On Wednesday, June 17, the Centers for Medicare and Medicaid Services (CMS) proposed a series of reforms to the way that pharmaceutical prices are reported to the Medicaid program, in an effort to encourage the use of innovative contracting models throughout both Medicaid and the private sector.
The proposed rule would not represent a major change to prescription drug pricing or policy in the way that some of the administration’s other proposals had envisioned. However, it is a thoughtful tweak to existing regulations that would help mitigate uncertainty for pharmaceutical companies interested in entering into these agreements.
In this post, I describe the problem the proposed rule seeks to solve, review the details of the proposal, and situate it within the administration’s other policymaking efforts on drug regulation and pricing.
Concern Regarding Barriers Created By Medicaid Best-Price Reporting
At present, pharmaceutical companies selling drugs to state Medicaid programs must remit to Medicaid a rebate for each unit of a drug they sell to that program. By statute, innovator drug companies must remit at least 23.1 percent of a drug’s Average Manufacturer Price, and states are empowered to seek additional rebates on top of this minimum requirement. If the drug company offers an even bigger discount to a set of predominantly private-sector payers, though, Medicaid is entitled to that “best price.” (The statute establishing the best-price requirement exempts prices paid by major public-sector payers, including Medicare Part D and the Veterans Administration, from this calculation.)
CMS is concerned about the intersection of the way this “best price” is calculated and the types of innovative contracting models that at least some pharmaceutical companies are seeking to enter into. CMS notes that the Food and Drug Administration (FDA) has now approved a number of gene and cell therapy products, where the intended goal is to provide a one-time cure for a patient, rather than to provide them with a maintenance medication to be taken over a period of months or years.
Yet payers may be unsure how or even whether to cover these new therapies, which come with both uncertain future benefits (given their recent approval) but also eye-popping price tags. The most recently approved of these therapies, Novartis’s Zolgensma, is intended for the treatment of children with spinal muscular atrophy. Approved in 2019, the durability of its benefit has yet to be determined—but the list price of the drug is $2.1 million.
At least some insurers would like to be able to enter into innovative contracting models for drugs like Zolgensma. Maybe the insurer would pay for the product over time, like a mortgage, rather than paying for it all at the time of its administration. Or maybe the insurer would pay for the product when it is administered, but receive rebates if the drug fails to work as predicted—an arrangement referred to as an outcomes-based contract.
These outcomes-based contracts create challenges for Medicaid best-price reporting. As co-authors and I wrote here in 2017, “A manufacturer, for example, might agree to pay a $75 rebate on a $100 drug that fails to work for a particular patient. If it did, however, $25 would now be the drug’s ‘best price.’ Every Medicaid program would be legally entitled to that price, decimating the manufacturer’s revenue from Medicaid.” The concern may stem from the regulatory instruction that best price is to be calculated on a “unit basis,” a requirement which does not appear in the statute.
Importantly, this concern clearly has not served to bar all outcomes-based contracts. Most obviously, it should not impact outcomes-based contracts that state Medicaid programs themselves enter into, as they can do so through the use of a supplemental rebate agreement, which is itself exempt from the best price calculation. Over the last few years, CMS has approved several state Medicaid programs’ requests to enter into these types of contracting arrangements. And at least some pharmaceutical companies have entered into outcomes-based contracts with private insurers, as co-authors and I detailed in a 2018 paper. (To be clear, there are additional non-legal obstacles to these agreements, including the challenges of administering them.)
But pharmaceutical firms and trade groups have argued that legal uncertainty remains for them regarding these deals. CMS’s proposal is designed to address these uncertainties and therefore provide encouragement for pharmaceutical firms to enter into innovative contracting models, primarily with commercial insurers but also with Medicaid, by tweaking the Medicaid best-price reporting rules.
The Proposed Rule: Broadly Defining Value-Based Purchasing And Providing Flexibility In Best-Price Reporting
CMS’s proposed rule has two main features. First, the proposal advances a definition of “value-based purchasing” that forms the basis for its alterations to Medicaid best-price reporting requirements.
Defining Value-Based Purchasing
CMS would define a value-based purchasing arrangement as “an arrangement or agreement intended to align pricing and/or payments to an observed or expected therapeutic or clinical value in a population (that is, outcomes relative to costs) and includes (but is not limited to):
- Evidence-based measures, which substantially link the cost of a drug to existing evidence of the effectiveness or potential value for specific uses of that product, and/or
- Outcomes-based measures, which substantially link payment for the drug to that of the drug’s actual performance in a patient or a population, or a reduction in other medical expenses.”
This expansive definition of “value-based purchasing” matches well with the meaning given to it by the pharmaceutical industry, which has used the term broadly to refer to purchasing arrangements that differ from the standard method of paying purely for the volume of drugs purchased. However, it does conflate two different concepts. Its first concept, evidence-based measures, would use the “value-based” label when the price of a drug is tied to the size of its clinical benefit provided (putting aside uncertainty over the meaning of “substantially”). Clinical effectiveness metrics like this are used by health technology assessment organizations both in the United States (through the Institute for Clinical and Economic Review) and abroad, and are often given the “value-based” label.
