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July 10, 2017

Value-Based Pricing and State Reform of Prescription Drug Costs

Author Affiliations
  • 1Program on Regulation, Therapeutics, and Law, Division of Pharmacoepidemiology and Pharmacoeconomics, Department of Medicine, Brigham and Women’s Hospital and Harvard Medical School, Boston, Massachusetts
JAMA. Published online July 10, 2017. doi:10.1001/jama.2017.8255

Faced with increasing prescription drug costs and congressional gridlock, some states have enacted meaningful reforms. In April 2017, New York State became the first public payer in the United States to authorize limits on prescription drug costs based on their therapeutic benefits.1 Under its new budget legislation, the state can identify high-cost drugs, determine a value-based price, and use enhanced powers to negotiate supplemental rebates to achieve this target price for its Medicaid program. New York’s Medicaid program is the second-largest in the United States, covering approximately 6 million beneficiaries who account for 10% of national Medicaid drug expenditures.2 This Viewpoint discusses New York’s novel approach to addressing drug costs and assesses the potential effect of this value-based pricing system.

Enacted Drug Price Legislation

Under New York’s fiscal year 2018 budget, the state may use various tools to reduce Medicaid prescription drug expenditures if the rate of drug spending growth exceeds the 10-year average inflation rate plus either 5% in 2017-2018 or 4% in 2018-2019. These provisions are likely to be triggered this year: state Medicaid data indicate that after accounting for rebates, net drug expenditures increased by approximately 20% in 2015 and 35% in 2014 compared with an average inflation rate of 3%.3 This increase was largely attributable to new therapies for hepatitis C, human immunodeficiency virus, and multiple sclerosis.

If spending growth does exceed that target, New York’s department of health would be authorized to identify and refer high-cost drugs to a drug utilization review board for a determination of a target rebate amount. In formulating a recommendation for a value-based price, the board may consider the effectiveness of the drug, therapeutic alternatives, and the seriousness and prevalence of the disease. Based on the board’s recommendation, the state is directed to negotiate a target supplemental rebate.

If the state and manufacturer fail to agree on a rebate that is at least 75% of the difference between the drug’s current price and value-based price, the state may waive provisions that currently require managed care plans to cover medically necessary drugs in certain protected classes, including antidepressants, antiretrovirals, and hematologic drugs. Furthermore, if total drug expenditures continue to increase faster than inflation despite these new rebates, the state may implement more aggressive actions to promote use of clinical alternatives, including directing managed care plans to remove drugs from their formularies that lack new rebate agreements. Because Medicaid must generally cover nearly all drugs for US Food and Drug Administration–approved indications, patients would still have the ability to seek coverage through appeals and fair hearings, with medication costs paid by the state if the patients prevail.

Potential Effect on High-Cost Drugs

Currently, the basic federal Medicaid rebate for brand-name medications is the greater of 23.1% of the average manufacturer price or the average manufacturer price minus the best price available to nongovernmental payers. For example, due to this statutory rebate, the net cost to Medicaid when sofosbuvir (Sovaldi) was approved in 2013 to treat hepatitis C was approximately $64 000 per 12-week treatment course compared with the wholesale acquisition cost of $84 000. Additional rebates must also be provided to Medicaid programs for any price increases exceeding inflation. States may negotiate supplemental rebates, which have historically represented less than 5% of total Medicaid rebate receipts.4

The effect of New York’s new authority on supplemental rebates may be greatest for recently approved drugs. The Table shows the brand-name drugs that were among the top 50 most costly medications on a gross basis for New York’s Medicaid program and evaluated by the Institute for Clinical and Economic Review (ICER), an independent organization that assesses value-based drug pricing in a similar way that New York will employ its drug utilization review board. For example, ICER determined that hepatitis C therapies would need to be priced at $34 000 to $42 000 per treatment course to keep overall per-member-per-month cost increases below 1% and to ensure long-term value to health care systems.5 In addition to the statutory 23.1% rebate, additional discounts would be required for Medicaid’s net costs of ledipasvir/sofosbuvir (Harvoni; 10%-23% discount), dasabuvir/ombitasvir/paritaprevir/ritonavir (Viekira Pak; 1%-16% discount), and daclatasvir/sofosbuvir (Daklinza/Sovaldi; 48%-54% discount) to reach this value-based price range.

Comparison of New York Medicaid Spending, Estimated Net Costs, WAC, and ICER Value-Based Prices for Selected High-Cost Drugs, 2016-2017
Comparison of New York Medicaid Spending, Estimated Net Costs, WAC, and ICER Value-Based Prices for Selected High-Cost Drugs, 2016-2017

By contrast, for certain older therapies, Medicaid’s existing rebates allow it to receive prices consistent with their value. For example, ICER estimated that value-based prices per unit were $700 to $1010 for adalimumab (Humira) and $381 to $560 for etanercept (Enbrel) to treat rheumatoid arthritis.6 Due to inflation-linked rebates, state Medicaid programs currently pay a net price below the value-based targets for this indication.

Ensuring Value for Patients and Payers

To control prescription drug costs for public payers, policy makers have traditionally relied on changes to statutorily defined discounts. For example, the Affordable Care Act increased the Medicaid rebate level for brand-name drugs from 15.1% to 23.1%. However, a fixed discount may not adequately account for differences in the value provided by new medicines. In an important shift, New York’s pricing policy ties Medicaid’s supplemental rebates for high-cost drugs to a formal assessment of their value. As such, New York’s reform goes further than actions by other states, including the bill enacted last year in Vermont that requires disclosure of reasons for price increases.7 For expensive drugs with limited therapeutic benefit, New York’s approach of coupling value assessment and negotiation could allow the state to obtain more substantial supplemental rebates than it did previously.

Following the governor’s signature into law in April 2017, implementation of New York’s pricing legislation is currently under way. As New York’s drug utilization review board reviews the first set of high-cost drugs, we believe the assessments of drug value and affordability should be publicly available. Continued monitoring of this policy’s effect on outcomes could allow New York’s policy to act as a model for broader reforms. For example, previous attempts by individual states to obtain discounts on prescription drugs led to federal legislation in 1990 establishing the first nationwide Medicaid drug rebate. New York’s drug pricing reform marks an important new chapter in state efforts to address the challenge of costly medicines.

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Article Information

Corresponding Author: Ameet Sarpatwari, JD, PhD, Division of Pharmacoepidemiology and Pharmacoeconomics, Department of Medicine, Brigham and Women’s Hospital and Harvard Medical School, 1620 Tremont St, Ste 3030, Boston, MA 02120 (asarpatwari@bwh.harvard.edu).

Published Online: July 10, 2017. doi:10.1001/jama.2017.8255

Conflict of Interest Disclosures: All authors have completed and submitted the ICMJE Form for Disclosure of Potential Conflicts of Interest. Mr Hwang reports prior employment by Blackstone and Bain Capital, which have invested in health care companies. No other disclosures were reported.

Funding/Support: This work is supported by grants from the Engelberg Foundation, Laura and John Arnold Foundation, and Harvard Program in Therapeutic Science (all from both Drs Kesselheim and Sarpatwari).

Role of the Funder/Sponsor: The funders had no role in the preparation, review, or approval of the manuscript and the decision to submit the manuscript for publication.

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