CBO Confirms House Bill Prohibiting Use of “QALYs” Would Undermine State Negotiation of Medicaid Supplemental Rebates

I previously raised significant concerns about a House health bill that would expand an existing Medicare prohibition on the use of Quality-Adjusted Life Years (QALYs) to other federal programs including Medicaid and the Children’s Health Insurance Program (CHIP).  I warned that the bill was overbroad in its prohibition of the use of QALYs and could weaken the ability of states to negotiate Medicaid supplemental rebates from drug manufacturers  That, in turn, would increase both federal and state Medicaid prescription drug costs.  A revised version of that bill (H.R. 485) addressed some but not all of these concerns and was subsequently reported out of the House Energy and Commerce Committee in May 2023.  Now, in a recent cost estimate of H.R. 485, the Congressional Budget Office (CBO) confirms that the bill remains problematic and would undermine the ability of states to negotiate supplemental rebates, thereby raising Medicaid 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.  But in addition to the rebates required under federal law, states may negotiate voluntary supplemental rebates from manufacturers.  According to the Medicaid and CHIP Payment and Access Commission (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 (PDLs) and use utilization management tools such as prior authorization and step therapy.  State decisions on whether drugs receive 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).

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 Medicare drug negotiation provision.

H.R. 485 would extend the existing Medicare prohibition to both Medicaid and CHIP, among other federal programs.  (It would also amend the definition of a “similar measure” to include those that treat “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, non-disabled, or not terminally ill.”)  As far as I know, no state explicitly uses QALYs in their Medicaid programs today.  But states commonly 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 PDLs, prior authorization and clinical requirements.  Such comparative effectiveness reviews are also used in negotiations with manufacturers on supplemental rebates.

H.R 485, however, remains broad in its scope because it does not further define what constitutes a similar measure to QALYs, which would be prohibited in Medicaid and CHIP, or provide any exceptions for, or clarifying language permitting, the kinds of existing comparative effectiveness reviews and clinical, value and pricing assessments widely used by state Medicaid programs today.

According to CBO, “the bill’s prohibition on the use of QALYs by state Medicaid programs would not by itself have a budgetary effect because other metrics would be available for use in securing supplemental rebates or developing PDLs.”  In other words, a prohibition limited solely to the use of QALYs would not affect Medicaid in CBO’s view.  But because the bill would also prohibit any measure similar to QALYs, “states may anticipate federal interpretation of the language more broadly and thus refrain from using [not only] QALYs [but also] similar measures.  As a result, states would have less leverage when negotiating supplemental rebates, particularly for drugs that have no therapeutic competition.  States also would face more difficulties in developing PDLs and using prior authorization — again, from reduced leverage in negotiations with manufacturers.”

CBO estimates a modest increase in federal Medicaid spending of $505 million over ten years.  “That cost is the result of a small percentage of lost supplemental rebates and less use of PDLs and prior authorization, in particular for brand-name drugs without competitors in the same therapeutic class.”

CBO thus confirms that H.R. 485, as currently drafted, would likely impede states’ long-standing use of comparative effectiveness reviews, including clinical, pricing and value assessments, by state Medicaid P&T committees.  This could 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.  It could also weaken the ability of states to set clinically appropriate preferred drug lists based on comparative effectiveness. Moreover, while the CBO estimate of the effect on Medicaid is small and supplemental rebates are a relatively minor share of the total rebates paid by manufacturers, supplemental rebates are growing, as discussed above.

H.R. 485 could also 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.  According to CBO, CHIP managed care plans may use similar measures to QALYs to create drug formularies and the bill would thus “hamper the states’ ability to negotiate rebates, which would increase federal costs for CHIP and in turn result in higher premiums.”  The increase in federal CHIP costs, however, is expected to be very small: an increase of less than $500,000 over the next ten years.

To address the adverse impact on Medicaid and CHIP that CBO finds, H.R. 485 could be further amended by limiting its scope solely to a prohibition on use of QALYs or include clarifications and exceptions permitting the types of comparative effectiveness reviews widely used by state Medicaid programs today.  It is also notable that the Office of Civil Rights in the U.S. Department of Health and Human Services recently issued a proposed rule related to section 504 of the Rehabilitation Act of 1973 which could address any need for legislative action.  If finalized, the proposed rule would add a new regulation 45 C.F.R. § 84.57 that effectively prohibits the discriminatory use of QALYs by any recipients of federal funding furnished through HHS (which would include states receiving federal Medicaid and CHIP funding) if used to “deny or afford an unequal opportunity to qualified individuals with disabilities with respect to the eligibility or referral for, or provision or withdrawal of any aid, benefit, or service, including the terms or conditions under which they are made available.”  The preamble, however, states that the use of a methodology like QALYs would not be discriminatory “if used in academic research to assess the relative contribution of different policy changes or medical innovations….”

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