Paying for Value in Medicaid Prescription Drug Coverage

My colleague Ross Margulies has already told our readers about a provision of the new proposed Medicaid regulation governing how the program pays for outpatient prescription drugs under the Medicaid Drug Rebate Program, or MDRP.  Today, we turn our attention to another provision of that proposed rule, and that is CMS’s attempts to permit pharmaceutical manufacturers, states, and commercial payers to enter into value based payment arrangements for covered outpatient drugs.  This provision of the proposed rule has generated a lot of attention, at least among us health policy wonks.

There are a lot of good reasons to consider value based arrangements in Medicaid.  For one thing, the Medicaid prescription drug rebate regulation has not been meaningfully updated in the 30 years since the underlying statute was enacted in 1990.  The law has been tweaked, and the regulations have been updated to reflect those tweaks, but CMS has not changed its basic interpretation of the statute for three decades.

Another reason to update the regulation is that the science underlying the types of therapies subject to the MDRP is advancing rapidly.  When the MDRP was enacted, the vast majority of prescription drugs were small molecule inert chemicals.  The use of biologic organisms as therapeutic agents was only just beginning to be understood.  Today, the Food and Drug Administration (FDA) is approving gene therapies that, by altering the expression of a defective gene, have the potential to cure disease after a one-time administration.  The underlying science is changing, but the regulations have not kept pace.  The proposed rule is an attempt to address that.

And finally, there is continuing, ongoing concern about the high cost of prescription drugs.  Last year, we told you about proposed legislation being considered by the United States Senate that would have altered Medicare and Medicaid reimbursement for prescription drugs, but that legislation was never enacted.  Meanwhile, drug prices continue to escalate and payers (including state Medicaid programs) have suggested:  in return for these high prices, manufacturers should bear some risk if a high-cost therapy fails to achieve its potential as expressed on the FDA label for the drug.  The proposed rule will, if it is adopted, facilitate these risk-sharing arrangements.

The rule proposes three main changes to the MDRP.  For starters, the rule would define the term “value-based purchasing arrangement” to describe any arrangement or agreement intended to align pricing or payment to an observed or expected therapeutic or clinical value in a population.  Arrangements could include evidence-based or outcomes-based measures.  We should note that, even if the rule is finalized, we don’t expect that manufacturers will enter into value-based arrangements for most drugs.  Where we think they will be most common is for extremely high-cost drugs, like the new gene therapies coming to market.

Second, CMS proposes a means to address a concern that manufacturers have indicated makes them reluctant to enter into value-based arrangements:  the “best price” feature of the MDRP.  Under the MDRP, Medicaid is almost always guaranteed the best price of any payer. If the list price for a drug is $100, and the manufacturer offers a health plan a $40 rebate off the price of the drug, Medicaid must get that same rebate.  The concern that manufacturers have expressed is:  what if 100 patients take our therapy, and one fails?  If, under our value-based arrangement, we don’t charge the payer for the one patient who fails, does that effectively reset our best price to zero because one payer didn’t have to pay for the drug?

CMS proposes to address this concern by redefining the term “bundled sale” in the regulation.  The proposed rule would allow a manufacturer to effectively allocate the zero price in the example above across all sales of the drug, thereby ameliorating the effect of the one failure of the drug to achieve its expected clinical result.  As CMS notes, “[t]his smooths out the discount [in our example above, the zero price] over all the units sold under the arrangement in the rebate period and does not reset the manufacturer’s best price based upon the ultimate price of one unit of the drug.”

Finally, under the proposed rule, CMS would allow a manufacturer participating in a value-based purchasing arrangement to have multiple price points for a drug that is the subject of a value-based arrangement.  This is a change from CMS’s current definition, which is that each drug can only have one best price.  Under the proposed rule, a drug can have more than one pricing point, each of which can establish a “best price” based on the relevant payment arrangement.  The agency feels that this policy, when combined with its re-interpretation of “bundled sale,” could facilitate value-based payment arrangements.

Absent from the rule is any discussion of another proposal advanced by manufacturers and payers:  the ability to pay for a therapy over time.  Suppose that a drug has a list price of $500,000.  A payer may want to pay for the drug over five years, and retain the flexibility to stop payments if the drug fails.  But a payment over time arrangement introduces complexities regarding the calculation of the average manufacturer’s price (AMP), the base rebate, and the best price of the drug.

Let’s take this example one step further to illustrate the problem.  Under the MDRP, the base rebate for a  drug is 23.1% of its AMP.  In the example above, the AMP for the drug is $500,000.  In year one, the manufacturer receives a payment of $100,000 – but its rebate obligation based on the AMP of the drug is $115,500:  $15,500 more than the manufacturer received in payment.

The obvious solution would seem to be to allow the manufacturer to pay its rebate proportionately over the five year period, but the CMS proposed rule does not permit this to happen.  We think it is likely that states and manufacturers will address this concern during the public comment period, and we’ll see if CMS addresses it when it promulgates the final rule.

At present, some states and some manufacturers have entered into small-scale value based purchasing arrangements through the use of supplemental rebate agreements.  We’ve told you about some of these in the past.  Our expectation – and we think that of states and CMS – is that these arrangements will likely increase once the proposed rule is finalized.

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