Medicaid, Medicare Drug Reimbursement Is Facing Significant Changes in Policy

Change is coming to drug reimbursement under the Medicare and Medicaid programs: CMS is set to implement a new Medicaid rule providing flexibility for value-based drug purchasing and is considering how best to incorporate value-based purchasing into parts of the Medicare program, a panel of experts said recently.

At the same time, there’s pressure to rein in drug spending within the two benefit programs, and that’s already impacting policy decisions: A provision in the American Rescue Plan, approved in March, eliminates the cap on rebates drug manufacturers must pay to Medicaid beginning in January 2024 in what one expert calls a “possible preview of what’s to come” from Congress over the next two years. Lawmakers are considering various proposals, including drug price negotiation and independent value assessments of pharmaceuticals.

“This is a big change,” said Matt Kazan, principal for policy at Avalere, of the Medicaid rebate cap elimination. “It has pretty significant implications for certain products and for certain manufacturers and stakeholders.” Kazan and three colleagues spoke in April at an Avalere webinar on drug pricing in public programs.

Prior to the change in the Medicaid rebate policy, manufacturers could owe rebates of up to 100% of the average manufacturer price (AMP) to states under their Medicaid programs. The anticipated elimination of the cap in January 2024 means drugmakers no longer will have a ceiling on what they could owe to states.

This particularly could impact “late life cycle products [and] products that currently might have a CPI-U [i.e., Consumer Price Index for All Urban Consumers] penalty or have seen AMP erosion, products that are either ‘penny priced’ or those that actually have negative revenue,” Lance Grady, practice director for market access at Avalere, told webinar attendees. It also could significantly impact products that have a major footprint in the Medicaid channel, he said.

The CPI-U penalty is an additional rebate manufacturers are required to pay to Medicaid if their product’s price has risen faster than the consumer price index for urban consumers, while “penny priced” 340B drugs are those required to be offered for one penny for a unit as a penalty to the manufacturer for raising prices faster than the rate of inflation.

Impact of Changes Will Vary

“And so without the AMP cap, and depending upon the tail of the life cycle of the product, you’re looking at a number of potential challenges here, including how manufacturers think about the Medicaid channel, how manufacturers think about setting price or maybe even lowering WAC [i.e., wholesale acquisition cost] to offset some of the AMP erosion,” said Grady. This is “a big win for states [and] certainly a big win for states that manage pharmacy spend,” he asserted, but “a significant concern for manufacturers towards the tail end of the life cycle and also for those products that are in very competitive markets that see a precipitous drop in net price or AMP, giving pressures in rebate negotiation.”

CMS’s new Medicaid value-based purchasing program rule, finalized in December 2020 (85 Fed. Reg. 87000, Dec. 31, 2020), is intended to provide states, private payers and manufacturers more flexibility to enter into value-based purchasing arrangements for prescription drugs. By making the changes, CMS said it hopes to encourage value-based payment arrangements and negotiations to help make new, innovative therapies — such as gene therapies — available to all patients.

Under the changes, which are slated to take effect on Jan. 1, 2022 — although on May 28, CMS proposed extending that six months to July 1, 2022 (86 Fed. Reg. 28742) — Medicaid and manufacturers will use a broad definition of value-based payment, which CMS said can better align pricing and payment to observed or expected evidence and/or outcomes-based measures in a targeted population. The final rule, which CMS expects to save up to $228 million through 2025, also allows manufacturers to report multiple best prices instead of a single best price when offering their value-based payment arrangements to all states.

“It’s a very important development that gives flexibilities to remove some of the often-cited barriers to a little bit more experimentation when it comes to innovative payment arrangements,” said Milena Sullivan, principal for policy at Avalere. The final rule offers the option for fee-for-service Medicaid to pursue state plan amendments and a path to more value-based contracts with manufacturers, she told webinar attendees, along with providing the option for value-based payment to Medicaid managed care plans. “That’s very, very important given the pipeline of innovative transformative therapies that are coming and probably provides some space for experimentation and things we haven’t seen to date.”

The value-based payment rule, as finalized, creates a new value-based best price, said Grady. This leads to flexibility for manufacturers to contract with an entity that’s at risk in the market that is subject to best price, he said. “So you could see this proliferate even beyond Medicaid — the original intent of this was likely to address competitive dynamics for managed Medicaid organizations, but any contracting entity that wants to enter into this value-based arrangement can do so now with protection from the manufacturer for other best prices that are not through this type of a contract,” Grady stated.

This is likely to be a catalyst for more value-based contracts, he said. “In the commercial space right now, we do see a lot of innovative contracts,” including some tied to traditional markers like net drug spend. “Some of the more sophisticated ones are tied to medical cost offsets, but typically these follow a retrospective rebate with the governance of protecting best price for the manufacturer. This rule, as finalized, could alleviate some of those pressures and could create and generate more of these innovative arrangements, certainly for cell and gene therapy, but even for other products as well, including, potentially, physician-administered products.”

