State Medicaid Programs Already Have Considerable Flexibility to Adopt Innovative Payment Models for New High-Cost Prescription Drugs

As I have previously warned, the ongoing prescription drug pricing debate could intentionally or unintentionally lead to significant harm to the Medicaid program and its effective Drug Rebate Program.  That, in turn, could result in higher federal and state Medicaid drug costs and reduced beneficiary access to needed medications.

One key element of the Medicaid Drug Rebate Program is its “best price” requirement.  Under the rebate program, manufacturers of brand-name drugs must pay a base rebate to state Medicaid programs equal to 23.1 percent of the Average Manufacturer Price (AMP) or the AMP minus the best price provided to most other purchasers, whichever is greater.  (Manufacturers must also pay an additional rebate if the prices of their drugs rise faster than general inflation.)  The intent of the best price provision is to ensure that Medicaid obtains discounts at least as large as those available to other payers, including private insurance.  It therefore significantly reduces Medicaid prescription drug costs, with the federal government and the states sharing in the savings.

The best price requirement, however, has been the subject of misleading criticism for years, particularly from drug manufacturers and some private insurers.  Now, the approval and pending approval of new, very high-cost drugs are being used to justify the latest series of attacks.  For example, the CEO of Novartis, the maker of a new $2.125 million pediatric drug treating spinal muscular atrophy, has argued that Medicaid’s best price requirement is obstructing the use of multi-year payment models and outcome-based contracts to help certain payers better afford the cost of the drug.  Around the same time, Scott Gottlieb, the former FDA Commissioner, wrote that state Medicaid programs could not absorb the cost of costly gene therapies and other drugs and ensure that Medicaid beneficiaries could receive these new treatments without the use of pay-over-time arrangements, subscription models (like in Louisiana, as discussed further below), or other new payment approaches.  But according to Gottlieb, that would require “federal legislation that frees drugmakers from the mandatory discounting, restrictions and reporting requirements that hobble innovative payment schemes.”

Yet state Medicaid programs already can adopt these kinds of payment approaches under current law.  Since June 2018, five states — Oklahoma, Michigan, Colorado, Washington and Louisiana — have received approval from the Centers for Medicare and Medicaid Services for state plan amendments (without waivers) to institute value-based purchasing arrangements with drug manufacturers.  Oklahoma, Michigan and Colorado are negotiating supplemental rebates (on top of the rebates required under the Medicaid Drug Rebate Program) that vary based on the clinical outcomes produced by manufacturers’ drugs.  Louisiana and Washington are instituting a “subscription” model under which their Medicaid programs will pay a fixed annual amount to drug manufacturers for an unlimited supply of drugs that treat low-income beneficiaries with Hepatitis C.  (It appears that manufacturers will essentially provide supplemental rebates that fully offset the cost of additional Hepatitis C drugs once the annual amount is exceeded.)

Based on federal regulations at 42 C.F.R. § 447.505(c)(7)), CMS clearly stated in its approval of Louisiana’s subscription model that “supplemental rebates paid by drug manufacturers to states are exempt from the Medicaid ‘best price’ rule.”  In other words, the Medicaid Drug Rebate Program’s best price requirement currently poses no obstacle to states pursuing innovative payment models — not just outcome-based contracts and a subscription approach but likely pay-over-time arrangements as well — that attempt to address the cost of costly prescription drugs so long as such models include a supplemental rebate component.

The recent misleading claims about best price should be seen for what they likely really are: efforts to instead seriously weaken or entirely eliminate the best price requirement in Medicaid.  Undermining best price would result in certain manufacturers of brand-name drugs paying considerably smaller rebates to state Medicaid programs than they would under current law and receiving a financial windfall, while further driving up Medicaid drug costs and leading to states being forced to make damaging cuts that reduce low-income beneficiaries’ access to needed care, including to prescription drugs.

Edwin Park is a Research Professor at the Georgetown University McCourt School of Public Policy.