Assessing the Trump Administration’s Final Medicaid Drug Rebate Rule Changing Best Price Reporting under Value-Based Purchasing Arrangements

On December 31, 2020, the Trump Administration finalized a rule that among other provisions, newly allowed drug manufacturers to report a range of prices offered through value-based purchasing arrangements (VBP) under the “best price” requirement under the highly effective Medicaid Drug Rebate Program (MDRP).  This final rule from the Centers for Medicare and Medicaid Services (CMS) was overshadowed by the flurry of other last-minute controversial regulations and Medicaid waiver approvals issued by the Trump Administration in the weeks before President Biden’s inauguration.  But as our public comments indicated, we believed that the proposed rule raised significant risks that manufacturers could end up paying smaller rebates, thereby driving up federal and state Medicaid prescription drug costs.  Nevertheless, the final rule’s variable best price changes only included a few minor revisions, leaving that provision largely identical to the originally proposed provision.  The Biden Administration should strongly consider revisiting this aspect of the rule before this variable best price provision takes effect on January 1, 2022.

The best price requirement is a critical component of the MDRP that substantially lowers federal and state Medicaid spending on brand-name drugs.  The intent of the best price provision is to ensure that Medicaid obtains discounts at least as large as those available to most purchasers in the commercial sector.  The Congressional Budget Office estimated that in 2015, the average base rebate — the higher of the minimum rebate of 23.1 percent of AMP or the best price discount — paid by manufacturers for brand-name drugs was 35.4 percent of AMP.  (Manufacturers must also pay additional inflation-related rebates if their prices rise faster than inflation.)  In other words, because the minimum rebate is 23.1 percent of AMP, the best price requirement, on average, increased the base rebate for brand-name drugs by more than half.  That translated into total federal and state Medicaid savings of up to $5 billion (of which, roughly about $2 billion were state savings) in 2015 alone.

Some drug manufacturers have pushed for legislative changes to entirely eliminate or seriously undermine the Medicaid best price requirement.  They have argued that the Medicaid best price requirement poses an obstacle to more widespread commercial adoption of VBP arrangements, such as outcomes-based contracts, that vary rebates based on how patients actually fare.  Manufacturers have claimed that VBP arrangements could make their new high-cost drugs more affordable to payers and consumers, even though in reality they are likely to do little or nothing to discourage excessive launch prices and instead merely facilitate them.  However, repealing best price or providing broad exemptions for such payment arrangements, as some manufacturers support, would considerably reduce the total rebates manufacturers now pay to Medicaid under current law, significantly raising Medicaid drug costs.  A far preferable approach was for CMS to use its authority in administering the MDRP to try to clarify how best price could be reasonably reported under contracts in which discounts vary based on patients’ clinical outcomes, without eliminating or dramatically weakening the best price requirement.  That is the approach the Trump Administration took in this rule but it did so in a very flawed way.

The final rule gives manufacturers using VBP arrangements two new options to report best price: bundled sales and variable best prices.  Under the bundled sale option, manufacturers could report a net discount under a VBP arrangement: that is, a weighted average of the discounts actually provided based on individual patient outcomes under that specific arrangement.  While the actual language of the final rule related to bundled sales was nearly identical to that in the proposed rule, the preamble indicates that in implementing this option, CMS plans to address some of the concerns that we and others raised in public comments about manufacturer gaming and other behavior that could undermine best price under this option.  For example, the preamble now clarifies that manufacturers electing the bundled sale option would not be allowed to mingle prices from multiple VBP arrangements or mix prices from VBP- and non-VBP arrangements.  In addition, the preamble clarifies that best price would be determined by the actual price for a single purchaser (accounting for all VBP and non-VBP prices, if any), not just VBP prices.

The second variable best price reporting option, however, could still lead to lower drug rebates paid by manufacturers and higher Medicaid prescription drug costs.  Under this option, manufacturers are able to report a range of best prices to the extent they may be determined by varying discounts under VBP arrangements, along with the regular best price under any non-VBP arrangements.  The final rule now clarifies that manufacturers must offer the same VBP arrangements they provide to commercial purchasers to all state Medicaid programs.  The preamble also clarifies that if a state Medicaid program does not participate in the VBP arrangements offered by manufacturers, it would still benefit from the best price provided under non-VBP arrangements.

But these changes, while welcome, do not address the risk posed under two possible scenarios for states that do not participate in these VBP arrangements: (1) manufacturers only offer their drugs through VBP arrangements so there is effectively no non-VBP best price and (2) for certain entities that would otherwise receive the largest discounts and would therefore set best price, manufacturers shift those current purchasing arrangements to VBP arrangements.  The first scenario would eliminate best price for states that do not participate in VBP arrangements while the second scenario would reduce the rebates states would have otherwise received under prior law.  The preamble to the final rule touts the fact that it will be up to states whether to participate in VBP arrangements.  But it acknowledges that states may not have the ability to operationalize and administer the data collection required for VBP arrangements, including monitoring patient outcomes among Medicaid beneficiaries to determine the discounts provided.  The preamble also admits that there will be administrative burdens placed on Medicaid providers and managed care plans if a state participates in a VBP arrangement, even though providers would also not be required to help administer any necessary data collection.  Finally, the preamble states that CMS has no plans to provide any federal funding to facilitate states’ participation in VBP arrangements.

In the case of a state being unwilling or unable to participate in a VBP arrangement, the preamble asserts the state would still have the benefit of a best price set by non-VBP arrangements.  That of course assumes that such non-VBP prices are available — even though the manufacturers who have most pursued statutory best price changes seem to be primarily or exclusively selling their drugs through VBP arrangements — or that non-VBP prices have not been inflated as manufacturers move some of their largest discounts they now offer to VBP arrangements.  These potential actions by manufacturers could simply be due to broader commercial pricing strategies outside of Medicaid or the result of intentional gaming to lower Medicaid drug rebate liability.  Moreover, in response to criticism in public comments, including in ours, that the proposed rule lacked a regulatory impact analysis, the final rule now includes one.  The analysis estimates that the rule’s best price changes would have no impact or produce only very modest savings.  But notably, as part of this analysis, CMS assumed there would likely be little or no effect because few states would take up VBP arrangements, considering the limited take-up of such arrangements by state Medicaid programs under prior law, which were already permitted and encouraged by CMS.  (The regulatory impact analysis, however, remains inadequate as it does not examine the risk of manufacturers not offering non-VBP prices or shifting their largest discounts from non-VBP to VBP arrangements.)

The final rule flatly states that “[t]here is no risk to states under the multiple best prices reporting.”  It is hard to see how this unequivocal statement can be correct.  There appears to remain at least some risk, and more likely a significant risk, that state Medicaid programs could receive lower rebates than under prior law and face higher costs, especially for the new, very costly drugs that are most likely to be offered through VBP arrangements by certain manufacturers now and in the future.  Despite our comments and those from other stakeholders raising these concerns, the rule does not address them (and the preamble largely ignores or dismisses them).

As a result, the Biden Administration should closely review this aspect of this final Medicaid rule and determine whether the variable best price provision should be modified or withdrawn before it takes effect on January 1, 2022, in order to avoid undermining the Medicaid Drug Rebate Program and increasing federal and state Medicaid drug costs.  One factor the Administration should also consider is that drug manufacturers will be able to use the bundled sale pricing option included in the final rule starting March 1, 2021, so it is not necessary to allow this risky, flawed variable best pricing option, as currently designed, to go ahead as scheduled next year.

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