House Bill Prohibiting Use of “QALYs” Is Overbroad, Could Undermine State Negotiation of Medicaid Supplemental Rebates

Editor’s Note: An amended version of the bill (H.R. 485) was reported by the Subcommittee on Health of the House Energy and Commerce Committee on March 8, 2023. The revised language addresses some of the concerns discussed in this blog post.

A House bill (H.R. 485) which was one of the bills discussed at a February legislative hearing of the Subcommittee on Health of the House Energy and Commerce Committee, may undermine the ability of states to continue to negotiate Medicaid supplemental rebates from drug manufacturers.  That, in turn, would increase both federal and state Medicaid prescription drug costs.

Under the Medicaid Drug Rebate Program (MDRP), drug manufacturers must provide substantial rebates to the federal government and states as a condition of having their drugs covered by Medicaid.  The rebates apply to both fee-for-service and to managed care and for brand-name drugs, consist of two mandatory components.  First, under a basic rebate, manufacturers must pay an amount equal to the greater of a minimum rebate of 23.1 percent of the average price paid by wholesalers for drugs (known as the Average Manufacturer Price or AMP) or the largest “best price” discount provided to most other private purchasers.  Second, manufacturers must also pay an additional rebate if their prices rise faster than general inflation.  In addition to the rebates required under federal law, states may negotiate voluntary supplemental rebates from manufacturers.

Due to the success of the rebate program, a groundbreaking 2021 Congressional Budget Office study found that compared to other federal programs and agencies, including the Department of Veterans Affairs, Medicaid obtained the lowest prescription drug prices, net of rebates and discounts.  Data from Medicaid and CHIP Payment and Access Commission (MACPAC) show that Medicaid rebates reduced overall gross federal and state Medicaid prescription drug spending by nearly 53 percent — or $42.5 billion — in fiscal year 2021.

According to MACPAC, the supplemental rebates that states negotiate are relatively modest compared to the mandatory federal rebates, accounting for only 6.5 percent of total rebates paid by manufacturers in 2021.  States, however, are negotiating larger supplemental rebates than in the past.  In fiscal year 2021, for example, supplemental rebates equaled $2.8 billion, more than double the $1.3 billion in rebates negotiated by states in fiscal year 2018.

While state Medicaid programs are subject to an open formulary protection for beneficiaries — under which nearly all FDA-approved drugs must be covered — they can still establish preferred drug lists and use utilization management tools such as prior authorization and step therapy.  State decisions on whether drugs received preferred or non-preferred status are informed by a panel of physicians, pharmacists and other experts known as a Pharmacy and Therapeutics (P&T) Committee, which can consider both clinical effectiveness and pricing considerations.

The risk of placement of a drug on a Medicaid non-preferred drug list that requires prior authorization can provide the leverage states need when they negotiate supplemental rebates from manufacturers.  That leverage can be further enhanced by participation in multi-state purchasing pools, as well as negotiating supplemental rebates on behalf of both fee-for-service and managed care on a uniform basis instead of relying on managed care plans to negotiate their own discounts (whether the pharmacy benefit is carved out or included in managed care benefits).

With all that as background, H.R. 485 would expand an existing prohibition under Section 1182 of the Social Security Act on the use of Quality-Adjusted Life Years (QALYs) in Medicare by the Secretary of Health and Human Services.  This current prohibition also applies to any “similar measure that discounts the value of a life because of an individual’s disability.”  QALYs, which attempt to measure how a drug or treatment can lengthen lives or improve quality of life, have raised concerns from some patient groups and people with disabilities because they could risk discrimination against those who have serious illnesses, are older, or have disabilities.  That is why, for example, alternative measures, such as Equal Value of Life Years Gained (evLYG) have been developed by the Institute for Clinical and Economic Review (ICER).  It is also why the Inflation Reduction Act already prohibits the Secretary from using “evidence from comparative clinical effectiveness research in a manner that treats extending the life of an elderly, disabled, or terminally ill individual as of lower value than extending the life of an individual who is younger, nondisabled, or not terminally ill” as part of the new Medicare drug negotiation provision.

