CMS Finalizes Changes to Medicaid Prescription Drug Rebate Program

Foley Hoag LLP - Medicaid and the Law
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Foley Hoag LLP - Medicaid and the Law

Earlier this year, my colleague Ross Margulies and I told you about a new proposed rule issued by CMS that makes several changes to the Medicaid prescription drug rebate program, or the MDRP.  Recently, CMS finalized the rule and we thought we’d take this opportunity to tell you about it.  On balance, we think that the rule succeeds in CMS’s stated goals of increasing access to innovative health care therapies to Medicaid beneficiaries as well as clarifying some longstanding questions about the operation of the MDRP.

But before we begin, a little bit of background about the MDRP.  In general, a pharmaceutical or biotechnology manufacturer of an outpatient drug or biologic agent cannot have Medicaid coverage for the drug unless the manufacturer agrees to pay a rebate to state Medicaid agencies.  The rebate is the greater of 23.1% of the average manufacturer’s price (AMP) of the drug or the AMP for the drug minus the best price for which the drug is sold in the United States (with a few types of sales excepted).  Manufacturers pay an additional rebate if they increase the price of their drug more than by the rate of inflation.  The MDRP was enacted in 1990 in an attempt to ensure that state Medicaid agencies always get the best deal for outpatient drugs dispensed to Medicaid enrollees.  The law was changed significantly as part of the Affordable Care Act and CMS finalized some regulations implementing the ACA changes in 2012.  The new regulations expand on the 2012 regulations.

There are three issues in the new regulation that we want to focus on:

  • Value based payment arrangements for innovative therapies
  • Line extensions of existing therapies
  • Rebate calculations when a manufacturer adopts a patient assistance program

Value based payment arrangements for innovative therapies

It seems clear to us that CMS’s main interest in adopting this rule was to incentivize the use of value-based payment arrangements, in both Medicaid programs and the private sector, for innovative new therapies.  As CMS said, these arrangements “are an important strategy to manage drug costs and promote beneficiary access to needed medications.”  Likely in CMS’s mind were some of the new FDA-approved gene therapies that carry a high cost (sometimes over $1 million) but are intended to be administered once in a patient’s lifetime because the therapies alter or modify a genetic defect (or, in the case of some therapies yet to be approved by the FDA, actually edit the patient’s DNA) and thereby cure the patient’s medical condition.

A state or a commercial payer may be reluctant to incur the high cost involved for these therapies without some guarantee that, if the therapy fails, the payer can recover all or a portion of its costs.  Manufacturers similarly have an interest in entering into these agreements because it’s more likely a payer will agree to purchase the therapy if they can be assured that there’s a value-based component to the price.  The new regulations make it easier to adopt these arrangements.

For one thing, the new regulations allow a manufacturer to report more than one “best price” for the therapy.  As we described above, Medicaid is guaranteed the best price for a drug.  Let’s say there are two sales of a gene therapy in the United States:  one to a state Medicaid agency and one to a commercial payer.  The drug fails in the commercially-insured patient, so under the value-based arrangement the manufacturer repays the payer and the price is zero.  Absent the rule’s revisions, Medicaid agencies would all be able to get the drug for free, even when the drug worked for a Medicaid patient.  Because the rule allows a manufacturer to report multiple best price points, states would have the choice of either entering into the arrangement or maintaining the current rebate structure.

Under the new rule, a “value based arrangement” is an arrangement that includes evidence-based or outcomes-based measures.  It becomes effective on January 1, 2022, in order to give states, manufacturers, and commercial payers time to implement these types of arrangements.  Although we do not anticipate that there will be a significant number of these arrangements (at least initially), the new rule does mark an important step in transitioning America’s health care system away from one that pays simply for the volume of services to one that pays for value.  This has been a goal of CMS for the last three Presidential Administrations.

Line extensions of existing therapies

The rule also addresses the issue of “line extensions” of existing drugs, although the final rule does not go as far as the original rule proposed.  A line extension is a change in an existing drug or biological entity (for example, an extended-release version of a drug that was originally approved by the FDA as one that is administered daily).  Prior to the ACA, it was possible for a manufacturer of a drug to introduce a line extension of an existing drug and set a price point for the line extension at a rate above the price point of the original product plus the rate of inflation, thereby avoiding the inflation penalty.  The ACA curtailed this possibility, but never defined the term “line extension.”  CMS does so in this rule.

Under the final rule, CMS finalized a definition of “line extension” to mean a new formulation of a drug (although CMS exempts from the definition an abuse-deterrent formulation of the drug).  CMS then goes on to define the term “new formulation” as “a change to the drug, including, but not limited to:  an extended release formulation or other change in release mechanism, a change in dosage form, strength, route of administration or ingredients.”  This change – along with clarifying that a drug can be a line extension even if it is not an oral solid dosage form – is expected to increase the number of drugs that are line extensions and therefore subject to inflationary penalties.

CMS also, notably, backed away from its proposal that a line extension can include a combination product (e.g., a drug that combines two distinct molecules into a single pill).  CMS did so based on concerns from commenters that its proposed definition would discourage the development and innovation of single tablet regimens (such as those commonly used in the treatment of HIV/AIDS, for example).

Rebate calculations when a manufacturer adopts a patient assistance program

Finally, CMS also addressed issues that arise in the MDRP when it comes to manufacturer-designed patient assistance programs.  Many pharmaceutical manufacturers have designed patient assistance programs for commercially-insured patients that essentially allow discounts off the price of a drug.  In turn, some payers have established “accumulator” programs that will not recognize payment by the manufacturer under the patient assistance program as an allowable out-of-pocket expense in terms of satisfying patient cost sharing (deductibles and coinsurance) that may apply under the plan’s benefit design.  This conflict – manufacturer price concessions not always recognized by payers – has made it difficult for manufacturers to calculate best price and AMP.  In the proposed rule, CMS attempted to address manufacturer concerns.

In the proposed rule, CMS agreed to exclude manufacturer patient assistance from the calculation of AMP and best price where the manufacturer could ensure that the benefit of the program was actually passed through to patients.  Manufacturers objected to the CMS policy on the grounds that they do not necessarily know when a payer has established an accumulator program.  Notwithstanding manufacturer objections, CMS has decided to finalize its policy in the final rule.  However, in response to manufacturer concerns, CMS is delaying the effective date of the policy until January 1, 2023, in order to give manufacturers an opportunity “to implement a system that helps them track their programs to ensure that manufacturer assistance is passed through to the patient in full, and no other entity is receiving any price concessions.”

The new final rule is yet another example of a regulation that the Trump Administration has adopted as the Administration prepares to leave office.  Many of the regulations that we have seen out of CMS in the past several weeks in both the Medicaid and Medicare programs are policies that the Administration views as legacy issues.  Here at the Medicaid and the Law Blog, we’ll be looking closely to see if the incoming Biden Administration continues in effect, adopts, modifies, or pulls back these last-minute Trump Administration policies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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