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States seek more tools to address drug spending in Medicaid

Health Care Current | January 16, 2018

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My take

Many states seek more tools to address drug spending in Medicaid

By Jim Hardy, Specialist Executive, State Health Transformation Services, Deloitte Consulting LLP

Substantial enrollment growth, combined with a wave of new curative therapies, has increased the strain on many state Medicaid budgets. While many states are launching or proposing strategies to slow the growth of Medicaid spending, applying value-based purchasing strategies to drug reimbursement is in its infancy.

Medicaid covers one in five Americans.1 It is typically states’ top budget expense, as well as the biggest source of federal revenue. When I headed Pennsylvania’s Medicaid program a decade ago, drug costs were second only to hospital expenses as the primary driver of our Medicaid budget.

State Medicaid directors I’ve interviewed over the past several months say they are increasingly concerned that drug costs will continue to erode their budgets. They also say the 21st Century Cures law could lead to faster approval of expensive therapies that they will be required to cover.

Medicaid drug spending ramped up nationally in 2014, driven largely by expanded access to low-income and childless adults—as called for by the Affordable Care Act (ACA)—and the introduction of curative therapies.

Federal rebate program helps offset drug costs
A federal rebate program for outpatient drugs—established in 1990—is one tool that helps states manage Medicaid drug costs. About 600 drug manufacturers participate in the program, which is authorized under Section 1927 of the Social Security Act. While the rebate program was built around the fee-for-service model, the ACA expanded it to include drugs paid for by Medicaid managed care plans.

In exchange for Medicaid covering all drugs approved by the US Food and Drug Administration, drug manufacturers—through the use of rebates—are required to provide Medicaid programs with the lowest net price, or “best price,” available for those drugs. The $42 billion dollars that Medicaid spent on prescription drugs in 2014, for example, was offset by about $20 billion that it received back in rebates ($22 billion net spending), according to the Medicaid and CHIP Payment and Access Commission (MACPAC).2

The introduction of high-cost curative therapies for Hepatitis C a few years ago made a significant dent in Medicaid pharmacy budgets. In 2011, Medicaid programs collectively spent about $400 million for treatments related to Hepatitis C. In 2014, after high-cost curative therapies were made available, spending on Hepatitis C claims more than quadrupled, according to MACPAC.

The following year, however, rebates for the new therapies helped to counter overall drug spending, which helped to slow spending growth, according to the Office of the Actuary at the US Centers for Medicare and Medicaid Services (CMS).3

Most states have also negotiated supplemental rebates with drug manufacturers on top of the federal rebates. These rebates are based on a state-defined preferred drug list (PDL) for a therapeutic class based on clinical and then cost considerations. Supplemental rebates are not counted in the best-price calculation. Numerous states have enhanced the use of their PDL by harmonizing it with formularies used by Medicaid Managed Care Organizations (MCOs), or by requiring the MCOs to adopt the PDL as their formulary. State strategies that align Medicaid fee-for-service programs with MCO pharmacy management programs can generate additional rebates. Such strategies also can lead to a more consistent approach to the evidence-based use of drug therapies across a state’s entire Medicaid program.

Several states are pursuing 1115 waivers that would allow them to strengthen their PDLs by making them more restrictive, but not so restrictive as to violate Section 1927. Although the law allows states to establish PDLs, it does not allow a state to establish a restrictive formulary. Here is an overview of two recent waiver requests:

  • Arizona: In an 1115 waiver request last November, the Arizona Health Care Cost Containment System (the state’s Medicaid program) said pre-rebate spending on dispensed pharmaceuticals increased more than 50 percent between 2014 and 2016. Instead of covering every breakthrough drug included under the federal rebate program, the state wants to be able to exclude drugs that are not clinically effective or that do not offer a therapeutic advantage over other drugs. The waiver suggests the state would cover at least two drugs per class “unless (1) only one drug is available for a particular drug category or class, or (2) only two drugs are available in a category or class but one drug is clinically superior to the other.”4
  • Massachusetts: In an 1115 waiver request last September, the commonwealth said its Medicaid drug spending has increased at a compound annual rate of 13 percent since 2010. MassHealth, Massachusetts’ Medicaid program, is seeking permission to negotiate supplemental rebates with drug manufacturers and adopt a closed formulary with at least a single drug per therapeutic class. The request highlights the fact that, unlike commercial carriers, Medicaid programs cannot cover drugs based on clinical effectiveness or price. Eliminating the federal requirement to cover any drug that a manufacturer includes in the Medicaid rebate program would improve the program’s ability to negotiate additional supplemental rebates, the state concludes in its request.5

Can drug-related value-based arrangements work in Medicaid?
Many Medicaid programs are moving to value-based payment models that reward doctors and hospitals for the value they offer, rather than the number of tests and services they perform.