Part D Redesign Is Under Consideration

Policymakers in both parties are considering changes to Medicare Part D drug benefits. Given that 2021 is the first year of a new presidential administration, and the presidency and both houses of Congress are held by the same party, there’s the potential for new spending, but also the potential for lawmakers to offset that new spending with reductions in some programs, Kazan said. This potentially could affect the Part D benefit design effort, he noted.

Policymakers would like to protect beneficiaries from high out-of-pocket costs, realign financial incentives for organizations that sponsor Part D plans and reduce overall program spending. According to an analysis released in May by the Commonwealth Fund, potential changes could include:

• “Creating a maximum out-of-pocket cap for beneficiaries when they reach the catastrophic spending phase of the program,”
• “Ensuring that Part D plans are incentivized to promote drugs that offer the most value at the lowest cost — for example, by reducing government subsidies for reinsurance and shifting responsibility for large claims to plans themselves” — and
• “Requiring drug manufacturers to provide cost discounts.”

“Currently, plans place high-cost drugs on preferred formulary tiers so that beneficiaries enter the catastrophic coverage phase as early in the year as possible — knowing that Medicare will subsidize claims at 80% for those beneficiaries,” the Commonwealth Fund analysis said. “By shifting financial responsibility for these claims from Medicare to the plans themselves, some analysts believe that Part D plan sponsors…would be likely to negotiate more aggressively with drug manufacturers for better prices and formulary placement. Others argue that redesign isn’t necessary, pointing to the popularity of the Part D program and the fact that premiums have been stable for years. Opponents of the proposed changes also say they could lead to significant increases in the size of discounts manufacturers owe for certain classes of drugs.”

Savings could reach $491 billion over 10 years if price negotiation and inflation-based rebates were included in any eventual legislation, according to the Commonwealth Fund.

Kazan said there’s actually quite a bit of common ground on potential changes to Part D among lawmakers of both parties: “The details matter, but the general structure has been agreed to. This potentially would be the biggest change to Part D since it was created.” To save money, Congress really has only two choices, he maintained: either increase the out-of-pocket cap or increase manufacturer and plan liability.

Plan sponsors have run simulated models on benefit redesign historically and likely would be more prepared to take on these changes, said Grady. The proposed changes likely would create more competition for beneficiaries who are covered by the Low-
Income Subsidy (LIS) program.

“Understanding what that market strategy is from a plan sponsor and how that plan may think about member retention strategies and member support strategies while also taking increased liability is going to be the key as they set formularies, as they understand their benchmark price and benchmark bids and as they manage the Part D benefit holistically,” Grady said.

“Manufacturers have got to understand that there could be a sweet spot of a price for access,” he continued. “You hear manufacturers talk about a value-based price for value-based access in commercial markets, but the same might also be true in Part D. If I’m a manufacturer and I recognize that I’m going to have an increase in catastrophic coverage offset, and also a rebate, I’m going to want some sort of a down-tiering type of a return so that my non-LIS beneficiary actually benefits from the negotiated formulary as early as possible when adjudicating that benefit.” Avalere is working with plan sponsors on plan design for plan year 2023 “with an eye towards 2024,” when these changes could take effect, he added.

The House bill sponsored by Democrats has a low out-of-pocket cap of $2,000 per year and “a pretty significant increase in mandatory manufacturer discounts,” said Kazan. Meanwhile, bills proposed by House Republicans and some senators would enact a higher out-of-pocket cap and more modest manufacturer discounts. Regardless, some proposals would shift liability to plan sponsors, he explained.

“Plan liability matters, and a shift in plan liability matters,” Grady said. This could lead to pressure on pharma manufacturers for higher rebates for plan sponsors to account for their increased liability. “You’ve got to think about how the manufacturer and the plan both would account for that increased liability away from the government,” he said. “It’s not going to be popular.” An increased coverage gap discount is a possible pay-for, he added.

There’s also policy action on the pharmaceutical benefit contained within Medicare Part B, said Kazan. The legislation introduced by House Democrats contains language on drug price negotiation that would affect both Part D and Part B, and multiple other proposals that would affect Part B are on the table, he said.

President Joe Biden and the new Congress appear to want to tackle Part D and Part B simultaneously, said Sullivan. For example, the House Democrats’ bill allows the HHS secretary to choose drugs for negotiation from Part D and from Part B, based on a number of criteria, she said. “The inflation rebates that are included in the same proposal also are targeting both Part B and Part D drugs,” she added.

Meanwhile, proposals from the Republican side include “a lot of very technical changes to Part B payment and reimbursement that do have savings potential, but they have to be taken as a package together in order to maybe move the dial on some of these pay-fors that Congress would need for other priorities,” Sullivan said.

House Democrats are “very interested in tackling the drug pricing issue across any type of prescription drugs that are associated with high spending and maybe lack competition,” Sullivan said. If Democrats in the Senate opted to pass Medicare drug price negotiation via the reconciliation process, which would require only 50 votes and would bypass potential Republican opposition, then that would raise considerable revenue, which then could be used for other purposes, she said.

