WASHINGTON — State Medicaid operations and Medicaid managed care plans will have more opportunities to use value-based purchasing arrangements for pharmaceuticals under a proposed rule from the Centers for Medicare & Medicaid Services (CMS).
“This proposed rule really creates the pathway for private insurance companies to enter into value-based agreements with manufacturers,” CMS Administrator Seema Verma said on a call with reporters Wednesday evening. “Value-based payments generally are taking a hold of the healthcare system. This proposal doesn’t necessarily guarantee lower prices, but it provides a tool in the toolbox for plans to negotiate with manufacturers. It also shifts us away from our typical negotiations around drug pricing — which are usually volume-based — and it shifts that conversation to having negotiations around outcomes and increases competition for manufacturers to develop drugs that are not only cost-effective but having definitive clinical outcomes.”
Paying for Good Outcomes
Currently, prescription drug manufacturers face challenges reporting payments under value-based arrangements to CMS, the agency said in a press release. “Current regulations hinder payers and manufacturers from designing new payment arrangements based on the value provided to a patient, which leads to price negotiations based on quantity of drugs sold instead of the quality of a drug product.” That also means that plans try to limit access to expensive new drugs using methods such as utilization management and step therapy.
The proposed regulations issued Wednesday “seek to modernize these regulations, encouraging innovation and empowering states, private payers, and manufacturers to pay for prescription drugs based on clinical outcomes,” the agency said. “Basing payment on the effectiveness of a given therapy can foster innovation in the treatments that are most impactful to patients, while reducing overall healthcare spending and hospital visits.”
For example, Verma said, “it’s possible a manufacturer could have clinical endpoints — say it’s a diabetes drug and it reduces your HbA1c to X level, it could be this price, and if it reduces it to another level, it’s another price … It really depends on how the manufacturer wants to set this up. It could be related to life expectancy, so if it’s a cancer treatment, maybe you’re making a payment for every year the patient is alive.” She emphasized that such an agreement would be entirely voluntary, “so if it’s going to create administrative difficulties for a plan, they may choose not to engage in this type of agreement.”
The Trouble With the “Best Price” Rule
Why don’t Medicaid plans use value-based purchasing now? Much of the reason relates to Medicaid’s “best price” rule, which requires drugmakers to give Medicaid the lowest price for a drug that they give to any other payer, including commercial insurers, Alexander Dworkowitz, a partner at Manatt Health, a professional services firm in New York City, said in a phone interview.
For example, if a drug normally costs $1,000, and the manufacturer gives a rebate to a commercial plan of $500, then the manufacturer has to report that deal to Medicaid, and has to offer Medicaid plans the same $500 rebate, so both Medicaid and the commercial plan would only pay $500 for that drug. But suppose the manufacturer instead makes a value-based purchasing arrangement with the commercial plan, in which the plan pays $1,000 if the drug works in a particular patient, but only $500 if it doesn’t work? “The manufacturer now has to report to all state Medicaid programs that their best price is $500, so every single Medicaid program gets the drug for $500, regardless of whether it worked or not,” making the manufacturers reluctant to negotiate such arrangements, Dworkowitz said.
Under the proposed rule, however, manufacturers could offer the same deal to Medicaid as it did to the commercial insurer, and wouldn’t need to give them only the $500 price — the rule would allow for more than one “best price.” This may actually make manufacturers more willing to negotiate such deals with commercial plans, Dworkowitz said. “They style this as a Medicaid-specific rule, and it does impact Medicaid, but in many ways the provisions of this rule impact commercial plans more,” he said.
These deals likely will be made for more expensive drugs, Dworkowitz noted. “Measuring outcomes is costly — it takes time, and everyone has to come up with a way to do it. So if a drug costs $50, it’s not worth going to every single patient” to see how well it worked. “But if the drug costs $500,000, maybe it’s worth it to spend time figuring out if the drug worked. I think that’s why people talk about it in the concept of gene therapies, because there it makes a lot of sense.”
Bringing Needed Flexibility
In general, the response to the proposed rule likely will be positive, he said. “I think most people think having value-based payment for drugs makes sense; it should be allowed. The big thing that came out here is they’re acknowledging that there is a regulatory hurdle to doing this. They’re saying, ‘There’s a problem and we’re trying to solve the problem.’ The debate is going to be not so much about that goal, but whether what CMS is proposing is the right way of addressing it.”
Dan Mendelson, founder of the consulting firm Avalere Health in Washington, agreed. “This kind of flexibility is sorely needed, because Medicaid rules were holding pharmaceutical companies back from doing innovative things with contracting,” he said in a phone interview. “‘Best price’ was intended to get the best price for Medicaid, but not to hold back the rest of the market. By giving flexibility on how the best price is calculated … the government is allowing prices to come down not only for Medicaid but also for the rest of the market. It’s a step forward in the right direction.” He noted that with more than half of the babies in the U.S. being born to Medicaid recipients, such agreements could help parents have better access to the cell or gene therapies needed for their infants.
For physicians and other clinicians, this proposed rule could mean a lot more paperwork, Dworkowitz said. “If I’m a physician thinking about this, it may be a good thing in terms of patient access, but the flip side is that if these agreements really take off, they might have more of an administrative burden, because the physician may be playing an important role in measuring patient outcomes … They may have to sign something to certify that a person’s condition has improved or a certain metric has been met.”
Mendelson said the trick will be to incorporate data retrieval automatically as part of the physician’s daily workflow, so no additional paperwork is required. “When these programs are effective, they track directly back to electronically filed outcomes,” he said. “Outcomes-based contracts are most effective when physicians don’t have to measure anything or report anything, but rather the information is easily obtainable from electronic records … It should fit into the workflow that exists currently.”