Although still rare, we have seen an uptick in value-based purchasing contracts between commercial health plans and pharmaceutical manufacturers. Last year, the manufacturer of a first-in-class therapy inked an outcomes-based arrangement with CMS where the agency will tie payments to the drug’s performance.6

The best-price rule ensures Medicaid programs get the lowest drug prices; however, the law could impact states and manufacturers that are considering value-based purchasing programs that tie outcomes to drug prices. For example, an experimental value-based initiative developed by an MCO or state Medicaid program might tie patient outcomes to the cost of a drug. If this program led to a lower price for that drug, the best-price rule would require the manufacturer to offer the same price to all Medicaid programs. This situation could limit the interest pharmaceutical manufacturers have in such initiatives.

A state might be able to navigate around the best-price implications by linking the outcomes risk to the manufacturer’s supplemental rebate, which is not included in the best-price rebate calculation. Supplemental rebates, however, make up a relatively small portion of the overall rebate states receive from the manufacturer, which could limit the impact of a value-based purchasing initiative.

Given these constraints, states will likely need CMS’s help if they intend to pursue drug-related value-based purchasing initiatives. Exempting cost reductions from the best-price rebate calculation, for example, would require CMS’s approval through a 1115 waiver.

Successful innovation in value-based contracting in Medicaid requires cooperation between the states, MCOs, drug manufacturers, and CMS. A coordinated effort among all stakeholders could lead to more cost stability in Medicaid while promoting evidenced-based interventions and encouraging the development of new innovative drug therapies.

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1 https://www.medicaid.gov/medicaid/program-information/medicaid-and-chip-enrollment-data/report-highlights/index.html
2 https://www.macpac.gov/publication/medicaid-spending-for-prescription-drugs/
3 https://www.cms.gov/research-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/nhe-fact-sheet.html
5 http://www.mass.gov/eohhs/docs/eohhs/healthcare-reform/masshealth-innovations/masshealth-section-1115-demonstration-amendment-request-09-08-17.pdf
6 http://blogs.deloitte.com/centerforhealthsolutions/a-little-less-conversation-a-little-more-action-in-outcomes-based-contracts/


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In the news

CMS releases guidance on implementing Medicaid work requirements

On January 11, the Centers for Medicaid and CHIP Services at CMS published a State Medicaid Director (SMD) letter detailing how it plans to evaluate states’ requests to add work requirements for adult Medicaid beneficiaries under Section 1115 Demonstration authority. The guidance pertains to beneficiaries who are not elderly, pregnant or disabled. The letter outlines broad parameters for such requests, but lets states establish specific eligibility criteria and program features (see the August 29, 2017 My Take on Medicaid work requirements).

Background: On March 14, 2017, CMS Administrator Seema Verma and former US Department of Health and Human Services (HHS) Secretary Tom Price sent a letter to governors expressing their commitment to giving states more flexibility to design and administering their Medicaid programs (see Even if the AHCA doesn’t prevail, states can still pursue their own health care reforms). CMS later released a series of policy documents outlining new Medicaid program goals and announcing changes to the Medicaid waiver process (see the November 14, 2017 Health Care Current).

On January 12, CMS approved Kentucky’s Section 1115 Medicaid demonstration waiver. Under the waiver, the state will require most able-bodied, non-pregnant, non-elderly, non-caregiver beneficiaries to work, volunteer, or take classes for 80 hours per month to remain eligible for Medicaid.

More than 100 new ACOs to participate in Medicare Shared Savings Program

Medicare has 561 accountable care organizations (ACOs) in its Shared Savings Program (MSSP), according to data released by CMS on January 5. More organizations joining the program, even though it requires them to take on additional risk, suggests that organizations are growing more confident that they can succeed in the program.

This year, CMS introduced the Track 1+ model, which aims to help organizations transition to accepting both upside and downside risk. This means they will have to pay money back or have it withheld if they miss the savings target. Organizations that opt for downside risk qualify to share in a higher percentage of any savings.

Tracks 1+, 2, and 3 qualify as advanced alternative payment models under the Medicare and CHIP Reauthorization Act of 2015 (MACRA); physicians and other clinicians participating in these models receive higher payments.

CMS unveils voluntary bundled-payment model after cancelling mandatory bundles

On January 9, CMS announced the Bundled Payments for Care Improvement Advanced (BPCI-Advanced) initiative—a new program that builds off of the Innovation Center’s previous voluntary bundled-payment model programs. This move comes after the November 30, 2017 rule, which cancelled a number of mandatory bundled-payment models (see the RegPulse blog).

