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Value-Based Purchasing Rule For Medicaid Rx Drugs: Continuing To Shift From FFS Towards Accountability

Administrator Seema Verma

For almost the past four years, the Centers for Medicare & Medicaid Services (CMS) has sought to advance value-based care across all programs and initiatives, including through new payment models, reforms to the Accountable Care Organization (ACO) program, updates to reimbursement for primary care clinicians, and new strategies to accelerate the move to value in Medicaid. As part of this effort, the agency also removed barriers to value-based payments—such as by updating regulations pertaining to the Stark Law, requiring transparency on quality and price, promoting the interoperability of medical records, and overhauling a number of regulations to reduce provider burden.

Drug pricing is also a prime candidate for value-based reforms, especially given the advent of new high-priced but potentially curative medications ill-suited to fee-for-service financing. Therefore, recent CMS action aims to usher in a new era of value-based drug reimbursement.

As provider payments are being tied to better outcomes and lower costs across the health care system, providers are incentivized to ensure cost-effectiveness when making treatment decisions; given the potential costs of some new medications, there is a role for manufacturers to be part of value-based pricing arrangements. The need for a value-based approach to drug pricing has become increasingly clear, especially as new high-cost cell and gene therapies, which modify a patient’s own living cells or genetic code to fight or even cure disease, have been approved by the Food and Drug Administration (FDA). While providing the hope of curing many devastating diseases, these therapies can approach or even exceed a cost of a million dollars for a course of therapy.

Today’s drug reimbursement system does not contemplate such expensive one-time treatments that can cure a disease. Rather, our system was built to pay for less expensive medicines that are taken routinely to manage chronic disease. New cell and gene therapies are expensive; however, they also promise to reduce overall health care spending by curing diseases entirely, or by reducing the need for hospitalizations or costly medicines that help manage symptoms without treating underlying illness. Health insurers are increasingly looking to new strategies to cover and pay for new high-cost medicines without substantial increases to insurance premiums.

While value-based payment for medications may not lower the cost of drugs, this approach at least requires manufacturers to have “skin in the game” as they develop their pricing strategies. It also gives some level of certainty to payers as they make coverage and payment decisions for high-cost treatments and try to keep premiums affordable. Today most payers impose requirements for prior authorization or other forms of utilization management to control spending on high-cost medicines, which have the effect of limiting accessibility. However, value-based payment arrangements could provide an alternative to these practices without limiting access.

Both state Medicaid programs and private payers are interested in developing new reimbursement methodologies that demand value from prescription drug manufacturers in exchange for payment. For example, discounts could be provided if a drug fails to have the desired clinical impact, or a high-cost drug could be paid for in installments over time as clinical milestones are reached. However, antiquated regulatory barriers, particularly around Medicaid “best price” determinations, have limited the range of payment arrangements that can be pursued.

CMS recently finalized changes to Medicaid’s Drug Rebate Program to facilitate and enable more value-based payment arrangements for drugs in our new rule: “Establishing Minimum Standards in Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based Purchasing (VBP) for Drugs Covered in Medicaid, Revising Medicaid Drug Rebate and Third Party Liability (TPL) Requirements.” This rule will remove regulatory barriers to make possible a new era for value-based payment for drugs covered in Medicaid.

The Medicaid Drug Rebate Program

Under the Medicaid Drug Rebate Program, prescription drug manufacturers seeking coverage and reimbursement for their covered outpatient drugs in Medicaid, Medicare Part B, and Veteran Affairs (VA) hospitals must pay rebates to state governments and the Federal government. This helps to ensure that Medicaid pays the lowest prices for prescription drugs in the country. In 2017, manufacturers paid a total of $35 billion in Medicaid prescription drug rebates to the government, up from $31 billion the prior year. To ensure that manufacturers pay the right amount of rebates, manufacturers are required to report to CMS the discounts and other price concessions they make to private payers.

The rules governing the Medicaid Drug Rebate Program and these reporting requirements were put into effect over the last thirty years. As part of larger efforts under CMS’s Patients Over Paperwork initiative, the agency has been reviewing outdated regulations that stand in the way of innovation and promotion of value-based care. CMS’s new rule updates Drug Rebate Program regulations to provide states and private payers greater flexibility to ensure access to the latest biomedical advances by developing and participating in new value-based purchasing arrangements.

