Medicaid Drug Rebate Program News and Notes

As part of its fiscal year 2024 budget, the Biden Administration proposed several Medicaid and CHIP policies related to the Medicaid Drug Rebate Program, which I covered in a recent blog.  But over the last few months, there have been two other Medicaid drug rebate developments that are worth highlighting:

Puerto Rico joins the Medicaid Drug Rebate Program  

In great news, according to Puerto Rico’s Department of Health and its Medicaid pharmacy benefit manager contractor, as of the beginning of this year, Puerto Rico is newly participating in the Medicaid Drug Rebate Program (MDRP).  While Puerto Rico and the other territories — American Samoa, Guam, the Northern Mariana Islands and the U.S. Virgin Islands — are technically required to participate in the Medicaid Drug Rebate Program as of January 1, 2023, they can seek federal approval for a waiver to continue to stay out of the MDRP.  Joining the MDRP will have two major benefits for Puerto Rico’s Medicaid program and its low-income beneficiaries:

Lower Medicaid pharmacy costs, net of rebates.  Under the highly effective MDRP, drug manufacturers must provide substantial rebates to the federal government and states as a condition of having their drugs covered by Medicaid.  As I have previously explained, thanks to the rebate program, the Congressional Budget Office has 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.  Moreover, data from the 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.

In contrast, prior to this year, Puerto Rico had to negotiate any Medicaid rebates from drug manufacturers only on a voluntary basis.  According to ASES, which jointly administers Puerto Rico’s Medicaid agency, for certain brand-name drugs, those voluntary rebates reduced pharmacy costs by 35 to 40 percent, on average.  But under the MDRP, the rebates would lower pharmacy costs for those same drugs by 50 to 55 percent or more.  As a result, ASES estimates that joining the MDRP will reduce Puerto Rico’s net prescription drug costs by $154.8 million over the next four years.  And as states do, Puerto Rico can continue to negotiate voluntary supplemental rebates from manufacturers, on top of the substantial rebates required under the MDRP, using the risk of placement on non-preferred drug lists and utilization management tools such as prior authorization and step therapy to provide bargaining leverage with manufacturers.

Greater beneficiary access to needed prescription drugs.  Under the rebate program’s open formulary protection, state Medicaid programs must cover nearly all FDA-approved drugs.  While states can use preferred drug lists and other utilization management tools, the rebate program bars states from entirely excluding coverage of prescription drugs, with very limited exceptions.  Because it was not previously participating in the MDRP, Puerto Rico was able to use a closed formulary with only a limited number of drugs covered, in order to lower its Medicaid pharmacy costs.  This had a harmful impact on beneficiary access to needed medications.  For example, Puerto Rico did not cover any drugs curing Hepatitis C until it decided to voluntarily add coverage of one such drug in March 2020, even though this class of Hepatitis C drugs first entered the market in 2014.  By joining the rebate program, Puerto Rico is newly subject to the open formulary protection and as a result, individuals and families enrolled in Medicaid will see greater access to prescription drugs.

Newly participating in the Medicaid Drug Rebate Program is yet another substantial programmatic improvement that Puerto Rico’s Medicaid program has adopted in recent years.  Increased federal Medicaid funding, including the most recent five-year funding increase included in the Consolidated Appropriation Act, 2023, has allowed Puerto Rico to both sustain and further improve its Medicaid program.  Such funding, however, remains temporary.  Puerto Rico and the other territories will not be able to come into fuller compliance with federal eligibility, benefit and other requirements — and thus dramatically increase access to needed care among low-income residents of Puerto Rico and the other territories — without elimination of the block grant structure, under which they operate, and permanent state-like financial treatment, under which the federal government picks up a fixed percentage of the territories’ Medicaid costs.