BPCI-Advanced, which includes 29 inpatient and three outpatient episodes of care, requires participants to take on financial risk. If organizations can provide care under the bundle with less overall utilization and meet quality goals, they may retain a portion of the savings.

The earlier program had multiple definitions of bundles, but under BPCI-Advanced, only acute care hospitals and primary group practices (PGPs) may initiate an episode of care. However, other provider types can still participate indirectly, through gainsharing relationships with hospitals or PGP, or by serving as a model convener. According to CMS, BPCI-Advanced will qualify as an Advanced Alternative Payment model under the Medicare Quality Payment Program (see the RegPulse blog on BPCI-Advanced).

Background: The CMS Innovation Center launched its first voluntary bundled-payment initiative, Bundled Payments for Care Improvement initiative (BPCI), in 2013. BPCI included four separate models (see our report on Navigating bundled payments). Model 1 concluded in 2016; 1,191 participants were actively participating in Models 2-4 as of October 2017. BPCI-Advanced builds off of BPCI Model 2, a retrospective bundled-payment program for acute and post-acute services delivered for a defined clinical episode of care.

Senate Finance considers Alex Azar HHS nomination

The Senate Finance Committee held a hearing on January 9 to discuss the nomination of Alex Azar for Secretary of HHS.

Azar outlined his priorities for HHS if confirmed. He said he would focus on:

  • Lowering drug prices while encouraging discovery and innovation,
  • Increasing affordability of health care as well as personal choice for patients,
  • Transitioning Medicare quality measures from focusing on processes to focusing on outcomes, and
  • Combatting the opioid crisis through prevention, education, regulations, enforcement, and by developing new non-addictive treatments.

Republican senators on the committee highlighted Azar’s experience as president of Eli Lilly and Company, and as general counsel and deputy secretary of HHS under President George W. Bush. Democrats, however, expressed concern about Azar’s willingness to work to lower drug prices, noting that prices for several drugs increased dramatically during his time at Eli Lilly and Company.

In response to questions from Sen. John Thune (R-SD), Azar also said he would support telemedicine and remote patient monitoring to increase patient access to care. Azar also expressed his support for allowing states to include Medicaid work requirements through waivers and transitioning Medicaid to a block-grant program. Finally, Mr. Azar noted a willingness to support mandatory payment initiatives under the Center for Medicare and Medicaid Innovation, a break from former Secretary Price (see the previous article for more on new payment models).

The Senate Finance Committee will hold a vote to confirm Azar, and then the full Senate will vote on the nomination.

MedPAC makes recommendations for biosimilar use

The Medicare Payment Advisory Commission (MedPAC) voted on recommendations for Congress covering the Medicare Part D drug benefit on January 11.

First, the commission voted to recommend Congress include biosimilar drugs under “applicable drugs” in the Medicare program, which would require biosimilar manufacturers to pay the discount in the coverage gap for Medicare Part D plans. The commissioners hope that this will encourage expansion of biosimilars and non-branded versions of biologic drugs, as well as lower costs for Medicare.

The recommendation also said not to consider manufacturer discounts in the coverage gap toward enrollee out-out-pocket spending for biosimilars. Under the current rules, Medicare Part D plans must pay a greater share for biosimilar drugs than their brand-name biologic counterparts, effectively discouraging the use of the less-expensive biosimilars. This costs the Medicare program more money.

Including manufacturer discounts as part of enrollee out-of-pocket spending leads to higher Medicare spending because it causes beneficiaries to bypass the spending level, or “doughnut hole,” where they must pay more out-of-pocket for drugs. Once their total spending passes this level, Medicare covers 95 percent of the cost. Commissioners noted that this leads to incentives for drug companies to raise list prices, so that beneficiary spending is higher.

Executive order in Idaho will allow plans that do not meet ACA rules

In an executive order issued earlier this month, Idaho governor C.L. “Butch” Otter (R) directed the state’s Department of Insurance to design lower-cost health plans for the individual market that might not comply with some ACA requirements.

The order noted that the recent repeal of the individual-mandate provision lets consumers buy plans that do not meet all ACA criteria. The state’s insurance director, Dean Cameron, said he expects premiums for the non-ACA-compliant plans to be between 30 and 50 percent lower than premiums for health plans that fully comply with the law.

Patient advocates and other supporters of the ACA’s essential health benefits provision have expressed concern that the order will allow the sale of plans that do not offer comprehensive coverage. For instance, new plans will not be required to cover maternity care. However, Cameron said insurers cannot implement lifetime limits or deny coverage based on preexisting conditions. Additionally, health insurers that sell the new plans must also offer ACA-compliant options.

