The Perils of Increasing Medicaid Rebates for Drugs With Accelerated Approval

In this edition of JAMA Health Forum, Sachs et al¹ review Medicaid spending from 2015 through 2019 on drugs approved via the accelerated approval pathway by the US Food and Drug Administration (FDA). They find that such drugs account for less than 0.4% of prescriptions but up to 9% of Medicaid drug spending. Drugs granted accelerated approval thus cost more on average than drugs without accelerated approval despite their reliance on surrogate end points that have not been confirmed to predict clinical benefit. Although Sachs et al do not recommend any policy changes, they note that their findings “help illuminate the scope of potential policy interventions” recommended by the nonprofit Institute for Clinical and Economic Review and the Medicaid and CHIP Payment and Access Commission, a federal agency that advises Congress. These groups have proposed increasing the rebates that manufacturers provide to Medicaid for drugs with accelerated approval until postapproval confirmatory trials are completed.

It is intuitively appealing to pay less for drugs with unverified benefit, but doing so affects more than Medicaid’s immediate budget. For example, rebates create an incentive to raise the baseline prices from which rebates are calculated, shifting the financial burden from Medicaid to other payers. Although a separate inflation rebate helps protect Medicaid from such price increases, it also encourages manufacturers to introduce new drugs at higher starting prices, further exacerbating the national drug price crisis while undermining long-term Medicaid savings. Increased rebates have been tried previously. In 2010, the Affordable Care Act increased branded-drug Medicaid rebates from 15.1% to 23.1%, providing the appearance of savings, but inflation-adjusted Medicaid retail spending on prescription drugs net of rebates increased from $27.7 billion in 2015 to $31.4 billion in 2019 despite a similar prescription volume.²

Because Medicaid accounts for less than 10% of US retail prescription drug expenditures,³ the effect of increased rebates on incentives for new drug development may be limited, so long as other payers do not emulate Medicaid’s approach to evidence-poor drugs. However, if the effect on manufacturer revenue is insubstantial, savings to the US population is necessarily equally insubstantial. As savings increase, the effect on incentives rises in tandem.

Surrogate end points have been associated with 11- to 19-month shorter study durations³ and 46% lower development costs.⁴ If larger or more widely adopted rebates grow to outweigh the financial benefits of lower trial costs and earlier revenue generation, manufacturers may choose to forgo accelerated approval in favor of traditional approval and some marginally profitable drugs might not be pursued at all, rendering moot any incentive that temporary rebates create to reduce delays in confirmatory trial completion. Greater use of traditional approval would yield higher-quality evidence and reduce the chance that an approved drug is entirely worthless, but would also undermine the original purpose of the accelerated approval program, namely, to accelerate patient access when surrogates “reasonably likely” to predict clinical benefit are available.

Increasing rebates in proportion to the risk that drugs will later be withdrawn for lack of efficacy would yield minimal savings. Among 54 oncology and malignant hematology indications receiving accelerated approval between 1992 and 2017 for which confirmatory trials were completed, no drug was fully and permanently withdrawn for lack of efficacy.⁵ One of bevacizumab’s (Avastin) indications that received accelerated approval was permanently withdrawn, but bevacizumab remained on the market for other indications and continued to be used off-label for the withdrawn indication, albeit at lower rates.⁶ Two drugs with accelerated approval, gemtuzumab (Mylotarg) and gefitinib (Iressa), failed to confirm benefit in the indications granted accelerated approval but received modified indications, and 2 drugs, tositumomab (Bexxar) and oral fludarabine (Oforta), were voluntarily withdrawn before completion of postapproval studies, but tositumomab was withdrawn owing to dwindling sales and injectable fludarabine remained on the market for previously approved indications. A more recent report found 10 additional indications (4 drugs) that failed to confirm benefit, but the drugs similarly remain available.⁷

