New CMS Proposed Rule Could Help State Medicaid Programs Negotiate Greater Supplemental Rebates for Certain High-Cost Drugs

On May 23, 2023, the Centers for Medicare and Medicaid Services announced a new proposed rule related to the Medicaid Drug Rebate Program (MDRP) and other Medicaid drug pricing, reimbursement and data collection issues. While much of the proposed rule focuses on regulatory changes conforming to legislation affecting the MDRP enacted in recent years as well as highly technical clarifications related to MDRP administration, the rule also includes two new initiatives that could modestly lower federal and state Medicaid prescription drug costs.  Public comments on this proposed rule are due July 25, 2023.

Drug pricing survey for manufacturers related to certain high-cost drugs

Under longstanding, albeit unused, statutory authority, CMS would begin conducting a mandatory survey of drug manufacturers for 3-10 high-cost drugs each year.  There would be a multi-step process in selecting the drugs subject to the survey.  First, CMS would identify high-cost outpatient prescription drugs based on highest drug spending per claim, highest total Medicaid drug spending, highest one-year price increase or highest launch price.  Second, CMS would then exclude drugs for which a manufacturer is currently participating in CMS drug pricing programs or initiatives including Medicare negotiation and a new Center for Medicare and Medicaid Innovation (CMMI) demonstration project related to cell and gene therapies.  It would also exclude drugs for which at least half of states have negotiated supplemental rebates that result in greater-than-average total rebates.  Third, CMS would further narrow the list by considering state input regarding manufacturer efforts to work with states to lower drug prices (including negotiating subscription models) and which of the remaining drugs have the highest costs.

The survey would require the selected manufacturers to provide certain pricing, distribution and utilization information to CMS including the Wholesale Acquisition Cost and invoice price, the average price for sales outside the United States, the actual or expected utilization of the drug, public prices for the drugs to other federal agencies including the Department of Veterans Affairs and information related to distribution costs.  Manufacturers would also have to provide other information, including the characteristics of the drug, clinical efficacy; effectiveness and patient outcomes; therapeutic benefits to patients; other competing therapies and how their prices compare to the drug; and whether the drug is approved by the FDA via the accelerated approval pathway.  The selected manufacturers would also have to provide any other information needed to verify prices and charges reported under the MDRP such as Average Manufacturer Price and best price.  CMS would share information collected in the survey with state Medicaid programs.  It could also publicly post non-proprietary information and require manufacturers to participate in a public forum.  Manufacturers that refuse to comply with the survey would be subject to civil monetary penalties.

The intent of the survey is to help state Medicaid programs better understand manufacturer pricing, which in turn could increase states’ leverage in negotiating larger supplemental rebates for this limited number of high-cost drugs. That could reduce both federal and state costs related to those drugs.  CMS points out that the survey information could be especially useful for high-cost drugs that are dispensed through specialty pharmacies, where prices and distribution costs are now particularly opaque, rather than through traditional retail pharmacies. CMS also emphasizes that this new tool, while likely to have only modest benefits due to its limited scope, is a far better approach than other proposals that would restrict or entirely eliminate Medicaid coverage of high-cost prescription drugs. For example, the state of Tennessee previously sought a provision waiving Medicaid’s open formulary protection — which requires coverage of nearly all FDA-approved drugs — and instead impose a closed formulary for its Medicaid program in order to lower its prescription drugs costs, a proposal that 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.

Furthermore, now that CMS has finally proposed to exercise its statutory survey authority under the MDRP for a limited number of high-cost drugs, it should also consider instituting a more comprehensive survey of manufacturers subject to the MDRP to better ensure compliance with MDRP requirements and that manufacturers are fully paying the rebates they owe to state Medicaid programs. Currently, CMS has no systematic process to ensure the accuracy of the pricing information reported by manufacturers under the MDRP such as Average Manufacturer Price and best price. CMS could require a sample of manufacturers each year to be subject to a survey requiring that they submit detailed pricing information documenting how they calculated Average Manufacturer Price and best price in order to verify that their reported prices were accurate. This proactive approach would be far more effective than how the MDRP is typically enforced today, through whistleblower lawsuits and individual Office of Inspector General audits.

Greater transparency in Medicaid managed care contracts to further deter spread pricing

Like in Medicare and in private insurance, “spread pricing” is a serious problem in Medicaid managed care. Many Medicaid managed care plans contract with pharmacy benefit managers (PBMs) to administer the pharmacy benefit for their enrollees.  But as states have discovered in recent years, some PBMs have been charging Medicaid managed care plans for pharmacy claims costs well in excess of the actual costs of reimbursing pharmacies for drugs dispensed to beneficiaries, net of any supplemental rebates the PBMs obtain from drug manufacturers.  The PBMs retain the difference, known as the “spread,” as profit.  That, in turn, artificially inflates the capitation payments that states must pay managed care plans, resulting in higher overall federal and state Medicaid costs.  However, according to the preamble to the proposed rule, only about one-fifth of states have enacted legislation prohibiting spread pricing in Medicaid managed care.

In 2019, CMS issued highly technical guidance on May 15, 2019 which was intended to modestly reduce the inappropriate use of spread pricing in managed care.  That guidance required that any drug rebates received and accrued (whether by the plan itself or by a contracted PBM) must be deducted from incurred pharmacy claims for purposes of Medical Loss Ratio (MLR) calculations.  (The MLR is the share of plan payments that goes to enrollees’ claim costs, rather than for administrative costs and profit.)  The guidance stated that PBMs must report to managed care plans all revenue and expenditure information necessary for the plans to calculate its MLR, including accurate reporting of amounts paid to pharmacies minus any rebates.  This guidance better ensured that managed care plans’ MLR calculations reflect their net pharmacy costs even if the prescription drug benefit is administered by a contracted PBM.  By leveraging the MLR requirement to promote greater transparency in this manner, the CMS guidance made it somewhat less likely that PBMs use spread pricing and thereby inflate federal and state Medicaid managed care costs.

The proposed rule builds on this guidance by requiring that Medicaid managed care plans structure any contract with PBMs to separately break out their pharmacy costs, including reimbursement for the cost of the prescription drug itself, dispensing fees to pharmacies and other providers, and other administrative costs, fees and expenses of the PBM contractor.  Essentially, by making PBMs break out their costs, state Medicaid programs would have a better sense of whether spread pricing is occurring.  It would also result in more accurate calculation of plan MLRs, which could lower capitation rates to actuarially sound levels.  Of course, a far more effective approach would be a uniform prohibition of spread pricing in Medicaid managed care. Congress is currently considering numerous bills related to PBM practices and could include a prohibition of spread pricing in Medicaid managed care as part of those efforts.

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