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Drug companies could strike more value-based pricing under proposed change to Medicaid best price

June 25, 2020

A proposed rule from CMS would change how Medicaid best price is calculated, potentially removing a significant hurdle to value-based contracts for drugs. If finalized, the rule could lead to more of these arrangements between drug companies and commercial and government payers.

On June 17, CMS issued a proposed rule that would allow drugmakers to use more than one price of a drug sold to commercial plans to calculate the price offered to all Medicaid plans. Under the existing Medicaid best price rule, pharmaceutical companies must sell a product to Medicaid plans at a 23.1% discount from the list price or the lowest price paid by a commercial plan, whichever is lower.

The best price calculation has limited the ability of drug companies to offer significant rebates to plans when they enter into performance-based or value-based contracts with commercial payers. This is especially true of contracts in which the drug company rebates a portion of its drug costs to the payer if the drug doesn’t produce the agreed-upon outcome in a patient.

For example, if a diabetes drug maker granted a 50% rebate on a drug for commercial patients who didn’t achieve the target HbA1c levels within a set time, the manufacturer would have to give all Medicaid plans a 50% rebate regardless of whether the drug worked in those individuals.

Under the proposed rule, manufacturers would be allowed to incorporate multiple “best prices” for a therapy if the prices are tied to a value-based pricing arrangement. CMS defines a value-based pricing arrangement as evidence-based or outcomes-based that may be derived by “observing and recording the absence of disease over a period of time, reducing a patient’s medical spending or improving patient’s activities of daily living thus resulting in reduced non-medical spending.”

If a value-based arrangement exists, the manufacturer would report the different prices paid for the drug under the different circumstance, and the Medicaid best price would be calculated as the lowest price offered for a given outcome if that outcome occurred in a Medicaid patient.

Alternatively, if drugs are sold as part of a bundled value-based agreement, the best price would be determined based on the total amount paid to the manufacturer divided by the number of drugs dispensed.

Manufacturers would have more than three years to report the best price offered to commercial plans, allowing them to potentially have risk-bearing or value-based arrangements that span longer periods for outcomes such as survival or clinical improvement.

“We are creating opportunities for drug manufacturers to have skin in the game through payment arrangements that challenge them to put their money where their mouth is,” CMS Administrator Seema Verma said in a press release announcing the proposed changes.

HRI impact analysis

CMS has encouraged the adoption of value-based pricing measures for therapeutics and has hinted for several years that it could make changes to Medicaid best price to allow for more of these arrangements.

In 2015, the agency issued letters to four makers of hepatitis C drugs asking about their attempts to engage in value-based contracts with state Medicaid agencies and the effects of the best price rule, suggesting that their feedback could inform future guidance on the topic.

In HRI’s 2017 “Launching into Value” report, a survey of 101 pharmaceutical and life sciences industry executives found that only about a quarter reported engaging in value-based pricing arrangements, with over 30% of executives surveyed highlighting “best price” issues as a major barrier.

New therapies have launched in the past few years with a value-based pricing arrangement, but the companies have limited the size of the rebate to 23.1% in circumstances where the drug doesn’t meet the agreed-upon performance criteria (see here and here).

CMS has allowed states to apply for waivers that would exempt Medicaid best price rules in certain circumstances and enable value-based pricing arrangements via supplemental rebates. States such as Colorado, Michigan and Oklahoma have received waivers.

While CMS encouraged state Medicaid agencies to also participate in value-based pricing agreements in the June proposed rule change, it’s unclear if that will materialize. HRI’s 2017 report found that pharmaceutical companies believed private insurers and managed care organizations were the most capable of participating in value-based contracts, and federal and state agencies the least capable.

The proposal did not address other concerns, including federal anti-kickback rules.

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Trine K. Tsouderos

Business Insights, Sectors Leader and Health Research Institute Leader, PwC US

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Crystal Yednak

Senior Manager, Health Research Institute, PwC US

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