Pharma Manufacturers Face New Medicaid Landscape as States Carve Out Drug Benefit

California and other states that are carving out drug benefits and implementing one single formulary within their state Medicaid programs likely will pose both a challenge and an opportunity for drug manufacturers seeking Medicaid market share for their products, stakeholders say.

As of this year, five states have generally carved out their pharmacy benefits from their Medicaid managed care organization (MCO) contracts: Missouri, North Dakota, Tennessee, West Virginia and Wisconsin. That means the states themselves, rather than the Medicaid MCOs and their affiliated PBMs, now are managing their pharmacy benefits. New York’s and California’s carve-outs are scheduled to take effect this spring.

Although MCOs are pushing back, additional states are considering carve-outs or are implementing other measures, such as value-based contracting, to manage drug spending. CMS recently finalized changes to Medicaid’s Drug Rebate Program to facilitate more value-based payments for prescription drugs, although it’s not clear whether the incoming Biden administration might make changes to the rule.

All these changes could have a significant effect on drug manufacturers as they attempt to target the Medicaid market, industry insiders say.

“Over the next two years, as you get New York, California, Ohio and Texas with its mandatory additional rebates to even be considered for their Prescription Drug Lists, I think you’re going to see the largest pharmaceutical marketplaces constrict,” says Jeff Myers, senior vice president of reimbursement strategy and market access at Catalyst Healthcare Consulting. High-cost drugs, such as therapies for spinal muscular atrophy, “are going to have a very challenging time in terms of market access and Medicaid,” Myers tells AIS Health.

“States do feel like they have just a few areas of leverage with manufacturers to get better rebates,” adds Rachel Dolan, a senior policy analyst with the Kaiser Family Foundation’s Program on Medicaid and the Uninsured. “They can’t cut any coverage for enrollees, and they can only charge very minimal cost-sharing. So compared to a commercial plan, they have very few levers to reduce drug costs — basically, to reduce drug costs they either need to lower utilization or get more rebates from manufacturers.”

State Medicaid programs rely on the Medicaid Drug Rebate Program to set prices. That program, put in place back in 1990, requires a drug manufacturer to enter into a national rebate agreement with HHS in exchange for state Medicaid coverage of most of the company’s drugs. Drugmakers pay the rebate quarterly, based on all drugs dispensed, and the rebates are shared between the states and the federal government.

In addition to these federal statutory rebates, most states negotiate with manufacturers for supplemental rebates, which are not subject to the best price floor. As of June 2019, 47 states and the District of Columbia had supplemental rebate agreements in place, according to the Kaiser Family Foundation. States often use placement on a preferred drug list as leverage to negotiate supplemental rebates with manufacturers, and states encourage providers to prescribe drugs on the PDL over other drugs and create incentives for them to do so if possible.

Some states have used their supplemental rebate authority to negotiate alternative payment models with manufacturers, and states have formed multi-state purchasing tools when negotiating supplemental Medicaid rebates to increase their negotiating power, according to the Kaiser foundation.

But states that rely on MCOs and PBMs to manage their drug benefits often don’t have transparency into the benefit and its costs, and that’s leading some to carve out the Medicaid drug benefit, essentially moving it back into a portion of Medicaid directly managed by the state itself. Beginning in April, California and New York will join a growing list of states that have opted to carve out prescription drug benefits, wagering that the state can do a better job at negotiating drug prices than MCOs and their contracted PBMs.

The shift toward carving out pharmacy benefits often represents an about-face from the carve-in trend that arose after the passage of the Affordable Care Act, as that law increased base rebate amounts for generic and brand drugs under the Medicaid Drug Rebate Program, Dolan says, adding, “so I think what we’re seeing now is kind of a recalibration.”

As in the commercial insurance market, there’s also a trend towards value-based contracting for drugs. In September 2019, Arizona submitted a waiver request to CMS to allow value-based/outcomes-based contracting for drugs in its Medicaid program. CMS has not yet approved that waiver request, but Alabama, Colorado, Massachusetts, Michigan and Oklahoma have similar arrangements.

Manage High-Cost or High-Use Drugs?

States can manage high-cost drugs in only a few ways, explains Myers: They can focus on the drugs that are used the most, or they can focus on the highest-cost drugs. For example, he says, the spinal muscular atrophy gene therapy Zolgensma (onasemnogene abeparvovec-xioi) from Novartis Pharmaceuticals Corp.’s AveXis, Inc., costs $2.1 million per claim, and states often focus on it and other high-cost drugs when considering how to impact drug spending under Medicaid. States also should consider managing spread pricing, since that tactic from MCOs and PBMs has escalated over the past few years, he says.

“I think the big thing that’s going to be disruptive this year is you now have four states that are actively cutting out their entire drug benefit from a Medicaid program that is essentially 80% or greater MCO,” says Myers.