H.R. 3 Calls for HHS Price Negotiations

Multiple lawmakers have called for Congress to mandate international reference pricing within Medicare, which could involve either changing reimbursement or changing the ceiling price of what Medicare would allow in terms of payments but could have room for market dynamics to play out, Sullivan said.

Legislation that’s pending in the House, H.R. 3, would direct the HHS secretary to negotiate prices with drug manufacturers for certain single-source products with high spending, starting with 25 products and ramping up to at least 50 products, plus all insulins and any newly introduced products with a WAC that is at least equal to the U.S. median household income. Manufacturers that didn’t comply would be subject to an excise tax ranging from 65% to 95% of gross sales of the drug, and international prices from six countries would determine the minimum and maximum prices for the negotiation process. The prices negotiated by HHS would be required in Medicare and would be available to commercial plans.

This version of international reference pricing would limit the number of countries used for reference pricing, which Sullivan said could provide a “cushion.” However, she said, its potential expansion to commercial markets carries multiple challenges.

Value Assessments May Be Used

During the presidential campaign, Biden proposed tying Medicare payments for certain drugs to a value assessment that would be performed by some sort of health technology assessment (HTA) panel, Kazan said. This leads to numerous issues, contended Brian Leinwand, Avalere associate principal for health economics and advanced analytics. These issues include who will run the HTAs and whether they will be housed within the federal government or be part of a private organization, Leinwand pointed out during the webinar. The U.S. has never had a publicly funded, independent HTA organization to evaluate drugs, diagnostics, devices or services, he noted.

The federal government does have the Agency for Healthcare Research and Quality (AHRQ), a federal agency that produces evidence to make health care safer, higher quality and more equitable and accessible, said Leinwand. In addition, the Affordable Care Act created the Patient-Centered Outcomes Research Institute (PCORI), a nonprofit entity that funds studies to help patients and caregivers make better treatment decisions. Both entities are prohibited from advising the government directly on pricing and reimbursement, he said.

Congress could expand the mandates of AHRQ or PCORI to include the ability to make recommendations on pricing and reimbursement, “and if the U.S. decides drug pricing should incorporate HTA information, a national HTA body could play a role,” explained Leinwand. “Another key issue is that it will need to determine how to ensure prices reflect value. Important elements of a process like this could include defining and incorporating value pricing and determining methods of price-setting — either negotiating or setting them based on some sort of formula. If prices are determined through negotiations, it will need to be decided who participates, are negotiations bilateral and multilateral, and what happens if they fail?”

The success of any official HTA body in the U.S. will require that issues of transparency and stakeholder engagement are adequately addressed, maintained Leinwand. In addition, a range of different stakeholders should have some degree of engagement during the HTA process. Patient involvement in the HTA process has increased, but very few countries give patients voting rights, he said. “Manufacturers are excluded from the voting body in most countries but submit clinical and economic evidence to the HTA organization and are of course represented during price negotiations.”

CMS also could experiment with value-based pricing via its Center for Medicare and Medicaid Innovation (CMMI), said Leinwand. However, all these approaches are complex and also include challenges. For example, using a value framework that employs cost-effectiveness analysis to help guide coverage and reimbursement decision-making poses problems, he said, since in the U.S., there’s been longstanding opposition by policymakers and the American public to using calculations that place a lesser value on the life of someone who is elderly, disabled or terminally ill.

In addition, it can be challenging to calculate “value” and “cost-effectiveness” for a drug that’s brand new, since the results from tightly controlled clinical trials don’t always translate into real-world results, Leinwand pointed out.

“What resonates the most with payers may not align one-to-one with what resonates most with patients or providers or policymakers or other stakeholders such as employers,” he said. “What complicates matters even further is that even within one of those stakeholder groups, there may be variation in what matters most to them. So for instance, a patient with stage IV terminal lung cancer may seek to live as long as possible and desire a treatment that can extend life to the greatest degree, regardless of out-of-pocket costs or toxicity burden. Another patient may prefer to live their life free from intolerable toxicities, with survival and costs taking a back seat. And yet another patient may prefer to prevent financial toxicity to their surviving family. So the varying value drivers, both between stakeholder groups and within stakeholder groups, will be a challenge for CMMI when attempting to construct a framework that makes sense at a population level.”

According to Sullivan, questions that need to be answered include: Who will be doing the negotiation? What are the drugs that will be covered by the program? What entity will be doing the assessment? How much will that influence actual coverage and access within the Medicare program?

“If CMMI were to work on value, not necessarily as a demonstration in and of itself but as a way to incentivize value-based payment within existing or other demonstrations, that also would be a very interesting path,” she said. “‘Value’ is a very nebulous term, and it may mean different things to different people. There is growing interest there in trying to understand how data and evidence around the clinical profile of the product might result in differential payment or differential incentives in CMMI models going forward, maybe across a broader spectrum. We don’t necessarily need to think about a value-based CMMI demonstration as a standalone demonstration.”

Contact Kazan, Sullivan, Grady and Leinwand via Avalere spokesperson Claire Anderson at claire.anderson@finnpartners.com.

by Jane Anderson