On March 23, 2022, the Centers for Medicare and Medicaid Services (CMS) released new technical guidance to drug manufacturers and states related to the highly effective Medicaid Drug Rebate Program (MDRP).  The guidance is related to a rule finalized late in the Trump Administration that, among other provisions, allowed manufacturers to report a range of prices offered through value-based purchasing arrangements (VBP) as their “best price.”  (The current effective date for this aspect of the final rule is July 1, 2022.)  As we have previously warned, the rule’s provision related to variable best price reporting would likely lead to lower drug rebates paid by manufacturers and higher Medicaid prescription drug costs.  Unfortunately, the guidance does not address the significant concerns raised by that rule.

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 (CBO) has found that Medicaid obtains the lowest prices, net of rebates and discounts, among other federal programs and agencies including the Department of Veterans Affairs.  As I have explained, the CBO analysis shows that the best price requirement is an essential contributor to the rebate program’s success in lowering Medicaid prescription drug costs.

Some VBP arrangements are outcomes-based contracts that vary rebates based on how patients actually fare (with lower discounts for patients with expected outcomes and higher discounts for poorer outcomes and lower-than-expected clinical effectiveness of the drug).  To facilitate the broad adoption of these types of contracts, the Trump Administration’s final rule allowed drug manufacturers 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.  Manufacturers must also offer the same VBP arrangements they provide to commercial purchasers to all state Medicaid programs.  In addition, the preamble to the rule stated 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 as I have explained, the rule made state Medicaid programs not participating in these VBP arrangements vulnerable to significant risks under two scenarios: (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.

Under the final rule, it was my assessment that the first scenario would eliminate best price for states not participating in VBP arrangements while the second scenario would reduce the rebates states would have otherwise received under prior law.  The final rule touted the fact that it will be up to states whether to participate in VBP arrangements.  But it acknowledged 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 to the final rule also admitted 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 stated that CMS had no plans to provide any federal funding to facilitate states’ participation in VBP arrangements.

The guidance does not address these concerns.  It encourages, but does not require, manufacturers to consider that states may not be able to track patient outcomes or have the resources to finance such tracking and to instead rely on other data like readily available claims data.  In fact, the guidance even adds to existing state burdens.  It requires states that enter into VBP arrangements to invoice the manufacturer directly for any rebates related to those arrangements, rather than have those rebates determined by the federal government as they are today.  (This could also hinder analysis and oversight by potentially removing those rebate amounts from the detailed federal drug pricing data reported to CMS, which are also available to the Office of Inspector General (OIG) at the Department of the Health and Human Services, the Congressional Budget Office and the Medicaid and CHIP Payment and Access Commission.)

In the case of a state being unwilling or unable to participate in a VBP arrangement, the preamble to the final rule asserted 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 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 intentional gaming to lower their Medicaid drug rebate liability.

The guidance agrees that there may be a possibility that there will not be a non-VBP best price.  It only requires that manufacturers instead use “reasonable assumptions” to “approximate” a non-VBP best price.  But that estimate would be based on the “lowest price available to the payer/provider if no additional discounts based upon outcomes are made under the VBP arrangement.”  If manufacturers newly tie most or all of their largest discounts and rebates, which they would otherwise provide to purchasers, to patient outcomes in a VBP arrangement, the best price requirement would be essentially eviscerated.

In fact, the guidance seems to acknowledge this potential result.  It only restates that in “the event the state does not choose to participate in a VBP arrangement, and there is no other non-VBP arrangement outside of the VBP arrangement,” the state would receive at least the greater of the minimum rebate amount (equal to 23.1 percent of Average Manufacturer Price) or the AMP minus the non-VBP best price, even if the non-VBP best price includes little or no discounts/rebates.  (Manufacturers also must pay additional rebates if their prices rise faster than inflation.)  The guidance only “highly encourages” manufacturers to negotiate other voluntary supplemental rebates with state Medicaid programs “when a state cannot take advantage of the multiple best price VBP arrangement” — even if those rebates would be considerably smaller than what would be required currently, in the absence of variable best price reporting.

As a result, as variable best price reporting takes effect in the coming months, it will be critical for CMS and other entities such as OIG to provide careful oversight and monitoring to identify the effects of variable best price reporting over time.  This includes changes in manufacturer pricing behavior, changes in VBP and non-VBP best prices, the number of drugs with no traditional non-VBP best prices for which manufacturers will be reporting approximated prices based on reasonable assumptions, and state participation in VBP arrangements.  CMS (and Congress, if necessary) should be ready to step in quickly to revise or end the ability of manufacturers to submit variable best prices if significant problems arise and Medicaid net prescription drug costs rise.  Unfortunately, this harmful impact still appears highly likely.