Medicaid Drug Proposal is Boon for Contracts Based on ‘Value’

The federal Medicaid agency on Wednesday offered some financial protection for drug companies looking to enter contracts with state Medicaid plans and commercial plans based on how well a drug works.

The premise is simple: States pay for a drug, but if it doesn’t work the state gets a partial refund from the drug company. These type of contracts are especially attractive for newer, expensive drugs.

Some states, like Oklahoma, have already adopted those types of contracts for some drugs. The change has not been adopted everywhere because that sort of payment structure can clash with existing regulations that are meant to prevent fraud.

Those contracts can also set up some drugmakers to offer bigger discounts than they originally intended. To prevent that, the Centers for Medicare & Medicaid Services wants to alter how certain discounts that drugmakers offer states are calculated and give more wiggle room for companies looking to use contracts based on a drug’s performance.

This wiggle room will help promote outcome-based contracts in the commercial space too, Seema Verma, CMS administrator, told reporters.

“By modernizing our rules, 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,” Verma said in a statement.

She acknowledged that this proposal doesn’t necessary guarantee lower prices, but it “provides a tool in the toolbox for plans to negotiate with manufacturers.”

Lowering Risk

Drug companies are already required to offer state Medicaid plans their “best price” for a product, which refers to the lowest amount the company will charge for a medication. All states get the same “best price” from a company. If a company offers one state or provider an alternate discount—or some sort of financial benefit that affects the ultimate price of a product—it could affect that baseline “best price” and force a drugmaker to offer that discount to everyone.

That’s a risk from which the CMS is trying to shield drugmakers through Wednesday’s policy suggestion. The hope is that more companies will use outcome-based payments if there’s less financial risk, Alexander Dworkowitz a partner at Manatt Health who specializes in Medicaid drug pricing, said.

One product could have multiple “best prices” under the proposed change, and drugmakers could use outcomes from multiple sales to determine what prices for products should be.

“Just because a drug didn’t work for one person, you don’t have to give the same discount for a million other people” under this policy, Dworkowitz said.

This change in Medicaid will reverberate in the commercial insurance industry.

Deciding multiple “best prices” could create an administrative nightmare, though, Dworkowitz said.

“There’s going to be a lot of administrative questions on how that’s going to work,” he said. “People will submit comments on that, and there will be a test of whether there is a way to administer something that’s that complicated.”

The policy suggestion would also create standards for state Medicaid boards to use when analyzing opioid use. Each state has a board that reviews drug claims in Medicaid plans to look for patterns of abuse or mistakes in prescribing. Over the last few years those boards have been used more and more to weed out inappropriate opioid prescribing.

“States have flexibility to develop or select standards that may best fit their programs and patient populations,” the agency said.