Extending VBP Models Into Medicaid Drug Purchasing

Health Highlights

Editor’s Note: Over the past decade, both public and private payers have sought to develop payment policies that emphasize the value of the services provided instead of the quantity. These value-based purchasing (VBP) strategies tie payment to metrics of cost-effective care. State Medicaid agencies are deploying VBP in both their fee-for-service and managed care programs as part of an overarching strategy to leverage their purchasing power to reduce costs and improve quality. Today, states are beginning to extend the VBP model into their drug purchasing. In a recent article published in Health Affairs, summarized below, Manatt Health examines the challenges and opportunities that state VBP initiatives present.


States are using several different models to extend VBP strategies into their drug purchasing, including:

  • A “results-based” arrangement, in which a manufacturer pays a high rebate if the drug fails to meet clinical metrics.
  • A drug adherence model, in which the level of rebates paid by the manufacturer depends on patient adherence to a drug therapy regimen.
  • A capped financing model, in which a state sets a ceiling on the aggregate payment for certain drugs and receives unlimited access to such drugs.

The trend toward using VBP in drug purchasing is likely to accelerate. Ultimately, for VBP to take off with respect to drug purchasing, however, several legal and practical issues will need to be resolved.

State VBP Initiatives

In 2018, several state Medicaid programs advanced VBP for pharmaceuticals:

  • Oklahoma’s Medicaid program, a leader in pharmaceutical VBP arrangements, announced four VBP contracts with manufacturers, all using supplemental rebate agreements. One example is the state’s contract with Melinta Therapeutics regarding its antibiotic Orbactiv®. Under the contract, Melinta will pay higher rebates to the state if patients taking the medication are hospitalized for conditions the drug is intended to treat. In exchange, the state no longer subjects the drug to prior authorization.
  • Michigan and Colorado have received approvals from the Centers for Medicare & Medicaid Services (CMS) for state plan amendments (SPAs), authorizing them to enter into outcome-based contracts with manufacturers whereby the manufacturer will pay greater supplemental rebates if clinical metrics are not reached.
  • Massachusetts encourages VBP arrangements through its new policy of making a separate payment outside the bundled payment to hospitals. Under Massachusetts’ policy, chimeric antigen receptor T-cell therapies are no longer included in the state’s bundled payment. Instead, the state makes a separate payment for such therapies, conditioned on the hospital making every effort to enter into an outcome-based arrangement with the manufacturer.
  • Louisiana and Washington State have proposed a capped financing model, soliciting proposals from manufacturers of hepatitis C virus (HCV) drugs. Under the proposals, total state Medicaid spending on a manufacturer’s HCV drugs would be capped in exchange for the manufacturer becoming the exclusive supplier of HCV drugs to the state’s Medicaid program.

In the next several years, the Food and Drug Administration is expected to approve many innovative but expensive gene therapies. Because manufacturers lack data on the long-term efficacy and cost-effectiveness of these treatments, academics and some manufacturers have proposed an “outcomes-based payment over time” model in which a state would make installment payments over months or even years, so long as the drug continues to work.

Open Questions

When Congress adopted the federal laws on Medicaid drug reimbursement, it did not contemplate VBP arrangements. As a result, statutory provisions intended to ensure that states receive discounts may impede VBP arrangements. Key challenges include:

  • The Medicaid “best price” rules on VBP arrangements. Under these rules, manufacturers must provide a state with greater rebates if they offer to another payer a price that is lower than what the state pays. Manufacturers are concerned that if they enter into a VBP arrangement with one state Medicaid program (or any other payer) and their drug fails to work for one patient, the low price paid for that one clinical failure will become the best price. The manufacturer then will be obligated to pay greater rebates to all state Medicaid programs regardless of whether the therapy is effective for those specific patients.
  • The Anti-Kickback Statute (AKS). Enforced by the Department of Health and Human Services Office of Inspector General (OIG), the AKS prohibits the payment of anything of value in exchange for referrals under Medicare, Medicaid and other federal programs. Manufacturers are concerned that the federal government could view discounts they offer to a Medicaid program under a VBP arrangement as intended to promote the manufacturer’s product over a competitor’s, in violation of the statute. There are several “safe harbor” provisions, but they have detailed requirements that might not be met under certain VBP arrangements.

The Trump Administration’s Role

In its drug pricing blueprint issued in May 2018, the Trump administration voices support for VBP arrangements under Medicaid. However, to date, the administration’s primary actions to advance such arrangements are the approvals of the SPAs in Oklahoma, Michigan and Colorado, discussed above.

For VBP to advance in a meaningful way, it will be important for CMS to provide guidance to states with respect to the use of the supplemental rebate in different VBP models. The OIG could propose a new safe harbor that allows for VBP arrangements that adhere to certain safeguards or could provide guidance on how existing safe harbors would apply to VBP arrangements. If guidance and regulatory changes are inadequate, a legislative solution may be required.

VBP for pharmaceuticals can be a complex endeavor. However, if the administration, states and manufacturers can find common ground on implementation, VBP for drugs under Medicaid may grow at a more rapid pace.



pursuant to New York DR 2-101(f)

© 2023 Manatt, Phelps & Phillips, LLP.

All rights reserved