gross prescription drug costs have grown by $1.7 billion or approximately 38 percent over the last three years.”

This was referring to pre-rebate outlays of $6.2 billion in fiscal year 2015-16, up from $4.5 billion in 2013-14.

However, rebates would have reduced the net increase to about $940 million. And since the federal government picks up half the cost of New York’s Medicaid program, the state’s share of the growth over three years would have been roughly $470 million.

That’s nothing to sneeze at, but far less than the impact of the governor’s minimum wage increase – which is projected to add $838 million to the state’s Medicaid costs, or $1.7 billion to state-federal Medicaid spending, over the next three years.

Under questioning by lawmakers, Helgerson and Health Commissioner Howard Zucker also confirmed that price increases for existing drugs – such as the controversial hikes for EpiPens used to control allergic reactions – have little impact on Medicaid. This is because federal Medicaid law requires manufacturers to rebate the amount of any hike that exceeds the inflation rate.

However, that rule does not protect Medicaid from new products that start out with high prices, such as hepatitis C drugs that can cost tens of thousands of dollars for a course of treatment.

This is not to say that rising pharmaceutical costs are not a significant concern, especially for commercial insurers. Health plans say prescription drugs are the fastest-growing component of their medical claims. And Department of Financial Services Superintendent Maria Vullo testified Thursday that drug costs, net of rebates, now account for 25 percent of health premiums regulated by her agency, compared to 18 percent for inpatient hospital care.

In January, Cuomo proposed a four-part plan to control drug costs:

• For certain high-priced drugs, the Department of Health would be empowered to collect detailed financial information from the manufacturer and establish a “benchmark price.”
• For drugs sold to Medicaid, manufacturers would have to rebate any amount above the benchmark.
• For drugs sold to commercial insurers, the state would impose a 60 percent tax on any amount above the benchmark, then distribute the money to health plans to offset premiums.
• The state would also regulate pharmacy benefit managers, which buy drugs on behalf of health plans and play an increasingly powerful but sometimes murky role in negotiating discounts and rebates.

The plan faces potentially stiff opposition from the pharmaceutical industry, which argues that the proposed price controls would squelch innovation and run afoul of federal law.

Cuomo’s proposal is analyzed in more detail here.