Hello readers! Today's post focuses on a topic we've touched on a few times in the past – Medicaid drug formularies.

Back in December 2021, the state of Oregon released a draft Medicaid waiver proposal that caught the attention of many stakeholders. In the draft proposal, Oregon stated that it was considering asking CMS for approval to a) adopt a commercial-style closed drug formulary and b) exclude from Medicaid coverage certain drugs approved via the accelerated approval pathway “with limited or inadequate evidence of clinical efficacy.” Oregon proposed to “use its own rigorous review process to determine coverage of new drugs and to prioritize patient access to clinically proven, effective drugs.”

After a state-level public comment period, Oregon submitted its final application to CMS on February 18, 2022. Notably, “based on feedback received during public comment” Oregon “remov[ed] its request for a closed formulary from the final application.” However, Oregon is proceeding with its request to allow the exclusion of accelerated approval drugs “with limited or inadequate evidence of clinical efficacy.”

Oregon states that it modified this latter aspect of the proposal “to address concerns brought up in public comment.” Specifically, Oregon states that under the modified proposal its drug review process will apply “FDA-developed guidance and timetables” to determine coverage of accelerated approval drugs that had not yet been granted “conversion to full FDA approval in the expected time interval.”

[Note to readers: the FDA grants “accelerated approval” to certain drugs that achieve surrogate endpoints considered to be predictors of clinical outcomes. The FDA provides manufacturers a certain time period by which to complete confirmatory trials for these drugs. If these trials confirm the drug can achieve the specified clinical outcome, the FDA converts the drug status from accelerated to full approval. Accelerated approval drugs have received a lot of attention over the last year or so. Just last year, MACPAC endorsed a policy by which manufacturers of drugs approved via the accelerated pathway would be required to pay higher rebates under the MDRP until completion of post-market confirmatory trials. The policy, which would require a statutory change to the MDRP, has not yet gained traction in Congress].

Although Oregon states that it is no longer pursuing a “closed formulary” – on its face it appears Oregon's request to exclude accelerated approval drugs would conflict with the state's requirement to operate an “open formulary” which is fundamental to the “grand bargain” between state Medicaid programs and drug manufacturers.

The “Grand Bargain”

A brief description of this grand bargain is in order. As my colleague Ross detailed previously:

[W]hile prescription drugs are an “optional” benefit under the Medicaid program for states, all states currently offer coverage for outpatient prescription drugs. In offering prescription drug coverage under their state plan authority, states must agree (by way of section 1902(a)(54) of the Social Security Act) to certain conditions which are set forth in section 1927. Section 1927 sets forth the requirements for the Medicaid Drug Rebate Program (MDRP). Under the MDRP, once a prescription drug manufacturer has agreed to pay rebates under the law's rebate scheme to be shared between the state and Federal government, states are generally required to cover the manufacturer's drug.

In practice, this means that state Medicaid programs generally must operate “open” formularies. The manufacturer provides the state a rebate, and in return the state guarantees coverage of the manufacturer's product in its Medicaid program. States can also negotiate higher rebates from certain manufacturers (“supplemental rebates”) in exchange for preferential treatment of the manufacturer's drug on the state's formulary and/or preferred drug list. However, states generally cannot negotiate for the exclusion of other drugs in the manufacturer's product's class.

This latter arrangement – which constitutes a closed drug formulary – would conflict with a state's statutory obligation to cover all drugs of a manufacturer participating in the MDRP.  However, some states have turned to section 1115 demonstrations as a possible workaround.

Past State Requests

Under section 1115 demonstrations, CMS can agree to waive certain statutory requirements to allow the state to experiment with specific aspects of its Medicaid program, as long CMS determines the demonstration is likely to further Medicaid's objectives.

Massachusetts was the first state to attempt to circumvent the statutory hurdle via a section 1115 demonstration (albeit unsuccessfully). As my colleague Tom wrote here, in 2018 Massachusetts became the first state to submit a request to implement a closed formulary in its Medicaid program. (Interestingly, Massachusetts' request was spearheaded by Dan Tsai, then the state's Medicaid director, and now the head of the Centers for Medicaid & CHIP Services in CMS). Specifically, Massachusetts sought to waive 1902(a)(54), which is the requirement in section 1902 that provides that states must comply with section 1927. Thus, Massachusetts attempted to waive 1927 by way of 1902, which, as mentioned above, is within the list of provisions CMS can waive. However, CMS ultimately rejected Massachusetts' request, indicating that a state could not simultaneously participate in (and benefit from) the MDRP and implement a closed formulary.

Then we have Tennessee. As my colleague Ross detailed here, during the Trump administration CMS approved Tennessee's request to use a closed formulary as part of its larger aggregate cap demonstration. Notably, however, in order to circumvent the “grand bargain” mentioned above, under the waiver Tennessee would not provide prescription drug coverage under sections 1905 (optional prescription drug benefit) and 1927 (the MDRP), and thus would not be under any MDRP open formulary obligation. Instead, such coverage would be offered under section 1115(a)(2) of Medicaid's waiver authority, which permits the state to treat as expenditures eligible for Federal matching payments services not otherwise covered (in this case, prescription drug coverage not complying with the MDRP). CMS argued this was possible because section 1115(a)(2) provides that expenditures “be regarded as expenditures under the State plan.” Thus, the manufacturer rebate obligation would remain even though the drugs provided would not be covered under 1927, because the amounts Tennessee expends on drugs would be treated as if they were provided under 1927. The Biden Administration has paused this demonstration and opened a new public comment period of the waiver request. As such, the legal status of the demonstration, and its closed formulary, are currently unclear.

Oregon's Request

Oregon's request poses a somewhat novel issue for the agency. Oregon states it is dropping its closed formulary request, but its proposal to exclude from coverage accelerated approval drugs would nonetheless conflict with its statutory open formulary requirement, and raises similar, if not the same, legal issues. In fact, even though Oregon states it is no longer pursuing a closed formulary, its scaled back request directly mirrors Massachusetts' unsuccessful closed formulary request in terms of the specific statutory requirements the state is asking CMS to waive (1927 by way of 1902).

Thus, the question is presumably the same: can a state that participates in the MDRP decline to cover a drug without running afoul of the “grand bargain”? Oregon's request, however, adds a wrinkle to this analysis, in that it only seeks to exclude certain drugs approved under one particular FDA pathway. Thus, in order to clear the grand bargain hurdle, the state and CMS will have to show that there is something unique about drugs approved under the accelerated pathway that distinguishes them from all other drugs under the MDRP, and which justifies denying accelerated approval drugs the same level of protection afforded to all other drugs under the MDRP.

As mentioned above, Oregon submitted its application to CMS on February 18^th. We will be following this issue closely, and will report back on any developments. Stay tuned!