Manufacturer Reporting Of Multiple “Best Prices”

The new rule finalizes a definition of “value-based purchasing arrangements,” stating that these arrangements must substantially align payment with clinical value. Value can be assessed using 1) “evidence-based measures,” which link cost to existing evidence of effectiveness and potential value for a medicine, and/or 2) “outcomes-based measures,” which link payment to a drug’s actual clinical performance in a population or a reduction in other medical expenses. If existing evidence of a drug’s effectiveness varies for different indications or patient populations, payers could set evidence-based measures differently for different sub-groups, allowing payment to more closely match a product’s expected value.

Refining the definition of value-based purchasing is only part of the solution. Manufacturers have been reluctant to provide discounts tied to outcomes because of the implications these arrangements may have to Medicaid best price requirements: any discount offered under a value-based arrangement could set the price for all of Medicaid (even for payments outside of value-based arrangements). This concern arises from the fact that a manufacturer must report to Medicaid the lowest or “best” price they charge for a drug in the U.S. The manufacturer must then pay the government rebates such that the drug’s cost to Medicaid is equal to this “best price,” or lower than this “best price” if this “best price” is less than 23.1 percent below list price (known as the Average Manufacturer Price).

For example, consider a private payer seeking to negotiate a 75 percent discount from a manufacturer for any doses of an oncology drug that do not lead to a patient’s cancer going into remission. The manufacturer may be concerned that if the drug in fact does not have the desired benefit for a single patient, the manufacturer would have to provide a 75 percent discount to all of Medicaid, even for patients in Medicaid whose cancers went into remission. The manufacturer may therefore choose not to offer this arrangement anywhere, potentially limiting Medicaid’s discount to just the required 23.1 percent discount.

The Medicaid Drug Rebate Program was structured to reduce the cost of drug therapies to all states by allowing Medicaid to take advantage of the negotiating abilities of the private sector. The program therefore should not hinder the linking of payment to clinical outcomes as long as the best prices offered as part of value-based purchasing arrangements outside of Medicaid are available within Medicaid. The final rule allows a manufacturer to report multiple best prices charged for a single drug under a value-based purchasing arrangement if the manufacturer offers the arrangement to all states.

Under this approach, manufacturers could report varying best price points based on the lowest prices negotiated for different evidence-based or outcomes-based measures achieved as a result of the value based purchasing arrangement. States choosing to participate in such value-based arrangements would then benefit fully from arrangements developed during negotiations between private payers and manufacturers. For participating states, rebates would be calculated based on the best price for each measure that any payer negotiated. Lower price points could become available to states as manufacturers would be more willing to participate in—and payers would have more power to demand—value-based arrangements.

In our new rule, CMS finalizes this reporting option and clarifies that for a manufacturer to report multiple best prices for a value-based arrangement, the manufacturer must offer that value-based arrangement to all state Medicaid programs. For any drug that has multiple best prices reported, CMS will share the multiple best prices with state Medicaid agencies as the agency currently shares other manufacturer pricing benchmarks with states on a quarterly basis. Manufacturers must continue to report the single best price that they offer outside of value-based arrangements, so that states that choose not to participate in value-based purchasing will continue to receive rebates based on the best price outside of value-based arrangements.

Additional Negotiation Tools For Expensive Medicines

The new rule also clarifies that a manufacturer can report a “bundled sale” price for all units of a drug sold to a payer under a value-based purchasing arrangement. This means that a manufacturer may distribute any value-based discounts over all the drugs purchased under such an arrangement. A manufacturer may calculate a weighted-average best price taking into account a drug’s “successes” and “failures,” so the price used for reporting purposes is an actual average price that a payer has paid.

