Since August, 2017, a new class of transformative therapies referred to as cell therapies or gene therapies have been approved by the US Food and Drug Administration (FDA).  These new cell and gene therapies are typically administered once, as opposed to repeatedly over the course of the patient's lifetime.

Payers, providers, and manufacturers have been considering how existing payment systems – particularly Medicare and Medicaid – can recognize the value of these new treatments.  For example, Medicare (and many state Medicaid plans) reimburse hospitals for inpatient services on the basis of diagnosis-related groupings, or DRGs.  But DRGs do not reflect the costs of new treatments; they are set based on historical costs.  As a result, current reimbursement rates may not account for the cost of a new gene or cell therapy.

In early February, the Massachusetts Medicaid program (which is commonly called “MassHealth”) took an unprecedented step to address some of these concerns.  MassHealth announced that, beginning March 1, it would remove the costs of certain drugs from the bundled hospital payment rate (both inpatient and outpatient) and instead pay for them separately. These drugs are called, in the announcement, “carve-out drugs,” a term defined to mean drugs that are individually identified by MassHealth and paid separately from the base hospital payment rate.  Although the list of carve-out drugs has not yet been made available, it seems clear from the context of the announcement that they will include the new class of gene and cell therapies.

The payment amount for the carve-out drugs will be set at the lesser of the hospital's acquisition cost for the drug; the wholesale acquisition cost of the drug; or, if applicable, the Medicare Part B payment for the drug (typically, the average sales price of the drug plus 6%).  MassHealth makes clear that the hospital's “acquisition cost” of the drug will reflect discounts, chargebacks, rebates, and other price concessions.  This policy is necessary to ensure that MassHealth is not paying for a mark-up that is not reflected in the acquisition cost of the drug to the hospital.

Many manufacturers of the new gene and cell therapies are considering offering payment arrangements for providers or payers such as efficacy, outcome, or performance-based contracts.  For example, if a patient receives such a therapy but it does not achieve its intended result, the provider may not be charged for the drug.  The MassHealth announcement requires that hospitals participate in these arrangements if they are offered and, if a hospital is not charged for a drug (or if they are charged but later receive a refund), the provider must make MassHealth whole.

Under the MassHealth announcement, a hospital must seek prior authorization before dispensing a drug on the carve-out list and must keep the agency updated on the patient's progress.  It must use a designated form to claim payment under the pass-through system.  Finally, MassHealth expects that hospitals will repay the agency for any overpayments as a result of the new methodology.

One consideration under this new policy is its implication under the Medicaid Drug Rebate Program and the 340B prescription drug discount program.  Under the Medicaid prescription drug rebate program, manufacturers must pay rebates to state Medicaid agencies on covered outpatient drugs.  Importantly, drugs paid as part of a bundled payment, are exempt from the Medicaid definition of “covered outpatient drug.”  The same policies and definitions apply in the 340B program.  Adoption of the new policy by MassHealth is likely to result in these new therapies being subject to rebates under the prescription drug rebate program and, if acquired by some hospitals, subject to rebates under the 340B program.

Given the transformative potential of new gene and cell therapies to cure serious diseases, policymakers are beginning to design policies to ensure access to patients.  The MassHealth announcement is a first step and could serve as a model for other state Medicaid programs and possibly the Medicare program.  The MassHealth policy may be the first but it will likely not be the last.