States’ most-utilized drugs include Sunovion Pharmaceuticals Inc.’s Latuda (lurasidone HCI) for bipolar depression, Gilead Sciences, Inc.’s HIV drug Biktarvy (bictegravir, emtricitabine and tenofovir alafenamide) and Janssen Pharmaceuticals, Inc.’s schizophrenia drug Invega Sustenna (paliperidone palmitate), Myers states. The total cost of the 10 most-utilized drugs in Medicaid was $10.1 billion in 2019, the most recent year for which figures are available, he says. That figure was split among 14.7 million claims, or approximately 3% of all Medicaid drug claims.

However, according to research Myers has performed for a new venture involving rare diseases, the total Medicaid cost for all drugs with a price tag of more than $10,000 per claim — just 218 drugs — was $10.4 billion in 2019. That represents just 580,000 claims, or approximately 0.08% of all Medicaid drug claims.

When drugs for hemophilia, HIV and hepatitis C are excluded — since, generally speaking, states already are managing the drug spend for these conditions — then less than 0.05% of all claims accounted for more than 10% of the gross drug spend in Medicaid, notes Myers. This will only get worse as gene therapies for conditions such as hemophilia and sickle cell anemia come online, he adds.

Meanwhile, the spread pricing issue has “become a crisis,” he maintains. “So you’ve seen states like Ohio completely carve out the drug benefit and bid out to gain help managing a transparent PBM,” with other states set to follow. “So all the MCOs will be required to use a unified PDL.”

This approach has taken root over the past year, Myers says. “You have, over the last 12 months, this real convergence of states making a decision to either set up complete unified PDLs and tell their MCOs, ‘This is what you have to do,’ or take most of the large product claims and set them into PDLs.” A total of 12 states have carved out the most expensive medications from the MCO payment structure, he notes.

States are under tremendous financial pressure due to the pandemic and can’t afford to spend more on their Medicaid programs, states Ashraf Shehata, partner and advisory industry leader for health plans at consulting firm KPMG. At the same time, there’s a growing trend toward more robust care management programs that would originate in the pharmacy benefit but ultimately would be aimed at reducing medical spend, he tells AIS Health. States considering carve-outs for their Medicaid drug programs will need to grapple with how to implement care management programs, he says.

Logistically speaking, it’s not too difficult to implement a Medicaid drug carve-out, says Shehata. But doing it well could be another matter. “They’re going to need to be really careful, because they’re dealing with underserved communities,” he explains. “If you start to carve some of these programs out and drive them into certain [business] relationships, you might actually create pockets of underserved communities. There needs to be a little bit better mapping of the impact of the carve-out benefit — maybe you look after frail elderly and people with disabilities a little bit differently. Maybe there’s a mental health provision.”

Health plan organizations are pushing back on carve-outs. For example, when California first unveiled plans to carve out its Medicaid pharmacy benefit, the California Association of Health Plans raised concerns about how the move would impact care coordination, as well as the “high level of uncertainty about whether it would result in any cost savings for the state.”

Alternate Approaches Are in Place

Alternatives to complete carve-outs include more stringent drug utilization review and carve-outs of specific drug classes, Shehata says. Still, what states are considering doing in Medicaid “is really no different than commercial tactics,” which include carve-outs, risk corridors, risk-pooling and reinsurance.

Other states are utilizing different approaches, says Myers. For example, “Pennsylvania now has its own specialty pharmacy, so if you have a high-cost, low-use drug, you have to go through their specialty pharmacy, which means it is incredibly restrictive.”

Meanwhile, New York has a global cap on its Medicaid drug spend, Myers says. “That means as high-cost entrants come in, the pressure is systemic, and there has to be some way to accommodate the new expensive drugs. So I think New York — which traditionally has not been all that challenging in terms of market access — is about to become significantly more challenging.”

Finally, CMS has given Tennessee approval to implement restricted formularies. “What the approval allows them to do is basically to cover the greater of one drug per therapeutic class or the same number of drugs per class as a selected EHP [i.e., employee health plan],” says Dolan. “It’s more benchmarked to the Affordable Care Act essential benefits standard, rather than the Medicaid standard. They have some sort of exceptions process, but they are still allowed to collect their statutory rebates.” Although the Biden administration likely will revise the rules that allowed Tennessee to obtain this waiver, it’s not clear whether the new administration can go back and revoke already approved waivers, she says.

California’s Medi-Cal Medicaid program could be the most interesting near-term program, Myers says. The California Department of Health Care Services plans to transition all Medi-Cal pharmacy benefits from managed care to a new fee-for-service program known as Medi-Cal Rx. It initially planned an April 1 start but pushed it back to an unknown date to review conflict avoidance protocals submitted by the project’s vendor. The transition will consolidate all drug benefits previously run by the state’s Medicaid managed care organizations under one program.

