CMS Proposes Medicaid Drug Rebate Changes to Facilitate Commercial Adoption of Value-Based Purchasing Arrangements

On June 19, 2020, the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule to change how drug manufacturers would report prices for purposes of the “best price” requirement under the Medicaid Drug Rebate Program (MDRP), among other modifications to the rebate program and to Medicaid coverage of outpatient prescription drugs.  The intent of the rule is to facilitate more widespread commercial adoption of “value-based purchasing” (VBP) arrangements, although such arrangements may do little or nothing to reduce excessive launch prices for new drugs.  This regulatory approach is clearly preferable to the highly damaging statutory changes to the Medicaid best price requirement that some manufacturers are seeking, which would sharply increase federal and state Medicaid drug costs and lead to harmful Medicaid cuts reducing beneficiaries’ access to needed care.  That being said, the proposed rule generally provides little or no guidance about how the price reporting changes would actually work in practice.  And where the proposed rule spells out some of the changes in greater detail, it raises serious concerns.  As a result, there is a significant risk that manufacturers could end up gaming the best price reporting changes in ways that reduce or delay the rebates they would otherwise have to pay state Medicaid programs.  Before finalizing this rule, CMS will need to develop its proposed best price changes to a greater extent in order to sufficiently address these issues.  Public comments to the proposed rule are due July 20, 2020 and can be submitted here.         

As Andrea Noda of Arnold Ventures and I wrote in a recent Health Affairs blog, some drug manufacturers and federal policymakers are pushing for legislative changes to entirely eliminate or seriously undermine the Medicaid best price requirement, which ensures that Medicaid obtains discounts for brand-name drugs at least as large as those available to most private purchasers.  They argue that Medicaid best price poses an obstacle to more widespread commercial adoption of certain payment arrangements like outcomes-based contracts that vary rebates based on how patients actually fare.  However, repealing best price or providing broad exemptions for such payment arrangements would considerably reduce the total rebates manufacturers now pay to Medicaid under current law, significantly raising Medicaid drug costs.  For example, we estimated that total federal and state Medicaid best price rebates equaled $5 billion in 2015 alone.  We instead recommended that CMS use its regulatory authority under the Medicaid Drug Rebate Program to provide detailed technical clarifications about how best price could be reported under contracts in which discounts vary based on patients’ clinical outcomes.

In the proposed rule, CMS would allow manufacturers using VBP arrangements to report best price in two new ways.  First, in determining their best price, manufacturers could proportionally allocate the discounts provided under a VBP arrangement based on actual patient outcomes across the total dollar value of the drugs dispensed to all patients under that arrangement, as if they were a “bundled sale”.  Second, manufacturers could report a best price range under the different discounts available under the VBP arrangement, along with the regular best price under non-VBP contracts.  Manufacturers would then be permitted to revise their best price outside of the current 3-year limit once actual patient data is available and if the VBP arrangement results in changes to the reported best price.

The new proposed regulatory language, however, is exceedingly vague.  For example, it merely states that “[v]alue-based purchasing (VBP) arrangements may qualify as a bundled sale” and that the best price or “lowest price available from a manufacturer may include varying best price points for a single dosage form and strength as a result of a value-based purchasing arrangement.”  The preamble to the proposed rule generally provides little additional detail on how this new best price reporting related to VBP arrangements would work in practice.  For example, the preamble does not clarify what manufacturers would have to report as their initial best price when clinical patient outcome data that determine the discounts available under a VBP would not be available for several years and if no regular best price is reported because the drug is exclusively provided through VBP arrangements.

This could allow manufacturers to calculate their initial best price using the smallest discounts possible under a VBP, even though the most likely net discount once actual patient outcome data is available would be far greater.  In turn, that would allow manufacturers to delay paying the bulk of the rebates they otherwise owe state Medicaid program for a potentially lengthy period of time.  Notably, the rule does not set a time limit on when manufacturers have to revise their best price reporting under a VBP arrangement even though state Medicaid programs would be most in need of upfront rebates to offset the costs of a new expensive drug in the first year the drug enters the market.  (To address this issue, Andrea Noda and I recommended that manufacturers could initially calculate the best price they report to the federal government by looking at the expected net price under the VBP arrangement, based on the expectations of the manufacturer and the private purchaser using clinical trial data.  The manufacturer would then revise their best price once actual clinical data is available, with their rebate amounts adjusted retroactively.)

