Medicaid Managed Care Proposed Rule: Provisions Relevant to the Biopharmaceutical Industry

On May 26, 2015 the Centers for Medicare & Medicaid Services (CMS) released its long-awaited proposed rule designed to modernize the Medicaid managed care regulations (last updated in 2002) to reflect changes in the use and growth of the managed care program and to align the program more closely with other existing healthcare programs, including Medicare/Medicare Advantage and qualified health plans offered by Exchanges.

As of FY 2011, at least 39 million individuals (or 58% of all Medicaid beneficiaries) access all or part of their Medicaid benefits through managed care plans (MCOs). Below we highlight several of the major proposals included in the rule most relevant to the biopharmaceutical industry. Note that several major proposals (including a new MLR requirement for Medicaid MCOs) are not discussed below.

CMS is accepting comments on the proposed rule through 5 p.m. on July 27, 2015.

  • In Lieu of Services. CMS formally addresses a rarely discussed authority – the use of “in lieu of services” – in the proposed rule. “In lieu of services” are alternative services in a setting that are not included in the state plan or otherwise covered by the contract but are medically appropriate, cost-effective substitutes for state plan services included within a contract. CMS (in authorizing the payment for services provided in an Institution for Mental Disease) states that MCOs may not require an enrollee to use an “in lieu of arrangement” as a substitute for a state plan coverage service or setting, but may offer and cover such services or settings as a means of ensuring that appropriate care is provided in a cost effective manner.  While this proposal does not immediately impact Medicaid drug coverage, it has a larger, long-term potential to impact Medicaid coverage by granting MCOs (and States) the flexibility to offer coverage for non-traditional Medicaid items and services.
  • Access to Covered Outpatient Drugs Off-Formulary. CMS proposes a number of changes to the standards for contract terms (between states and MCOs), some of which have an impact on coverage of outpatient drugs.   CMS proposes to add a new subsection or subsections to 42 CFR 438.3 to add standards for contracts with MCOs that are contractually obligated to provide coverage of covered outpatient drugs to beneficiaries. The new standards are intended to clarify that when an MCO provides prescription drug coverage, the coverage must meet the standards specified in the definition of coverage outpatient drugs included in the Social Security Act.
    • In particular, when a patient has a medical need for a drug that is not included on the plan’s formulary but that is within the scope of the contract, the MCO must cover the drug under a prior authorization process.
    • CMS also clarifies that if an MCO is not contractually obligated to provide coverage of a particular drug under its contract, the state is required to provide the drug through fee-for-service.
  • Appeals and Grievances. CMS proposes to update the appeals and grievances system relevant to Medicaid managed care to more closely align the system with the rules for Medicare Advantage, private health insurance and group health plans. Most of these changes are not substantive, but instead bring more uniformity to the terms and conditions applicable to appeals and grievances. The proposal clarifies that MCOs may only have one level of appeal before beneficiaries exhaust the MCO’s internal appeals process, triggering the State Fair Hearing process. Aligning the procedures with other healthcare programs in some instances shortens existing timeframes: for example, CMS proposes to reduce the timeframes MCOs have to make a decision about standardized enrollee appeals from 45 days to 30 calendar days and expedited enrollee appeals from 3 working days to 72 hours.
  • Drug Utilization Data and Double Dipping. Under the terms of the proposed rule, MCOs will be required to report drug utilization data necessary for the state to bill for Medicaid rebates within 45 calendar days after the end of each quarterly rebate period. This requirement is being implemented to comply with a provision of the Social Security Act requiring states to bill manufacturers for rebates for drugs dispensed to enrollees of MCOs. In addition, CMS proposes that MCOs must have procedures in place to exclude utilization data for drugs subject to discounts under the 340B program (to avoid double dipping).
  • Prior Authorization Timelines. CMS clarifies in the proposed rule that MCOs must comply with the statutory drug review provisions in the Social Security Act. In particular, MCOs must provide a response to a request for prior authorization for covered outpatient drugs within 24 hours of a request and dispense a 72-hour supply in an emergency situation.
  • Access to Formularies. CMS proposes to require MCOs to provide their medical formularies electronically or on paper, if requested. The formularies must display all covered medications (both generic and brand name) and have the tier of each medication. CMS is also proposing that formulary drug lists be made available on the MCO’s website.


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