The Future of Pharmaceuticals in Medicaid

Health Highlights

Editor’s Note: In an environment sharply focused on the cost of drugs, it is increasingly critical to understand the Medicaid pharmacy benefit and the part health plans play in managing that benefit. In a recent webinar, Manatt Health took an in-depth look at how pharmaceutical benefit trends are evolving—and the role of Medicaid managed care. In part 1 of our article summarizing the webinar, published in the December Health Update,  we examined drug coverage under Medicaid; the “rules of the road” for states; and Medicaid managed care, including best practices, formulary development and rate setting. In part 2 of our article (below), we look ahead to the future of pharmaceuticals in Medicaid. Click here to download a free PDF of the presentation.


The Search for Savings and Value: The Federal Perspective

President Trump’s “American Patients First” blueprint outlines several initiatives to lower drug prices and reduce patients’ out-of-pocket costs. Shortly after the blueprint was introduced, Department of Health & Human Services Secretary Alex Azar released a request for information (RFI). The Medicaid-specific points across both documents fall within five categories:

  1. Drug pricing transparency, including directing the Centers for Medicare & Medicaid Services (CMS) to make Medicare and Medicaid prices more transparent;
  2. Medicaid drug rebate reform, clarifying Medicaid’s definition of brand drugs in the context of the rebate;
  3. Innovation through demonstrations, focusing particularly on drug contracting based on outcomes;
  4. Spurring competition, referring primarily to the speed of approval for generics and biosimilars; and
  5. Reducing patient out-of-pocket costs, prohibiting pharmacy benefit managers from restricting the ability of pharmacists to disclose the availability of a lower-price alternative, if patients are paying out of pocket.

The president’s budget also included a demonstration to waive Medicaid Best Price. The proposal envisions that states would have increased flexibility to exclude drugs from formularies, while manufacturers would no longer be required to provide rebates. Up to five states, which have not yet been identified, would participate in the demonstration.

CMS has not announced whether it will proceed with the demonstration without legislation. It is important to note that CMS would likely need to waive portions of Section 1927 and Medicaid Best Price before the demonstration could move forward. Section 1927 requires states to cover every drug approved by the Food and Drug Administration (FDA), with limited exceptions such as weight loss, fertility and hair loss drugs, as well as vitamins. There is no grace period. States are required to cover a drug immediately after it receives FDA approval. It is also important to remember that CMS denied a request from Massachusetts to waive Section 1927 to permit the state to exclude drugs from its formulary while it retained full federal rebates. The most likely scenario is that CMS would use its demonstration authority to grant a full waiver of Section 1927 in the five demonstration states and a limited waiver in the remaining states.

Another key stakeholder in the mix is the Medicaid and CHIP Payment and Access Commission (MACPAC)—the nonpartisan agency in the legislative branch that provides policy and data analysis, as well as makes recommendations, to Congress, HHS and states on issues that affect Medicaid and CHIP. In a September 2018 presentation, MACPAC reviewed several proposals for improving Medicaid, including formalizing a grace period for states to develop coverage criteria for newly approved drugs.

Medicare Part D plans have 90 days to make coverage decisions for drugs in six protected classes and 180 days to determine coverage requirements for all other drugs. Unlike Medicare, Medicaid programs must cover outpatient drugs upon FDA approval. MACPAC supports giving states a grace period of either 90 or 180 days to do clinical reviews before covering newly approved drugs, as well as lifting the Medicaid rebate cap. 

State-Specific Innovations

Several states are implementing creative approaches to address cost and value issues. Ohio Medicaid is one of the leaders in developing innovative programs, including:

  • Executing value-based payment reform. Providers are given a report card that assesses their charges, quality of care and patient outcomes. If they deliver value-based care, they are rewarded with a $4 per patient per month bonus. If the care they provide is overpriced and lower-quality than the care their peers provide, they receive poor reviews and don’t get any reward. This approach has reduced asthma treatment costs by 21% and acute chronic obstructive pulmonary disease (COPD) costs by 18% in 1 million Medicaid enrollees over a two-year period.
  • Renegotiating pharmacy benefit management (PBM) contracts in favor of transparency. Ohio Medicaid is requiring managed care organizations to renegotiate contracts with PBMs because of opaque pricing practices. The state is moving to a pass-through model that allows PBMs to charge Medicaid only what they pay the pharmacy for a prescription drug, along with dispensing and administrative fees.

States also are introducing innovative alternative arrangements to address high-cost therapies in state Medicaid programs. Examples include:

  • Oklahoma. CMS approved Oklahoma’s request to factor the effectiveness of drugs into the price paid to manufacturers, allowing the amount of the rebate to vary based on value. As of October 2018, two agreements were signed and in the public domain. In the first, the state receives a higher rebate for a skin infection antibiotic (Orbactiv) if it fails to keep patients out of the hospital. The second ties rebates for a schizophrenia drug to patient adherence, with the drug’s price decreasing every month as long as the prescription is refilled.
  • Louisiana. In what some are calling the “Netflix model,” Louisiana’s strategy is designed to expand access to hepatitis C therapies. The program proposes a subscription-based model, with the state paying a drugmaker a fixed annual cost over a number of years to provide unlimited access to hepatitis C drugs for Medicaid recipients and prisoners.

Across the board, states are grappling with the challenge of how to pay for promising but expensive treatments, such as gene therapies that offer a cure for genetic disorders. Coverage and reimbursement for gene therapies are left up to the states. Once coverage is determined, the state must decide whether to reimburse for the cost of the product as a drug or a hospital service.

If a state pays for gene therapy as a drug, the state will make a payment for the drug only, in addition to any payments paid for hospital services, such as infusing the drug into the patient. If the state pays for gene therapy as a hospital service, the state provides a bundled payment to the hospital, which reimburses the hospital both for the cost of the drug and for the services.

CAR-T is another emerging treatment area that carries a high price. In CAR-T, T cells (a type of immune system cells) are taken from the patient and modified in a laboratory so they can be reintroduced to attack cancer cells. Like gene therapy, CAR-T is very expensive, so states, such as New York and Massachusetts, have put new models in place to pay for these treatments. Under the new models in both states, the therapies are subject to payment under a carve-out. The payment rate for the carve-out in New York is the actual acquisition cost. In Massachusetts, it’s the lowest of the actual acquisition cost (net of price concessions), the wholesale acquisition cost or the Medicare rate.



pursuant to New York DR 2-101(f)

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