Center for Medicare and Medicaid Innovation Demonstration Project for Federal Negotiation of Supplemental Rebates and Value-Based Arrangements for Cell and Gene Therapies

On February 14, 2023, the Secretary of Health and Human Services, Xavier Becerra, announced that the Center for Medicare and Medicaid Innovation (CMMI) will test three models to further lower prescription drug costs and increase prescription drug affordability beyond what was enacted in the Inflation Reduction Act.  One such model would be the “Cell & Gene Therapy (CGT) Access Model” under which the Centers for Medicare and Medicaid Services (CMS) would, on behalf of state Medicaid programs, negotiate supplemental rebates with drug manufacturers of very high-cost, potentially breakthrough, cell and gene therapies, on top of the rebates required under the MDRP.  Such supplemental rebates could involve value-based arrangements such as outcome-based agreements that vary supplemental 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.).  The model could also include fixed, discounted price payments spread over time if beneficiaries continue to meet clinical outcome targets.  CMMI will begin model development in 2023, determine model specifications in 2024-2025 and implement the model as early as 2026.  It may also first start with drugs with a single therapeutic indication such as sickle cell disease.

In many ways, this model is similar to a proposal in the Biden Administration’s fiscal year 2024 budget, under which CMS would negotiate supplemental rebates on behalf of states for “high-cost drugs.”  Like I have previously written with regard to that budget proposal, whether this federal negotiating model for gene and cell therapies can be successful will depend on a number of factors.  There would have to be sufficient state participation, including among some of the larger states that now opt out of multi-state purchasing pools that negotiate supplemental rebates in favor of negotiating on their own.  States, however, may be more willing to participate in this cell and gene therapy model because it could make outcome-based contracts much more feasible than is the case today.  As I have noted about such arrangements, many states may not be able to track patient outcomes, which would determine supplemental rebate amounts, or have the resources to finance such tracking and may not have the administrative capacity to invoice the manufacturer directly for any rebates related to such arrangements.  In this case, under this CMMI model, CMS would handle the data tracking and undertake these administrative duties.

States would also need to be more willing to align their preferred drug lists and abide by the same supplemental rebate/value-based arrangements that CMS negotiates across fee-for-service and managed care in their own jurisdictions and across other states participating in the federal purchasing pool.  Some states that currently participate in multi-state purchasing pools, for example, do not align their preferred drug lists with those of other states.  Finally, manufacturers of cell and gene therapies may be willing to provide larger supplemental rebates than they would otherwise provide, for administrative ease.  Instead of having to separately negotiate supplemental rebates with the three major multi-state purchasing pools, as well as a number of individual states, or have to negotiate value-based arrangements including outcome-based contracts with individual states, they would only have to negotiate with CMS.  But that would require widespread state participation, especially among larger states.  Moreover, to the extent that these cell and gene therapies are breakthrough treatments, manufacturers may be unwilling to offer much in the way of supplemental rebates off their drugs’ very high list prices, beyond the rebates required under the rebate program, irrespective of this CMS-administered model being in place.

That being said, the CMMI model is a far more promising approach to address the potentially very high cost of cell and gene therapies in the drug development pipeline than some other proposals to reduce Medicaid prescription drug costs that have been put forward in recent years.  For example, the state of Tennessee previously sought a waiver provision to impose a closed formulary for its Medicaid program in order to lower its prescription drugs, a proposal which it eventually dropped.  Under Tennessee’s proposal, the Medicaid program would have had to cover only one drug per class and high cost could have been the sole factor for exclusion from the formulary.  And Oregon initially proposed, and later dropped, a proposal to exclude coverage of certain “accelerated approval” drugs.  Both waiver proposals had ill-defined exceptions and appeals procedures for beneficiaries that may not have been meaningful.  In addition, MACPAC has in the past discussed (but has not recommended) establishment of a new federal program that would carve out coverage of cell and gene therapies from the rest of Medicaid.   Such a program could also include limiting or eliminating the open formulary protection and it also may or may not be guaranteed to produce lower net prices than what is already provided under the MDRP.  In contrast, the CMMI model builds on the highly effective MDRP, with any discounts negotiated by CMS on top of those required under the rebate program.  It also leaves in place its critical open formulary protection for beneficiaries to ensure access to needed medications and treatments like cell and gene therapies.

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