JAMA Health Forum – Health Policy, Health Care Reform, Health Affairs | JAMA Health Forum | JAMA Network
[Skip to Navigation]
Sign In
Views 1,795
Drug Pricing
August 31, 2020

Exceptions for Exceptional Cures—Modernizing the Medicaid Drug Rebate Program

Author Affiliations
  • 1University of North Carolina Kenan-Flagler School of Business, Chapel Hill
  • 2Cigna Corporation, Nashville, Tennessee
JAMA Health Forum. 2020;1(8):e201058. doi:10.1001/jamahealthforum.2020.1058

New and increasingly personalized pharmaceuticals can offer restored functionality or even a new lease on life. At the same time, unprecedented prices, such as Spark Therapeutics’ Luxturna gene therapy at $425 000 per eye, have raised the specter of affordability—both for individuals and for public and private insurers. Insurers’ payment policies have long struggled with structuring incentives for cost-effective—yet expensive—curative procedures and treatments. A new proposed rule from the Centers for Medicare and Medicaid Services (CMS) helps address this by modifying the Medicaid Drug Rebate Program (MDRP) to facilitate pharmaceutical value-based contracts (VBCs) in Medicaid programs. Given how the MDRP shapes drug pricing policy, the proposed rule will have a large impact and will allow for more pharmaceutical VBCs in ways that should benefit Medicaid beneficiaries. However, there are challenges with the proposed rule, and we suggest alternative pathways to achieve the same goal of paying for therapeutic performance.

Why Value-Based Contracts for Pharmaceuticals?

Under a fee-for-service model with up-front payment, payers accept all risk for future outcomes, while member turnover impedes any one payer’s capture of long-term savings. Value-based payments are most effective when there is significant uncertainty regarding clinical benefits, especially in the face of a high price. Uncertainty typically exists for therapies approved with trials that are significantly shorter than the intended duration of benefits or have limitations in design owing to the nature of rare disease (eg, single-arm studies) and when the clinical benefits represent substantial and delayed financial savings.

For example, onasemnogene abeparvovec (Zolgensma), a single-dose gene therapy approved in 2019 to treat spinal muscular atrophy type 1, met payer resistance because of its $2.125-million list price. Alternative treatments for spinal muscular atrophy type 1 are few and include nusinersen, a maintenance therapy injected into the spinal cord, with an incremental cost per quality-adjusted life-year gained estimated at $665 570. In contrast, despite onasemnogene abeparvovec presenting a potential long-term curative therapy, payers remained hesitant because it was studied under small, open-label, single-arm clinical trials of limited duration. Gene therapies, such as onasemnogene abeparvovec, and many advanced therapeutics for hematologic and oncologic malignant neoplasms are prime targets for pharmaceutical VBCs.

Previous Policy Barriers to Value-Based Contracts

Gene therapies and other advanced therapeutics face payment policy barriers to widespread use. Enacted in 1990, the MDRP, otherwise known as the Medicaid best-price rule, requires manufacturers—as a condition of receiving Medicaid coverage of their products—to provide a rebate for all outpatient prescription drugs taken by beneficiaries. Set in statute, the rebate provides the best price available in the private market or a certain percentage of the drug’s average manufacture price, whichever is greater. In response, Medicaid programs are required to have an open formulary (ie, they must include all of the manufacturer’s drugs). Because pharmaceutical VBCs are designed to pay manufacturers only if an individual patient responds positively to a therapy, the best price under the MDRP regulations if a patient fails to respond to a treatment could theoretically be no charge at all. Understandably, this has inhibited manufacturers’ willingness to participate in pharmaceutical VBCs.