The state argues that access to pharmacy services in California will improve since the pharmacy network now will include approximately 94% of the state’s pharmacies, making it wider than individual plan pharmacy networks. State officials also argue that one unified program will have more clout to negotiate better state supplemental rebates.

To implement its new Medi-Cal Rx program, California contracted with Magellan Health, Inc. (which announced on Jan. 4 that it would be acquired by top Medicaid managed care player Centene Corp. in a $2.2 billion deal, hence the reason for the pushed-back start date) (SMA 2/1/21, p. 3). As part of its contract with California, Magellan surveyed all the state’s MCOs to make sure it was taking into account existing MCO formularies when building out the new state formulary, says Myers.

Finally, there could be more challenges ahead on the federal level for drug manufacturers seeking access to state Medicaid programs, he states: “The Biden administration and the possible new incoming CMS administrator have talked about the value of not reimbursing for FDA-approved products.”

For example, Biogen’s Alzheimer’s disease drug aducanumab was overwhelmingly rejected by the FDA’s Peripheral and Central Nervous System Drugs Advisory Committee in November, Myers points out, but still could win FDA approval. “If it gets approved with the label Biogen wants, it would be a $19 billion drug in its first year. That’s twice as big as the current largest-selling drug in the United States. So imagine if Medicaid got pounded with giving all the Medicaid Alzheimer’s patients aducanumab?” This could increase pressure on CMS to allow state Medicaid programs to apply a more selective, evidence-based standard within their drug programs, he says.

Drug manufacturers seeking market share in Medicaid likely will need to recalibrate their approaches, contend industry stakeholders.

In California, Myers says, “in the past you had so many large MCOs with two million or three million insureds — MCOs like L.A. Care Health Plan in Los Angeles,” which has more than two million enrollees. “So if you couldn’t get on all of a state’s formularies, you had a couple of really big targets that could be second-best,” he says. “Now, you’re not going to have that.”

He tells AIS Health that he expects California to negotiate aggressively for the best deals, particularly when there are multiple products in a class: “They’re going to pit everyone against each other.”

More broadly across the states, Myers says he anticipates three short-term and long-term effects on market access for pharma manufacturers.

First, there will be more integration with patient groups, particularly for groups that represent patients for whom there is no existing therapy. “If you’re producing a new, breakthrough product, where there just simply is no alternative, I think pharma companies are going to lean very heavily on patient groups to drive acceptance and access at the state level and in Medicaid.”

Second, where there are multiple products, many of which have been on the market for some time, “I think you’re going to see really, really fierce demands for price reduction,” says Myers. “Even if they don’t carve out the drug benefit, states are going to use a universal formulary or a PDL and step therapy to discourage the use of any products but those from the companies giving them the best deal.” This isn’t necessarily good for the federal government, he says, because it drives rebates over value.

The third area where Myers expects significant effects on market access involves diseases where new products exist with compelling data to suggest better outcomes. Still, he says, it’s not clear how state Medicaid programs might handle these products. To look at value, multiple states are setting up “mini-ICERs,” or state-based organizations mirroring some of the work done by the Institute for Clinical and Economic Review, he explains. Still, there’s been little impact so far from this approach for small number of states that already are following it.

The biggest impact, maintains Myers, will come from drug classes where multiple products compete. “I believe they’re going to focus on drugs where it’s easy to pit everybody against each other in a gladiator-style fashion for the biggest rebate.”

Carving out pharmacy benefits from a state’s Medicaid program may sound like something that’s relatively simple to do, says Shehata. “But to really take the program past that initial round of a handful of drug therapies and classes and categories and to really get the results that we’ve seen in commercial means we’re really talking about a full-scale program.”

States are ready “for testing the waters” on this, but Shehata warns that “having a contract doesn’t mean that you’re going to get results. They really do need to have very talented system integrators that understand the contract, understand the provisions and are able to hold all parties accountable for the kind of long-term success that doesn’t even come through the contract. This isn’t kind of a one-and-done, ‘let me balance the budget on the backs of the contract’ issue. It’s going to need to be revisited annually to make adjustments.”

Shehata says he expects, at a minimum, more pressure on claims payments for more complicated cases, with additional medical review. This already is leading pharmaceutical manufacturers to hire people with clinical claims review expertise to help with transaction claims issues, he says.

States also will need to be transparent with their pharmacy and therapeutics committee deliberations, sharing information broadly with legislators and governors about the impact of their decisions, says Shehata. Finally, “if states invest in the data and analytics framework, they are going to get a lot more returns and a more sustainable program.”

Contact Myers via Joe Reblando at joe@joereblando.com, Dolan at racheld@kff.org and Shehata via William Borden at wborden@kpmg.com.

by Jane Anderson