Trump Administration Encourages States to Seek Waivers to Opt Out of Medicaid Drug Rebate Program

On June 27, the Centers for Medicare and Medicaid Services partially approved Massachusetts’ Medicaid waiver proposal, but among other provisions, rejected a proposal to impose a “closed formulary” for prescription drugs under which the state could entirely exclude coverage of certain drugs in ways not permitted under current law.  Instead, CMS expressed openness to approving waivers under which states could use a closed formulary but only if they entirely opt out of the effective Medicaid drug rebate program.  Such damaging waivers would likely be similar to the highly flawed Trump Administration budget proposal to establish a demonstration project for up to five states to drop out of the rebate program and negotiate directly with drug manufacturers.  Urging states to take up these waivers is consistent with ongoing Administration efforts to undermine the Medicaid rebate program, such as misleading criticisms of the program included in the HHS drug pricing blueprint that don’t withstand scrutiny.

As I’ve previously explained about the demonstration project proposal, it is highly unlikely that states seeking such Medicaid prescription drug waivers could somehow negotiate better discounts with drug manufacturers than what is provided under the Medicaid drug rebate program today using leverage from being able to impose a fully closed formulary.

That’s because current Medicaid rebates are significantly larger —three times greater according to the HHS Office of Inspector General and the Congressional Budget Office — than what are negotiated by Medicare Part D insurers who can use restricted or closed formularies (except in the case of select protected classes).  Medicaid rebates thus reduced total Medicaid drug spending by 51.3 percent in 2016, compared to rebate savings of only 19.9 percent in Medicare Part D.  Medicaid rebates are also much greater than those negotiated by private insurance plans which can have closed formularies without any protected classes.  Altarum, for example, estimates Medicaid obtains rebates for brand-name drugs that are nearly four times larger than those negotiated by insurers in the private insurance markets.  

In addition, a very large share of Medicaid rebates comes from inflation-related rebates — accounting for 54 percent of total rebates for selected drugs in 2012 — under which manufacturers pay additional rebates if their prices rise faster than inflation.  Yet the base rebate (which for brand-name drugs is equal to the higher of 23.1 percent of the Average Manufacturer Price or the best price discount provided to most payers and for generic drugs, is equal to 13 percent of AMP) is likely to be the primary focus of negotiations between states and manufacturers.  And the current base rebate is already guaranteed to provide the best price. Finally, states with waivers would not even know how the rebates they negotiate compare to current rebate levels, as best price data reported by manufacturers and unit rebate amounts calculated by the Centers for Medicare and Medicaid Services are confidential and not shared by the federal government with the states.   

Moreover, the voluntary supplemental rebates that nearly all states now negotiate with manufacturers for at least some drugs (either on their own or as part of multi-state purchasing pools) are relatively small — 3 to 6 percent above the federal rebate amounts — according to one study conducted by a Pharmacy Benefit Manager (PBM) contracting with state Medicaid programs.  Those supplemental rebates are derived from preferred drug lists, under which states require prior authorization before a drug is dispensed.  While these drug lists are not true closed formularies, they operate under a similar approach: manufacturers provide supplemental rebates in exchange for their drugs being placed on the preferred, rather than non-preferred, Medicaid drug list.  

As a result, were a state to obtain a waiver opting out of the Medicaid drug rebate program, it would be virtually certain that it would not produce larger rebates that result in lower federal and state Medicaid prescription drug costs, relative to current law.  In fact, such a waiver would increase federal Medicaid costs — which would violate the budget neutrality requirement that applies to section 1115 Medicaid waivers — if the negotiated rebates turn out to be less than current rebate amounts, as is highly likely. For example, the Congressional Budget Office estimates no savings from the Administration’s budget proposal.   Even HHS and the Office of Management and Budget are skeptical that the demonstration proposal will actually yield lower costs; they estimate that the proposal would only reduce federal Medicaid spending by $35 million over five years and $85 million over ten years.