So, under the hypothetical example of an oncology drug mentioned previously, a manufacturer would not report either the full price or the 75 percent discounted price as the “best price” (assuming that every payer had a mix of some patients whose cancers went into remission and other patients whose cancers did not). The manufacturer would instead report the lowest average price that any payer paid per patient, factoring in the successes for that payer’s enrollees (for which full price was paid) and the failures (for which a 75 percent discounted price was paid). The price that manufacturers report as their Medicaid best price over a bundled sale under a value-based arrangement would become available to all of Medicaid, even if a Medicaid program did not have a value-based payment arrangement based on the bundled sale.

CMS also finalized an exception to the time frame for a manufacturer to make revisions to reported pricing data. The generally applicable time frame for revisions is currently three years. However, in the context of value-based purchasing arrangements, payers are interested in evaluating a drug’s performance for durability of effect beyond three years, especially for expensive new drugs that are expected to be curative. Payers may want to see longer-term results and tie reimbursement to outcomes for a longer period of time. Therefore, in the new rule, we are permitting applicable revisions of pricing data outside the three-year window when evaluations under value-based purchasing arrangements extend longer than three years.

Taken together, these regulatory changes will enable payers, providers and Medicaid programs to demand value from manufacturers and tie payment to performance. Manufacturers can tie prices to results without distorting their Medicaid rebate obligations. CMS projects that an increase in value-based purchasing in Medicaid as a result of the new rule could generate total government savings of up to $228 million over the next five years, with a portion of the savings accruing to states and the rest going to the federal government.

Government regulations should not stand in the way of private sector innovation in value-based payment models for prescription drugs. And while CMS’s new rule will facilitate value-based payment arrangements, there is no requirement for any payer to engage in value-based negotiation. If prescription drug manufacturers do not offer a better deal under value-based arrangements, states, providers and private payers will not participate in them.

Reorienting Prescription Drug Spending Around Value

Value-based drug reimbursement does not guarantee lower drug prices, but it does offer more negotiating power to payers and requires manufacturers to have more accountability. The new rule empowers payers to demand discounts if a drug does not deliver value to match its price. For manufacturers that instead tried to launch at a low price and increase their price once their drug demonstrated value, the manufacturer would have to pay additional rebates if they increased their drug price faster than inflation.

The FDA recently predicted that by 2025, the agency will be approving 10 to 20 cell and gene therapy products every year. While these medicines are certain to be groundbreaking in their approach, like a tree falling in a forest where no one is present to hear it, these drugs will not have any impact if no one is able to access them. CMS’s changes to the drug rebate program will help patients access new high-cost medicines, as payers will be more apt to cover the drugs if there are guarantees of significant benefits to patients or a reduction in overall health care costs. Value-based payment arrangements could give payers an assurance of cost-effectiveness and allow them to consider lifting requirements for prior authorization or other forms of utilization management for high-cost medicines, thereby increasing access for patients and relieving burden on providers.

Today we see clear benefits from value-based payments to doctors and hospitals—increased quality and lower costs. As the largest payer for prescription drugs in the world, CMS must create a pathway for value-based reimbursement for prescription drugs as well. CMS’s new rule lays the foundation to bring to prescription drugs the value-based payment strategies that – slowly but surely – are successfully taking root nearly everywhere else in health care.

While this rule will open these opportunities in Medicaid and private insurance plans, the next frontier will be Medicare, particularly Medicare Part B, where today payment is based on the average sales price without ensuring that price is tied to value. Established in 2003, Medicare Part B’s payment methodology never envisioned curative cell and gene therapies as expensive and uniquely targeted as those starting to enter the Medicare market. Moreover, Medicare pays the administering provider of Part B drugs an additional percentage of the drug’s sales price, rewarding the use of higher-cost drugs.

Many new cell and gene therapies are biological products that must be administered by infusion, thereby placing them in Part B. If new value-based payment arrangements successfully emerge in private plans and Medicaid as a result of CMS’s final rule, CMS could look to these approaches for ideas to improve Medicare Part B.

In short, this rule does not simply reform prescription drug payment in Medicaid for the better; if it fulfills its promise, it will also provide workable models for policymakers looking to promote value—and the lower costs that result—in payment for prescription drugs across the entire health care system. All patients, not just those in Medicaid, may ultimately feel the positive effects of the rule for a long time to come.

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