More than 105,000 Idahoans signed up for coverage through Your Health Idaho—the state’s public insurance exchange—during the 2017 open-enrollment period. However, Idaho has not expanded its Medicaid program, and 78,000 residents still lack coverage, according to a state-commissioned report. State lawmakers have proposed multiple ways to cover these individuals over the years. Otter advocated for a program that would expand primary care by funding community health centers, but the proposal did not pass in the state legislature.

Administration releases draft guidelines for data sharing between providers and researchers

Last week, the Office of the National Coordinator for Health Information Technology (ONC) released guidelines to improve interoperability between researchers and health systems who use different health information systems. Required by the 21st Century Cures Act, the draft guidance provides a framework for using common methods of network participant authentication and information exchange.

Specifically, the guidelines outline six principles to which stakeholders should adhere:

  • Standardization: Stakeholders should follow industry- and federally-recognized standards, policies, best practices, and procedures
  • Transparency: Stakeholders should exchange all information openly 
  • Cooperation and non-discrimination: Stakeholders should collaborate across the continuum of care to exchange health information, even with business competitors
  • Privacy, security, and safety: Stakeholders should exchange health information securely to protect patient safety and data integrity
  • Access: Stakeholders should ensure that patients and caregivers can access their health information 
  • Data-driven accountability: Stakeholders should exchange multiple records for groups of patients, when appropriate, to lower the cost of care and improve the population’s health overall

ONC is accepting comments on the draft proposal through February 18. The agency will then finalize the voluntary framework.

Maryland’s all-payer hospital payment system receives year-long extension

CMS has granted Maryland a one-year extension of its All-Payer Hospital Model Contract. The state’s Medicare per capita savings model, the only one of its kind in the US, negotiates with insurers to set prices for hospitals. The program is exempt from the standard Medicare payment systems.

In an announcement on January 8, Maryland Department of Health Secretary Dennis Schrader described the extension as an opportunity to finalize its updated model and continue to reduce the cost of care. According to CMS, the waiver extension requires the state to save $330 million over five years. The state will determine whether health has improved in the state based on three measures: Readmission rates, percentage of hospital-acquired conditions, and population health outcomes.

If the state fails to achieve the performance goals outlined in the model, it will transition back to the national Medicare payment system.

Breaking Boundaries

Use of drones in health care could accelerate in 2018

Drones—the small, remotely-controlled planes that you might have seen darting around the park—are gaining interest among some health care leaders in the US. This is largely due to early successes in other parts of the world. Global programs are demonstrating drones’ ability to transport medical supplies, blood products, and lab samples to and from disaster sites and remote locations that are difficult access by car or motorbikes. Currently, Federal Aviation Authority (FAA) regulations do not allow GPS-enabled drones to fly out of sight of the operator. But given that the FAA has made some exceptions for health care uses, new policies might expand the use of drones in the future.

Last October, the federal government launched a program to continue testing drone detection and tracking for nighttime operations and flights out of sight of the operator. Through the program, state and local governments can seek regulatory approval for testing and expanding the use of drones. The program aims to learn more about the delivery of medications, commercial packages, infrastructure inspections, and support for emergency management operations. The program, which would expire after three years, could allow drone flights of up to 400 feet in altitude.

Health Integrated Rescue Operations (HiRO) was developed by universities in Mississippi and has tested almost a dozen medical drones in the US. The initiative grew out of the opportunity for drones to support health care services after natural disasters, when ambulances cannot reach everyone in need. HiRO equips drones with medical kits that can treat as many as 100 patients. The drones also have an audio-visual connection and a pair of smart glasses to connect bystanders and first responders with remote care teams.
In the winter of 2015, an initiative in rural Virginia successfully tested medication delivery to rural clinics that were having trouble getting restocked after a snowstorm. Other groups have had similar tests in New Jersey.

Globally, drones have been used in many situations. They have delivered automated external defibrillators (AEDs) to emergency callers who reported a suspected heart attack in Sweden, brought contraceptives to women in hard-to-reach villages in rural Africa, and improved HIV/AIDS testing and care in Malawi. Drone company Zipline International is taking experiences from Rwanda— where it ferried blood products and medication to remote communities—to three states in the US, as well as some Native American reservations.

Analysis: Drones could be a cheaper, faster, and more efficient way to reach patients in rural, disaster-struck, and remote areas in the US and around the globe. Drones have been used for disaster surveillance and assessment, and their use is rapidly expanding within health care. As drone technology becomes more widespread and cost-effective, many researchers behind these experiments hope they can revolutionize access to medical care and provide aid in humanitarian crises.

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