If state Medicaid waivers opting out of the rebate program could satisfy budget neutrality and produce any savings, it would likely only be the result of states using the new authority to impose a closed formulary to unduly restrict access to needed high-cost drugs, including those with high clinical value.  In other words, savings would result from a negative volume effect — from beneficiaries not getting the drugs they require — rather than from any price effect. In its letter denying Massachusetts’ closed formulary proposal, CMS provides no detail on what standards or requirements would need to apply to states applying for waivers to opt out of the rebate program and establish closed formularies.  (The Administration also has not provided any such detail as part of its demonstration project proposal.) Could drugs or entire drug classes be excluded solely based on cost, rather than any clinical criteria? How would drug classes be defined? Even for on-formulary drugs, would states be able to impose stringent prior authorization requirements that are inconsistent with clinical practice standards?  

The only requirement in the demonstration project proposal, which may also apply to approval of waivers, is that there would be “an appeals process so beneficiaries can access non-covered drugs based on medical need”.  But it is likely that any such appeals process would be substantively far weaker and more burdensome and time-consuming than what must be provided under current law. (For example, state Medicaid programs must now respond to prior authorization requests within 24 hours, and provide a 72-hour supply in emergency situations.)  

Low-income Medicaid beneficiaries, especially the most vulnerable like people with disabilities and chronic conditions, would thus be at risk of going without needed drug treatments if the medications they need are simply dropped from Medicaid formularies due to cost or they cannot satisfy overly restrictive clinical requirements.  Initial state actions to impose unduly restrictive prior authorization and coverage criteria of very high-cost drugs that treat Hepatitis C in apparent violation of the requirements of the Medicaid drug rebate program are instructive and could be an indication of what states participating in the demonstration project may do with any new closed formulary authority.

It is also important to recognize that for the same reasons, even if CMS had approved Massachusetts’ waiver proposal to impose a closed formulary with the effective rebate program remaining in place, providing Massachusetts (and other states) such authority raises serious concerns about whether beneficiaries would retain access to needed prescription drugs.  The waiver application proposed a minimum of only one drug per therapeutic class without any protected classes (which is more restrictive than under Medicare Part D which requires two drugs per class and establishes six protected drug classes).  It promised that selected drugs would meet the “clinical needs of the vast majority of members,” which appears to acknowledge that the formulary could exclude drugs needed by beneficiaries with relatively rare conditions. In addition, while it would establish an exceptions process to cover off-formulary drugs when medically necessary, the waiver application did not provide any detail about when specific clinical needs of a patient would justify access to drugs excluded from the formulary.  (The waiver application only stated that the procedures for seeking an exemption would be similar to the procedures for the existing prior authorization process for non-preferred drugs.)

Later, Massachusetts indicated it would add additional “guardrails” and “member protections” although it never amended the waiver application or included such beneficiary provisions in the latest failed bill language seeking approval for this aspect of the waiver from the state legislature.  Yet, at the same time, the state also appeared to acknowledge that high cost by itself (irrespective of clinical efficacy or value) could have been justification for exclusion if the state was unable to come to a “fair and reasonable” supplemental rebate agreement with a manufacturer or if it has been unable to collect penalty payments from the manufacturer on the basis of unreasonable or excessive prices.  This clearly raises the risk that Massachusetts could have used closed formulary authority, if it had been approved by CMS, to deny coverage of a clinical breakthrough drug solely because of cost, not just in case of low-value drugs that aren’t more clinically effective than existing lower-cost drugs. It should also be noted that in its waiver application, Massachusetts never assumed specific savings from its closed formulary proposal, which implies the state itself was uncertain about whether it could generate much larger supplemental rebates than it does now (without the closed formulary authority leading to significantly reduced access and harm to beneficiaries).

Moreover, it is likely that if other states were granted similar closed formulary authority, many would have far fewer beneficiary protections than even what Massachusetts was proposing to provide.  Lastly, even if CMS was willing to grant a closed formulary waiver with the rebate program remaining in place, it is highly unlikely that this Administration would insist that the rigorous protections needed to help ensure beneficiary access be incorporated in a waiver and/or that such protections be enforced or implemented in meaningful ways.

Edwin Park is a Research Professor at the Georgetown University McCourt School of Public Policy’s Center for Children and Families.