While the new Affordable Health Care law provides a variety of funding opportunities for states, one provision in the health law that could shift billions of dollars from cash-strapped states to the federal government. Under the National Medicaid Drug Rebate Program  created by the Omnibus Budget Reconciliation Act of 1990, drug manufacturers are required to enter into agreements that provide rebates for Medicaid purchased drugs, establishing a 15% minimum level of rebates. Up until now, the rebates were divided between the states and the federal government. But under the new health reform law, a significant portion of the rebates will go solely to Washington beginning this year.
Changes in Federal and State Rebate Share: On the positive side, the Affordable Care Act now requires greater discounts in Medicaid rebates  by increasing the minimum rebate level from 15% to 23.1% for most brand name medications. This increase, which also applies to manufacturers of generics, is projected to raise $36 billion over 10 years. Under the old policy, states sent Washington a proportion equal to the share of Medicaid funding the federal government paid. But now, the new federal reform law allows the federal government to keep 100 percent of the rebate  that falls within the 15.1 to 23.1 percent range. Any rebates above 23.1 percent will continue to be shared. According to the office of Senate Majority Leader Harry Reid the change was necessary to help pay for a $434 billion  10-year increase in federal Medicaid funding.
Some States Stand To Lose Millions: Based on 2009 Medicaid data, states received average rebates of 38.5 percent a year ago, well above the previously required 15 percent, so the change will cost them dearly. California, for instance, could lose as much as $50 million  next year alone because of the changes. Indiana predicts losses of $400 million over the next 10 years. And because the new policy is retroactive to 2010, Vermont stands to lose $2.3 million in fiscal year 2010 and $4.2 million in FY 2012.
What States Can Do: If states move quickly , they can secure both federal best price rebates and state supplemental rebates that can realize Medicaid rebates as high as 40-50%- increasing the rebate portion states hold onto and offsetting losses.
One key step is to secure clear state data on base prices from which rebates are calculated. Currently, the federal government is barred by a court order  from sharing data on the Average Manufacturer Price (AMP) and federal Best Price with the states, so since states don’t get this price data reported to them , state laws need to be in place to require drug companies to report AMP and best price directly to them.
Only Maine  and Vermont have apparently passed such reporting laws. To respond to this emergency, Maine Rep. Sharon Treat, who also serves as Executive Director of the National Legislative Association on Prescription Drug Prices (NLARx), recommends that State Medicaid directors and State Legislatures need to immediately review their preferred drug lists. They need to make changes from a clinical perspective to reflect retroactive changes in rebate policies that will affect their budgets this year. States also need to pass a state drug price reporting law.
See also model AMP/best price legislation  to address this data reporting issue.
Medicaid Rebates Now Available for Medicaid Managed Care Plans: One more twist on the changes affecting Medicaid rebates is that another provision of the federal law will help to offset the loss of rebate dollars in some of the states. For the first time, drug rebates will be allowed for drugs sold to State Medicaid managed care plans . Forty-one states use managed care plans  and in total this accounts for about 70 percent of Medicaid enrollees across the country. However, only 16 of them depend on the managed care programs to administer drug benefits, while others have opted to pay for many drugs directly to get rebates. Clearly the new managed care policy strongly favors those 16 states. The provision will encourage more states to use managed care plans for drug coverage, which could lead to a reduction in drug spending. Arizona is one of the states that will see a major benefit . Its entire Medicaid program is run through managed care plans, so the state did not benefit in the past from the federally required rebates.
CMS - National Drug Rebate Agreement
Kaiser Health News - States' Medicaid Funds Tapped For Federal Health Overhaul
National Legislative Association on Prescription Drug Prices - Special Report: States Must Act Now to Preserve Medicaid Drug Rebates!
National Legislative Association on Prescription Drug Prices - Model Law: Manufacturer Drug Price Reporting
Inside Health Reform - States Upset With Guidance On Medicaid Dug Rebates, Still Have Questions 
Inside Health Reform - Reid Bill Would 'Recapture' $20 Billion In Medicaid Rebates From States