Medicaid Administrators Start to Take on Drug Costs

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By Victoria Pelham

Public and private sector decision makers are turning their attention to ways to trim Medicaid’s pharmaceutical costs, including shaking up how the program covers drugs.

Massachusetts earlier this fall asked the federal government for the first time to grant the option to pick and choose which drugs to cover, taking into consideration their effectiveness and price tag, and to leave some out. The selection process would go through a “commercial-like” closed formulary that would bring Medicaid more in line with private insurers, with the goal of reining in “unreasonably high” and growing pharmaceutical spending.

Other states’ programs are closely watching how the Centers for Medicare & Medicaid Services responds to the request—especially because no states have been able to make real changes to Medicaid drug coverage in decades, Matt Salo, head of the National Association of Medicaid Directors, said.

“This is the time in history when we need to be able to say we need more tools at our disposal to be able to contain costs and ensure we’re spending the taxpayer dollar wisely,” he told Bloomberg Law.

In the private sector, managed care plans also want to take on Medicaid drug spending—but with a totally different approach. Medicaid Health Plans of America is finalizing a policy proposal in the coming weeks to overhaul the Medicaid drug rebate program and essentially create a Medicare Advantage-style prescription drug plan within Medicaid managed care. Jeff Myers, president and CEO of MHPA, told Bloomberg Law the proposal would give rebate savings to plans (rather than states), which now run the benefits for around three-quarters of Medicaid enrollees.

“By allowing plans to use the same tools they use in commercial or other segments of health care, you end up getting better results at lower cost,” Myers said.

Medicaid spent about $29 billion in fiscal 2015 on prescription drugs (after rebates), an increase of about 14 percent, according to the Medicaid and CHIP Payment and Access Commission. The previous year, that price tag grew by more than 24 percent, which the commission said was largely driven by Medicaid coverage expansions and new specialty drugs for conditions such as hepatitis C. Meanwhile, the $550 billion-and-climbing safety-net health insurance has faced a year of criticism and pressure from the Trump administration and lawmakers over the sustainability of its spending.

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Each state Medicaid program offers an outpatient prescription drug benefit.

Under the arrangement, Medicaid receives set discounts for the medicines—MACPAC analysts estimate states receive nearly 50 percent back under the Medicaid Drug Rebate Program. But in exchange, programs must essentially cover every outpatient Food and Drug Administration-approved medicine from participating manufacturers. That leaves them with tools such as preferred drug lists or mandatory prior authorizations to prioritize or discourage certain drugs, such as risky use of opioid painkillers.

But they’re held back by an inability to use market forces to make coverage determinations like other health insurers, Salo said.

In practice, this translates to Medicaid having to cover all medicines that are deemed safe and better than a placebo—a standard not justifiable when considering new orphan drugs coming out that can cost up to $700,000 per year or those that are approved but don’t work as well in treating some strains of an illness as others, he said.

“At the end of the day Medicaid gets its rebates and that’s great; Medicaid gets ‘best price,’ and that’s great,” Salo added. “But getting the best price as defined by the statute doesn’t mean we’re getting a sustainable price.

“It doesn’t mean we’re getting an appropriate price.”

Reviewing Drugs’ Effectiveness

Massachusetts also cautioned that standards for FDA accelerated approval aren’t required to show a full clinical benefit and overall have been relaxed under the 21st Century Cures Act to speed drugs to market. The state asked to be able to review the medicines’ effectiveness independently through a medical school partnership and skip coverage of those deemed to have “limited or inadequate” use. It also wants more leeway to leave out those that have been reformulated but have no extra medical value.

As it stands, Medicaid directors can do little to stem the tide of growing prescription drug costs, Salo warned. And while coverage might be affordable for beneficiaries, it isn’t so for states.

“If the manufacturer notes that at the end of day Medicaid has to cover the product, then their willingness to come to the table and offer supplemental rebates is relatively limited,” Salo said. But “if Medicaid can go to the table with manufacturers and say, ‘No, we’re going to make some decisions, and we’re going to cut some people out,’ that motivates manufacturers to come to the table and say, ‘All right, we’ll bring our prices down.’”

Balancing Act

On the flip side, industry stakeholders argue that the current battle over high drug costs comes amid an era of life-saving innovation and the possibility of new genetic therapies.

The Pharmaceutical Research and Manufacturers of America opposes the Massachusetts proposal, saying it would “pose a serious threat to patients’ access to lifesaving medicines. Medicaid patients—those with disabilities, children and the elderly—frequently have complex and chronic health conditions that often require access to a broad range of medicines.”

“Massachusetts’ proposal to supplant the U.S. Food and Drug Administration’s judgment on the safety and efficacy of new drugs interferes with physician judgment and patient access to innovative therapies to treat cancer and HIV,” PhRMA spokeswoman Caitlin Carroll told Bloomberg Law in a statement.

Limiting the available options would hurt the most vulnerable beneficiaries, she added, calling the request “an aggressive waiver with such a direct threat to patients.”

Further, the drugmakers’ industry lobby believes that the Massachusetts Medicaid program already has “significant flexibility” to keep drug spending in check, noting that it made up just 3.5 percent of the state’s Medicaid budget in 2016.

PhRMA also backed the rebate program’s ability to grant Medicaid the lowest price with tools and options to control coverage such as preferred drug lists. Drugmakers gave Massachusetts Medicaid $637 million in rebates in 2016, PhRMA said.

Medicaid managed care plans agreed on the importance of new medicines but diverged with the drug industry on its support of the drug rebate program, saying it’s not the solution.

“The question is, how [are the new innovations] going to get paid for?” Myers said.

“You really have to look at how we’re buying old stuff…” he added. Doing that efficiently could then create the funds to cover the rising cost of new drugs and have a ripple effect on the quality of care.

An approach to the outpatient drug benefit that boosts health outcomes at a lower price would help everyone in Medicaid, Myers said.

Unclear Path Ahead

MHPA’s plan is weeks from being introduced.

Myers said the drug rebate program is largely divorced and separate from the actual delivery of care to Medicaid enrollees. Giving the plans more of a say, as MHPA hopes to do, could drive competition and innovation.

The overhaul would create formularies with similar protections as Medicare Advantage that the plans would be in charge of.

“Because plans already take the risk, plans have real financial incentive to provide the right drug to the right person at the right time,” he said.

Many other states are likely to explore an approach similar to that of Massachusetts if it’s approved, Salo said. But an approval would also likely face legal challenges with unclear results.

Myers said it’s not certain the state is even able to do what it’s asking under a Section 1115 waiver. But he’s hopeful that the proposal will spur meaningful action on the issue of high drug costs.

To contact the reporter on this story: Victoria Pelham in Washington at

To contact the editor responsible for this story: Brian Broderick at

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