On Thursday, July 25, the Senate Finance Committee is scheduled to consider bipartisan drug pricing legislation (known as the Prescription Drug Pricing Reduction Act).  While much of the bill focuses on provisions related to Medicare Part D and Part B, it also includes a number of significant improvements that would strengthen the effective Medicaid Drug Rebate Program and enhance administration of the prescription drug benefit, which would lower both federal and state Medicaid drug costs.  (Many of the provisions are consistent with recommendations included in our January 2019 issue brief.)

According to the Congressional Budget Office estimates, these Medicaid provisions would reduce federal Medicaid spending by about $16.5 billion over 10 years.  Based largely on the current federal and state share of Medicaid drug rebates, this level of federal savings means the Senate bill would likely produce more than $8 billion in state Medicaid savings as well.  Lowering net federal and state prescription drug costs would not only benefit state Medicaid programs but also help ensure that millions of low-income children and other beneficiaries, including children with special health care needs, continue to have access to needed medications.

The Senate Finance Committee bill includes the following sound provisions:

• Raising the cap on total Medicaid rebate amounts. Under current law, total Medicaid drug rebates on both brand-name and generic drugs cannot exceed 100 percent of the Average Manufacturer Price (AMP).  This limit, however, undermines the effectiveness of Medicaid’s inflation-related rebates — under which manufacturers must pay an additional rebate if the prices for their drugs rise faster than general inflation — in discouraging manufacturers from instituting excessive annual price increases.  When Congress originally enacted the 100 percent of AMP limit, it had not anticipated the very large year-to-year price increases for both brand-name and generic drugs that have occurred in recent years.  Elimination of the cap was recently recommended by the Medicaid and CHIP Payment and Access Commission (MACPAC) and was also included in the Trump Administration’s fiscal year 2020 budget.  The bill would increase the cap to at least 125 percent of AMP starting in fiscal year 2023 (with manufacturers potentially required to pay higher rebates depending on their past and future price increases).
• Barring manufacturer gaming that uses “authorized generics” to lower rebate amounts. As MACPAC has noted, manufacturers that make their own generic version of their drugs (known as “authorized generics”), which can artificially lower the Medicaid rebates they pay.  Drug companies sometime sell the authorized generic version of their brand-name drug to a secondary manufacturer so that it can be distributed.  But if that secondary manufacturer has a corporate relationship with the brand-name drug company (for example, they have the same parent company), the brand-name company may intentionally charge a much lower “transfer” price than it would otherwise charge another manufacturer or wholesalers.  This would have the effect of reducing the Medicaid rebates the manufacturer pays for its brand-name drug because the formula used to determine rebate amounts is based on AMP and incorporates the price of authorized generics in calculation of the AMP.  In other words, manufacturers can game the rebate program through this approach and lower what they otherwise would owe to state Medicaid programs.  MACPAC has thus recommending eliminating authorized generics from the calculation of rebates.  The bill would follow the MACPAC recommendation and also clarify that secondary manufacturers do not count as wholesalers for purposes of determining the AMP.
• Conducting regular audits on drug manufacturers to ensure better rebate compliance. Currently, the Centers of Medicare and Medicaid Services (CMS) has no systematic review process to ensure the accuracy of the pricing information reported by manufacturers under the Medicaid Drug Rebate Program, such as AMP and best price.  The bill would require auditing of manufacturer’s pricing and drug product information, including the use of evaluation surveys, statistical sampling, and predictive analytics.  The bill would also authorize the use of surveys of wholesalers and direct sale manufacturers to verify pricing information.  Civil monetary penalties would be established and/or increased to ensure responsiveness, timeliness and accuracy.  The Secretary of Health and Human Services would also be required to submit an annual report to Congress on the results of the audits and surveys.  This provision would ensure better compliance with the requirements of the Medicaid Drug Rebate Program and that manufacturers are fully paying the rebates they owe to state Medicaid programs.
• Extending the Medicaid Drug Rebate Program to certain drugs administered in outpatient hospital settings. The Medicaid Drug Rebate Program applies to outpatient drugs, including drugs administered in a physician office or in an outpatient hospital clinic if they are reimbursed separately.  But increasingly some new, high-cost and complex drugs administered in hospitals on an outpatient basis are provided only as part of a bundle of services (including diagnosis and related treatment) under which there is no separate payment for the drugs.  The bill would establish an option for states to classify such drugs as outpatient drugs subject to the Medicaid Drug Rebate Program, in order to make those drugs more affordable for state Medicaid programs and thus increase access for beneficiaries.
• Prohibiting use of “spread pricing” by Pharmacy Benefit Managers. Many Medicaid managed care plans contract with pharmacy benefit managers (PBMs) to administer the pharmacy benefit for their enrollees.  But as Ohio, Pennsylvania and Kentucky have found, PBMs in their states have been charging Medicaid managed care plans for pharmacy claims costs well in excess of the actual costs of reimbursing pharmacies for drugs dispensed to beneficiaries, net of any supplemental rebates the PBMs obtain from drug manufacturers.  The PBMs retain the difference, known as the “spread,” as profit.  That, in turn, artificially inflates the capitation payments that states must pay managed care plans, resulting in higher overall federal and state Medicaid costs.  The Trump Administration recently issued highly technical guidance related to Medical Loss Ratio (MLR) requirements that could help make it less likely that PBM spread pricing occurs in Medicaid managed care.  But the Senate Finance bill would better address this problem and more directly.  It would effectively prohibit the use of spread pricing outright, not just in Medicaid managed care, but also in fee-for-service.  PBMs would be required to pass through actual pharmacy costs (net of rebates) to managed care plans or the state, charge only the actual cost of the drug plus a dispensing fee, and be provided only a reasonable administrative fee.
• Addressing conflicts of interest in administration of the Medicaid drug benefit. Under current law, states can establish preferred drug lists, which are typically developed by so-called Pharmacy and Therapeutics (P&T) Committees and are often tied to prior authorization requirements.  The preferred drug lists can be used to leverage supplemental rebates from manufacturers on top of those required under the Medicaid Drug Rebate Program.  In addition, all states are required to operate prospective and retrospective drug utilization review (DUR) programs that screen for duplication, contraindications, interactions with other drugs, incorrect dosage and abuse and misuse and review claims and other data for overuse, inappropriate or medically unnecessary care, appropriate use of generics and fraud and abuse.  But some of these entities, including the P&T Committee in Arizona, have suffered from serious conflicts of interest where members were receiving financial remuneration from drug manufacturers or where manufacturers otherwise exercised undue influence.  Among other requirements, the bill would require P&T Committees and DUR boards to have conflict-of-interest policies in place for their members.
• Improving access to prescription drug data. The bill would also require a federal drug pricing survey of retail community pharmacies, a federal report on coverage of specialty drugs in Medicaid, manufacturer reporting of wholesale acquisition cost, and an annual federal analysis of provider prescribing patterns.  This information would all be useful for federal and state policymakers in improving administration of the drug benefit in state Medicaid programs.
• Facilitating in-depth analysis of the Medicaid Drug Rebate Program. Unlike the Congressional Budget Office, the Government Accountability Office and the Department of Veteran Affairs, MACPAC currently lacks access to the detailed drug pricing data reported by manufacturers for purpose of the Medicaid Drug Rebate Program.  The bill would authorize the Secretary of Health and Human Services to share drug pricing and other rebate-related data under both Medicaid and Medicare Part D with MACPAC and the Medicare Payment Advisory Commission (MedPAC).  This provision would ensure that MACPAC can conduct a more comprehensive analysis of the Medicaid Drug Rebate Program.  That, in turn, would better inform federal and state policymakers and facilitate MACPAC’s development of further recommendations to improve the effectiveness of the Medicaid Drug Rebate Program.  A similar provision was reported out of the House Energy and Commerce Committee.