Moreover, the lack of any detail related to the revised best price reporting changes also increases the overall risk of inaccurate and non-uniform reporting and manufacturer gaming that could lower the rebate amounts manufacturers otherwise pay under the rebate program over both the short- and long-term.  For example, manufacturers may be able to artificially raise their best price by mixing VBP and non-VBP prices into the same bundled sale, even if the best discount under all non-VBP arrangements is greater and the regular best price would be lower.  If CMS finalizes this rule, it is critical that CMS also institute a long overdue mandatory audit system for manufacturers to periodically verify the accuracy of reported price information, as I have previously recommended.  This would not only ensure that this revised best price reporting related to VBP arrangements is not being inappropriately gamed but also ensure better overall manufacturer compliance with the requirements of the Medicaid Drug Rebate Program.

Where the preamble to the proposed rule provides some additional detail, it raises serious concerns.  The preamble appears to state that when manufacturers report a range of best prices, the best price that would actually apply for purposes of the Medicaid drug rebate program would be based on whether the state was participating in a VBP arrangement in its Medicaid program and the clinical outcome of each individual Medicaid beneficiary receiving the drug.  If the state Medicaid program was not part of a VBP arrangement with the manufacturer, no VBP-related best prices would apply even if they would have the effect of increasing the rebates manufacturers owe.  Even if the average best price discount under VBP arrangements is larger, a smaller discount would apply if a Medicaid beneficiary has a clinical outcome that is better than average.  This also begs the question of what would happen if there is no non-VBP regular best price because the manufacturer is exclusively providing the drug through VBP arrangements.  Altogether, this could substantially weaken the best price requirement.  For example, as discussed below, only a relatively small number of state Medicaid programs currently have VBP arrangements, and of those, the arrangements are only with a single or a handful of manufacturers.  It is hard to believe that this is what CMS is proposing and provides a strong indication that CMS has not adequately developed its proposed best price reporting changes before issuing this rule.

The proposed rule correctly acknowledges that the Medicaid drug rebate system does not currently allow for manufacturers to report varying best prices, let alone allow for calculation of rebates based on the individual patient outcomes of Medicaid beneficiaries receiving that drug within a state Medicaid VBP arrangement.  The proposed rule states there would be “operational challenges this may bring to MDRP systems” and that “it will take us time to make such system changes.”  Setting aside the issues related to the best price depending on Medicaid VBP participation and individual Medicaid beneficiary outcomes, CMS and manufacturers would need sufficient time to prepare for these best price reporting changes so they could be soundly implemented.

As a result, it is clear that CMS must take much more time to develop its proposed best price reporting changes and provide substantially greater detail on how manufacturers would report best price under VBP arrangements before finalizing the proposed rule.  While the regulatory approach CMS is taking would not eliminate or gut the best price requirement outright, as would legislative proposals that some manufacturers support, it would still raise a significant risk of gaming that could delay or reduce manufacturers’ rebate obligations.

It is also important to note that the proposed rule is about facilitating the adoption of VBP arrangements in the commercial sector, not about helping lower Medicaid prescription drug costs.  That is because, as Andrea Noda and I have noted, states already have considerable flexibility to adopt “subscription” models, outcome-based contracts, pay-over-time contracts and other alternative payment arrangements.  Since 2018, seven states have received CMS approval for state plan amendments (without waivers) adopting these approaches.  The preamble to the rule misleadingly argues that without the proposed best price reporting changes, “manufacturers may be unwilling to offer VBP to Medicaid… .” But as the Health Affairs blog points out, so long as the Medicaid drug pricing arrangements include a supplemental rebate component, CMS has already determined that best price poses no obstacle to states adopting these arrangements.  If states want to use these arrangements for some drugs and determine whether they can meaningfully reduce their Medicaid prescription drug costs, particularly for new expensive drugs, they can do so today.  More promisingly, Congress could enact improvements to the Medicaid Drug Rebate Program that would produce both federal and state prescription drug savings.  For example, bipartisan Senate legislation (S. 2543), if enacted, would reduce federal Medicaid drug spending by $15 billion over 10 years and state drug spending by about $7.3 billion over 10 years, based on Congressional Budget Office estimates.

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

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