But the outcomes-based contracting model is quite different. A pharmaceutical company agreeing to provide a rebate when a drug fails to meet a particular benchmark in a patient or group of patients is certainly engaging in an innovative contracting model, relative to standard payment for volume. But neither the initial list price nor the rebated price is necessarily tied to the product’s clinical value or efficacy. If this model can fairly be said to be “value-based,” that is true only in a very different sense than for the evidence-based model.
Flexibility In Best-Price Reporting
Second, within the context of value-based purchasing arrangements as defined in this way, the proposed rule provides new flexibilities for manufacturers’ best-price reporting. Instead of reporting a best price based on individual outcomes, one proposal would give manufacturers the option to report a “bundled sale” instead, expanding the existing regulatory definition of that term at 42 C.F.R. § 447.502 to more explicitly include value-based contracts. To put it briefly, manufacturers would be able to take a weighted average of their sales for a particular product under a value-based contract, reporting the average net price rather than the lowest individual price within that group.
A related proposal would permit manufacturers to report multiple best prices per drug, where each “best price” would be tied to the relevant value-based arrangement entered into by the manufacturer. CMS envisions that under this proposal, “the manufacturer would report a single best price for the drug for the quarter for sales of the drug in that quarter. In addition, the manufacturer would also report a distinct set of ‘best prices’ that would be available based on the range of evidence-based or outcomes measures for that drug that are possible under the VBP arrangement.”
Under either proposal, the relevant Medicaid rebate due to the state program would depend on whether the rebate would be paid on a drug dispensed to a Medicaid beneficiary within a value-based contracting arrangement or not. It does not appear that the proposal would require pharmaceutical companies to offer these types of arrangements to Medicaid programs, however, and so these new best prices may not be available to states.
The proposed rule includes a set of smaller changes attempting to support this broader change to best-price reporting. For instance, at present manufacturers may only modify their best-price reporting for a period of three years after the drug in question is administered. The proposed rule considers extending that period, but only if the modification occurs as a result of a value-based purchasing arrangement.
CMS acknowledges that these proposals would create “operational challenges.” Medicaid best-price reporting is already a complex endeavor, and the idea of reporting multiple best prices for different value-based contracting arrangements would be likely to increase these complications.
The Proposed Rule In Context
The proposed rule ought to be understood as one element of the Administration’s broader policymaking efforts on both drug pricing and drug regulation.
The Administration’s Drug-Pricing Agenda
The Trump Administration has made lowering drug prices a focus of its public policy agenda, beginning with the release of the Administration’s Drug Pricing Blueprint in May 2018. However, to date the Administration has enacted very few policies along these lines. A recently announced model enabling certain Medicare Part D plans to curb Medicare beneficiaries’ out-of-pocket payments for insulin may have positive impacts for beneficiaries finding it difficult to afford the lifesaving medication. But the program has yet to take effect, and its impact stands to be quite limited. It will assist only a small set of patients experiencing affordability challenges, and will do nothing about the underlying prices of the medications.
The Administration’s other proposals have not yet taken effect. Perhaps most notably, the Administration’s bold Advance Notice of Proposed Rulemaking to use international reference pricing in Medicare Part B has not even advanced to the proposed rule stage. CMS walked back its proposal to permit Medicare Part D plans to exclude from coverage drugs (even those in protected classes) whose manufacturers increase their prices more rapidly than inflation. The Department of Health and Human Services’s (HHS) proposal to permit states to import prescription drugs from Canada has not yet been finalized. And HHS’s rule requiring pharmaceutical companies to disclose list prices in television advertisements was blocked in the courts.
This proposed rule could have implications for drug pricing, although the implications might differ across payers. CMS Administrator Seema Verma has suggested that this proposal is intended to help lower prescription drug prices, although she acknowledged that it certainly does not guarantee price reductions. It is certainly possible, though, that private payers could pay less for certain medications, while at the same time Medicaid itself might experience price increases, if manufacturers use this best-price reporting flexibility to reduce their Medicaid rebate responsibilities.
The Administration’s Deregulatory Agenda
The Trump Administration has also pursued a broadly deregulatory agenda, seeking to lessen or eliminate certain types of regulatory hurdles for private entities. In the drug regulatory context, the FDA has advanced a range of proposals designed to speed new products to market. Some of these, as with the administration’s new policies in the generic drug area, aim to introduce competition more quickly and lower drug prices for patients. Others, as with the administration’s expansion of the use of real-world evidence in the clinical trials process, would allow companies to obtain approval for new indications of products more quickly but would not have offsetting competition or pricing benefits.
This proposal fits well with the Administration’s deregulatory agenda. This proposal seeks to alter a regulatory requirement of the Medicaid program in order to encourage private contracting arrangements. It is not clear that the resulting value-based purchasing arrangements would directly benefit Medicaid itself, however, and could cause financial harm to the program. It is certainly possible that in the long run, payment models that have worked for private payers could be adapted by state Medicaid programs. But these benefits are certainly more attenuated.
CMS’s Medicaid best-price reporting proposal should mitigate legal uncertainty for pharmaceutical companies seeking to enter into innovative contracting arrangements with commercial insurers, although it is unclear whether the administration will be able to finalize the rule. However, more will be needed to address broader drug pricing concerns and encourage true value-based payment reforms.
Author’s Note
The author sits on the Midwest Comparative Effectiveness Public Advisory Council of the Institute for Clinical and Economic Review (ICER).