On Wednesday, April 26, 2023, the Health Subcommittee of the House Energy and Commerce Committee will hold a legislative hearing discussing numerous health bills including H.R. 2666 — the “Medicaid VBPs for Patients Act.”  This bill would codify for five years a technical 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” under the highly effective Medicaid Drug Rebate Program (MDRP).  The best price requirement, which is a key component of the MDRP, ensures that Medicaid obtains discounts at least as large as those available to most purchasers in the commercial sector.  The final rule took effect on July 1, 2022, after a delay instituted by the Biden Administration, and the Centers for Medicare and Medicaid Services (CMS) also issued technical guidance to drug manufacturers and states related to the rule on March 23, 2022.

As I have previously written (here and here), the final rule related to variable best price reporting (including the guidance related to the final rule) would likely lead to lower drug rebates paid by manufacturers and therefore higher net federal and state Medicaid prescription drug costs.  I therefore warned that “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….”  CMS “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.”  But by codifying the rule — as well as making additional changes that further raise the risks the rule poses — the bill would effectively bar CMS from course correcting for at least five years even if, as is very likely, evidence shows that manufacturers are gaming variable best price reporting to evade or undermine the best price requirement.

Thanks to the MDRP, the Congressional Budget Office 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 federal and state Medicaid prescription drug costs.

Some VBP arrangements are outcomes-based contracts that vary rebates or discounts 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, especially in the commercial sector, the 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 that do not participate 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 that do not participate 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.

As noted, in March 2022, CMS issued guidance related to the final rule but it did not address these serious concerns.  The guidance encouraged, but did 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 added to existing state burdens.  It required 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.

Moreover, 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 the system to lower their Medicaid drug rebate liability.  The guidance agreed that there may be a possibility that there will not be a non-VBP best price.  It only required 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 significantly weakened.

In fact, the guidance seemed to acknowledge this potential result.  It only restated 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” encouraged 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.

Instead of mitigating the substantial risks of the final variable best price reporting rule, H.R. 2666 would actually exacerbate them.  First, the bill would codify the final rule by making it “have the force and effect of law” for five years from the date of enactment.  By codifying the rule as-is, H.R. 2666 would bar CMS from making changes inconsistent with the rule through other rulemaking or guidance to address problems as they arise.  For example, if experience shows that many states are unable to participate in VBP arrangements, the number of drugs without traditional non-VBP prices is significantly rising, rebates are declining and/or net Medicaid prescription drug costs are increasing, CMS would be unable to course correct for at least five years, unless Congress takes action.  And if H.R. 2666 becomes a “health extender” and Congress extends the codification or makes it permanent, this could result in the evisceration of the best price requirement for many drugs over time, especially new high-cost drugs being sold largely or exclusively through VBP arrangements.

Second, the bill goes beyond just codifying the variable best price reporting final rule by weakening the final rule and guidance and facilitating the likelihood of manufacturer gaming.  For example, the bill would clarify that nothing in the bill shall be construed as requiring a manufacturer to enter into a VBP arrangement with a state.  The final rule preamble and the guidance, however, required that manufacturers offer the same VBP arrangements they provide to commercial purchasers to all state Medicaid programs and if manufacturers do not comply, they must incorporate the lowest price from any VBP sales in a single best price.  While states may be unwilling or unable to participate, this ensured that at least states had access to VBP arrangements (and the variable best prices associated with such arrangements).   The bill’s rule of construction appears to imply that a manufacturer could entirely refuse to offer states a VBP arrangement (or at least refuse to participate in a VBP arrangement even if the state accepts the offer).  The bill also would add an explicit definition for the non-VBP best price to the Medicaid statute but omits any language from the guidance about manufacturers making “reasonable assumptions” to “approximate” a non-VBP best price, thus making it even more likely that the non-VBP best price is not meaningful.

Finally, the bill would create a new section 1948 in the Social Security Act that allows states to use similar VBP arrangements for drugs provided in inpatient settings.  Such drugs, however, are not currently subject to the MDRP, which applies to covered outpatient drugs and states already have considerable flexibility in how they reimburse hospitals and other providers.  This would appear to allow states to negotiate VBP arrangements that provide rebates for inpatient drugs.  But if the goal of the provision is to lower the federal and state Medicaid cost of prescription drugs furnished on an inpatient basis, the MDRP could instead be extended to inpatient drugs as well, which would be far more effective.  Moreover, hospitals serving Medicaid-covered patients can already negotiate VBP arrangements with manufacturers themselves, which if they actually lower drug costs would lower total inpatient costs that are reimbursable by state Medicaid programs on a fee-for-service basis or by Medicaid managed care plans.  While the drafting is not clear, it appears that the intent may be to exclude commercial hospital VBP arrangements for inpatient drugs from best price.  Because purchases by major hospital-based systems often set best price under the MDRP, this would have the effect of making it more likely there is no meaningful non-VBP price, which in turn would further undermine the best price requirement.

Manufacturers will likely argue that H.R. 2666 ensures greater predictability and would therefore encourage greater VBP takeup by both manufacturers and states.  But there is no indication that CMS has any immediate or future plans to reverse or substantially revise the final rule and any major actions to do so would of course require formal rulemaking.  Limited takeup of the Medicaid variable best price reporting so far is likely more due to lack of strong interest in VBPs generally among health plans, providers and state Medicaid programs, as VBPs may do little or nothing to address high launch prices for new drugs.  It also may be the case that manufacturers are simply more interested in explicitly eliminating or more severely curtailing the best price requirement rather than following the final rule’s very flawed but less extreme approach.

As discussed above, H.R. 2666 would have the adverse effect of freezing the variable best price reporting final rule in place for an extended period of time, preventing CMS from making any policy changes conflicting with the rule for the next five years through rulemaking or guidance even if, as is likely, there is widespread manufacturer gaming, weakening of the best price requirement, lower rebates and/or higher federal and state Medicaid prescription drug costs under the rule.  The final rule has been in effect since July 2022 so manufacturers using VBP arrangements can take advantage of variable best price reporting today, as well as another option provided under the rule: bundled sales.  Congress could instead just let the rule’s VBP options be taken up by manufacturers and state Medicaid programs, with CMS and the HHS Office of Inspector General carefully monitoring the impact of the final rule and CMS be allowed to course correct, as will likely be needed.