The proposed rule allows manufacturers to support multiple prices if a therapy is tied to a pharmaceutical VBC, defining VBCs as an arrangement aligning payment with evidence-based and outcome-based measures, which “substantially” links payment to performance. Reported as a bundled sale, the MDRP best price would be the average, weighted net price provided, including any discounts from the pharmaceutical VBC (as opposed to an individual best price). Under the proposed regulatory change, a therapeutic that failed to achieve any measurable outcomes would drive the price down but not to zero. The rule also extends the time to make pricing revisions beyond the existing 36-month time frame, as new therapeutics have long-term benefits beyond 3 years. Finally, taking into account concerns that manufacturers would use an exception to drive other therapeutics through a value-based platform with higher launch prices coupled with minor discounts, the proposed rule both uses and seeks stakeholder input as to meaningful interpretations of substantial in defining a pharmaceutical VBC. In conclusion, the proposed rule provides state Medicaid programs with enhanced flexibility to enter into pharmaceutical VBCs, while private payers and manufacturers may enter into pharmaceutical VBCs without the risk of triggering disincentivizing MDRP best-price rules (ie, a price of $0).

Pitfalls and Recommendations

While the proposed reforms to the MDRP would facilitate the use of pharmaceutical VBCs, definitional and administrative challenges remain. The proposed rule contains a number of regulatory definitions, which can age poorly and yield unintended negative consequences. Recent examples include potential increased mortality associated with the 30-day Hospital Readmissions Reduction Program1 and challenges with postacute care access resulting from the 3-day rule.

Instead, there are alternative policy approaches to accomplish the goal of enabling pharmaceutical VBCs. Noting that—despite the proposed rule—some stakeholders have continued to highlight the need for greater flexibility to enable pharmaceutical VBCs, it may be easier to redefine best price as a set of best pricing options, facilitating long-term flexibility and helping counteract “gaming” as market conditions change. Under this approach, Medicaid would receive the best set of outcomes and rebates (or options set) that manufacturers provide to other payers in other VBCs. Manufacturers would thus report existing contracts, reducing administrative burden, while CMS would avoid the aforementioned definitional challenges.

Another option is statutory change, given that rulemaking is frequently subject to legal challenge (as has happened with price transparency) and not infrequently proves unstable across presidential administrations. By instead adding a statutory exemption to or modifying the MDRP definition of best price to ensure that Medicaid receives the best set of pricing options, Congress could eliminate barriers and support Medicaid’s transition to value-based agreements for curative therapeutics, increasing access and improving quality of life for impoverished, disabled, and vulnerable people in the US.

Back to top
Article Information

Open Access: This is an open access article distributed under the terms of the CC-BY License.

Corresponding Author: Brian J. Miller, MD, MBA, MPH, University of North Carolina Kenan-Flagler School of Business, 300 Kenan Center Dr, Chapel Hill, NC 27599 (brian@brianjmillermd.com).

Conflict of Interest Disclosures: Dr Miller reported serving as a member of the CMS Medicare Evidence Development and Coverage Advisory Committee and a consultant to the Federal Trade Commission, as well as previous employment at MedStar Georgetown University Hospital and future employment at the Johns Hopkins University School of Medicine. Mr Zima reported previous employment with UnitedHealthcare, Inc.

Disclaimer: The views expressed in this post are the authors’ alone and do not necessarily reflect the views of Cigna Corporation or any of its subsidiaries.

Khera  R, Dharmarajan  K, Wang  Y,  et al.  Association of the Hospital Readmissions Reduction Program with mortality during and after hospitalization for acute myocardial infarction, heart failure, and pneumonia.   JAMA Netw Open. 2018;1(5):e182777. doi:10.1001/jamanetworkopen.2018.2777PubMedGoogle Scholar
Limit 200 characters
Limit 25 characters
Conflicts of Interest Disclosure

Identify all potential conflicts of interest that might be relevant to your comment.

Conflicts of interest comprise financial interests, activities, and relationships within the past 3 years including but not limited to employment, affiliation, grants or funding, consultancies, honoraria or payment, speaker's bureaus, stock ownership or options, expert testimony, royalties, donation of medical equipment, or patents planned, pending, or issued.

Err on the side of full disclosure.

If you have no conflicts of interest, check "No potential conflicts of interest" in the box below. The information will be posted with your response.

Not all submitted comments are published. Please see our commenting policy for details.

Limit 140 characters
Limit 3600 characters or approximately 600 words