The greatest failing of Medicaid rebates is that they are based on uncertainty—rather than magnitude—of benefit. This approach reduces revenues for highly effective drugs such as imatinib (Gleevec), which received accelerated approval in 2001, while still allowing enormous expenditures on minimally effective drugs such as eteplirsen (Exondys 51), which received accelerated approval in 2016 and was listed at $300 000 per year. Even for drugs eventually showing no benefit of any amount—Sachs et al¹ name only 1: hydroxyprogesterone caproate (Makena)—temporarily reducing reimbursement can fail to prevent hundreds of millions of dollars in wasted expenditures. Ten years (and approximately $1 billion in Medicaid expenditures¹) after hydroxyprogesterone caproate’s 2011 approval, which constitutes a large majority of the average 13.6-year period between drug approval and generic entry,⁸ the FDA still has not removed the indication that received accelerated approval. Placing accelerated approval revenues in escrow until benefit is confirmed could avoid such expenditures but would require a new infrastructure, present difficult questions of interest rates and compensation for altered indications, and reduce spending only infrequently, when postapproval trials fail to show benefit and the drug has no other indications.

The conflation of evidence with efficacy also diverts attention from the far larger volume of drugs without accelerated approval that contribute to high Medicaid drug expenditures.¹ New drugs, with or without accelerated approval, tend to represent a disproportionate share of total pharmaceutical expenditures. It is therefore unsurprising that products with accelerated approval, about 66% of which were approved in 2007 or later,¹ represent an outsized amount of expenditures relative to their use.

Another approach could better reduce Medicaid drug spending without the drawbacks of accelerated approval rebates. Most (69%-98%) new drugs provide minimal or no incremental value.⁹ Rather than continuing to require that Medicaid cover nearly all such drugs, Congress could grant state Medicaid programs the authority to exclude low- and no-value drugs altogether. Use of this authority could eliminate spending on high-priced product hops or additions to therapeutic classes that lack demonstrated superiority and might also be appropriate for first-in-class drugs receiving accelerated approval but having doubtful value, such as the recently approved Alzheimer medication aducanumab (Aduhelm). Even without statutory changes, states could better use the full scope of their existing authority. For example, only 38 state Medicaid programs require prescription drug cost sharing. Closed formularies and broader use of formulary management tools would not only help reduce needless use of low-value drugs, but could also provide leverage to negotiate lower, value-based prices.

Congress has previously failed to anticipate industry responses to new legislation, such as the increasing prices for drugs and health care services that followed the expansion of insurance beginning in the 1960s¹⁰ and the splintering of large disease categories such as cancer following the 1983 Orphan Drug Act. Medicaid rebates can be circumvented in ways that raise rather than lower overall societal drug expenditures and have previously failed to reverse the growth in Medicaid expenditures. Even if they succeed in slowing spending increases, they reduce incentives in proportion to the savings they provide, retroactively diminish expected revenues after manufacturers have provided the amount of evidence that Congress and the FDA specifically invited, provide little savings if based on historical confirmatory trial results, and, most importantly, bear almost no relation to the magnitude (rather than certainty) of patient benefit. As Congress evaluates the various estimates of expected savings, it should anticipate how the pharmaceutical market is likely to react and consider whether broadening Medicaid’s authority to engage in formulary management could more effectively help match revenues with the degree of incremental benefit a drug provides, to better control both drug prices and overall Medicaid drug expenditures.

Published: October 8, 2021. doi:10.1001/jamahealthforum.2021.3184

Open Access: This is an open access article distributed under the terms of the CC-BY License. © 2021 Darrow JJ. JAMA Health Forum.

Corresponding Author: Jonathan J. Darrow, SJD, LLM, JD, MBA, Program On Regulation, Therapeutics, And Law (PORTAL), 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 (jjdarrow@bwh.harvard.edu).

Conflict of Interest Disclosures: Dr Darrow receives research support from Arnold Ventures, the Commonwealth Fund, The Greenwall Foundation, Health Action International’s program on Addressing the Challenge and Constraints of Insulin Sources and Supply, the Kaiser Permanente Institute for Health Policy, the National Institutes of Health, the Novo Nordisk Foundation (grant NNF17SA0027784), and West Health, and has received speaker fees from National Cooperative Rx.

Funding/Support: This work was supported by Arnold Ventures.

Role of the Funder/Sponsor: Arnold Ventures had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; and decision to submit the manuscript for publication.

Additional Contributions: I thank Erin Fuse Brown, JD, of the Georgia State University College of Law, and a government expert who requested anonymity for their contributions. No compensation was provided.

Additional Information: LLM waived on admission to the SJD program for financial reasons. All substantive degree requirements completed.