As states continue to see their healthcare budgets rise, some are turning to alternative payment models to control rising prescription drug costs and improve population health, according to a new report.

State healthcare budgets increased 7.3% from 2017 to 2018, according to the Duke-Margolis Center for Health Policy. But their attempts to curb the prescription drug costs that contributed to that budget bump are facing some barriers, including operational issues such as a limited ability to collect data about peoples’ health outcomes and an absence of proven contracting models.

“New payment models for prescription drugs are in their early stages, and states are still learning what works,” said Marianne Hamilton Lopez, research director of value-based payment reform at the Duke-Margolis Center.

The payment models are part of a broader trend toward value– and population-based payments in the U.S. healthcare system. These innovations have been spurred by demand from the public and employers to reduce the growth of healthcare spending, which is expected to make up 20% of gross domestic product by 2026.

States are trying many approaches to control drug pricing by increasing their negotiating power. They include price transparency, pooled purchasing, utilization reviews and assessments of health technology. States are increasingly combining these measures with reforms that tie drug payments to healthcare quality, health outcomes or population health.

But Medicaid payment reforms are constrained by current law and regulations because drug pricing is primarily based on utilization and Medicaid programs already pay the lowest prices for drugs. State Medicaid programs need to get approval before they can try new payment methods like outcome-based contracts or population health models.

Some of the new payments also aim to increase the value of care for patient populations rather than focusing strictly on reducing costs.

“States’ growing policy activity around prescription drugs underscores their strong interest in controlling Medicaid spending growth while improving access and outcomes,” said Dr. Mark McClellan, director of the Duke-Margolis Center. “States are exploring multiple strategies, with many looking toward outcomes-based contracts and population-based payment models that hold promise to reduce drug spending without the unintended consequence of limiting access to needed treatments.”

Colorado, Michigan and Oklahoma are testing outcomes-based contracts that link Medicaid spending to measurable health outcomes within their patient populations to improve the value of care. Cost reductions aren’t required. But many states don’t have the data they need to create these types of contracts, so it’s not clear if or when they could be widely deployed.

Louisiana and Washington state are trying population-based payment models that use a “subscription” approach. They focus on increasing access to therapies for specific conditions. Under these programs, a state agrees to buy a drug at a given price until a predetermined cap on expenditures for the drug is reached. The state pays a lower unit price for the drug after it exceeds the cap. This mechanism protects both states and drugmakers from downside financial risk.

Population-based subscription models usually rely on supplement clinical and public health capacity to achieve expanded access. This capacity includes the ability to diagnose, prescribe, track and manage treatment. It also includes public and provider education about the importance of screening, disease prevention and treatment. Both Louisiana and Washington sought to reduce the prevalence of hepatitis C through their reforms.

“States, and their Medicaid programs, are learning how to implement these programs, including identifying the data they need; how to measure improvements in people’s health; and how to ensure the state has sufficient clinicians to diagnose the specific condition, prescribe the specific drug, and manage the condition,” Lopez said.

Medicaid programs that try to implement new drug payment models have higher administrative costs because there aren’t verified models available, regardless of whether states or managed-care plans administer them. States and drugmakers must collaborate to identify and educate each other about best practices as they develop and test new models.

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Medicaid drug spending could be cut with new payment models –