Finally, the Senate Finance bill includes an explicit option for state Medicaid programs to pay for certain drugs — gene therapies designed to treat a rare condition on a one-time use basis — on an installment basis over no more than five years.  States already have considerable flexibility to adopt innovative payment models for high-cost prescription drugs without a waiver.  For example, since June 2018, five states have received federal approval for such approaches.  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.

Moreover, CMS has already clarified that the Medicaid Drug Rebate Program (including its best price requirement) currently poses no obstacle to states pursuing innovative payment models — not just outcome-based contracts and a subscription approach but likely installment arrangements as well — that attempt to address the cost of costly prescription drugs so long as such models include a supplemental rebate component.  Finally, allowing states to pay over time does nothing to discourage excessive launch prices for new drugs and would instead appear to merely facilitate them.  One more effective alternative, for example, would be to increase the minimum Medicaid drug rebate, where the rebate gets increasingly larger as the drug launch price exceeds certain dollar thresholds.  This would not only allow Medicaid programs to better afford the new brand-name drugs with launch prices of hundreds of thousands or millions of dollars but also help deter manufacturers from setting such high initial prices.

Nevertheless, in a welcome move, this installment option provision does not appear to make any changes to the Medicaid Drug Rebate Program that would seriously weaken or eliminate its best price requirement.  Some have misleadingly argued that the approval and pending approval of new, very high-cost drugs justify such a change as it would interfere with installment and other payment approaches more broadly.  Undermining best price, however, 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.