States Seek More Tools to Address Drug Spending in Medicaid | Deloitte US has been saved
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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:
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.
Jim is Deloitte Consulting LLP’s Medicaid Advisory Services lead. Previously Pennsylvania’s Medicaid director, he has more than 20 years of Medicaid, health policy, reimbursement and rate development experience. Recently, Jim assisted in developing a state Medicaid care management strategy and long-term care reform strategy; assisted states with coverage initiatives; and led a hospital payment reform initiative for quality incentives and to reduce payment for avoidable re-admissions.