H.R. 485 would newly prohibit any federal agency or states from using prices based on Quality-Adjusted Life Years (QALYs) “or such a similar measure or using averages or other pricing metrics that directly or indirectly take into account such prices…”  This prohibition would be explicitly extended to both Medicaid and the Children’s Health Insurance Program (CHIP).  As far as I know, no state uses QALYs in their Medicaid programs today.  But states do conduct comparative effectiveness reviews of prescription drugs, including clinical effectiveness and assessments of the value of new prescription drugs relative to existing drugs and drug classes that take into account price.  These reviews typically take into account a variety of factors and evidence, which in turn contribute to key state Medicaid program decisions such as placement on preferred drug lists, prior authorization and clinical requirements.

Such comparative effectiveness reviews are also used in negotiations with manufacturers on supplemental rebates.  H.R 485, however, appears to be excessively broad in its scope — extending its QALYs prohibition to any pricing metrics similar to QALYs or any measures that directly or indirectly are based on such similar metrics, without further defining what constitutes a similar metric or what would constitute a measure directly or indirectly based on such similar metrics.  Moreover, it has no exceptions for, or clarifying language permitting, the kinds of existing comparative effectiveness reviews and clinical/value/pricing assessments widely used by state Medicaid programs today.  Would H.R 485 bar the use of any comparative effectiveness reviews that incorporate value and price assessments by  Medicaid and CHIP?  Would it prohibit states from using comparative effectiveness reviews that include, among other considerations, an analysis of various assessments of a drug’s relative cost-effectiveness, including international assessments, that use a quantitative or qualitative metric?  Would it prevent states from using comparative effective reviews that weigh clinical effectiveness, price and value when they negotiate “subscription” model prices and outcome-based contracts for certain drugs with manufacturers, that several states have adopted?

Due to its broad and poorly defined scope, H.R. 485 may therefore obstruct or bar the long-standing use of comparative effectiveness reviews, including clinical, pricing and value assessments, by state Medicaid P&T committees.  This could seriously undermine the ability of state Medicaid programs (or multi-state purchasing pools and/or Medicaid managed care plans on their behalf) to continue to effectively negotiate supplemental rebates from manufacturers, on top of the rebates required under federal law, including through subscription models and outcome-based contracts.  (It could also more broadly undermine the ability of states to set clinically appropriate preferred drug lists based on comparative effectiveness.)  That, in turn, could increase federal and state Medicaid prescription drug costs over the long run.  As noted, while supplemental rebates remain a relatively modest share of total rebates paid by manufacturers, they are growing.

H.R. 485 could increase federal and state CHIP costs as well.  While prescription drugs furnished to children enrolled in CHIP-funded Medicaid coverage are subject to the Medicaid Drug Rebate Program, the rebate program does not apply to drugs furnished to children in separate CHIP programs.  States or CHIP managed care plans must negotiate any rebates or discounts with manufacturers solely on a voluntary basis but like with Medicaid, comparative effectiveness reviews, including clinical, pricing and value assessments, are likely a key factor in such negotiations as well.  Due to the relatively small size of state CHIP programs, states and CHIP managed care plans already have very limited leverage in obtaining supplemental rebates from manufacturers.

H.R. 485 could be amended to avoid this possible adverse impact on Medicaid and CHIP programs by limiting its scope solely to a prohibition on use of QALYs or a similar measure that discounts the value of a life because of an individual’s disability.  However, some stakeholders, including the pharmaceutical industry, may support the bill’s overly broad and poorly defined scope for the very reason it could have the effect of undermining Medicaid supplemental rebates (and more importantly undermining the new Medicare drug negotiation provision enacted under the Inflation Reduction Act).

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