United States: CMS Releases Guidance To States And Manufacturers On Medicaid Value Based Purchasing Arrangements

Last Updated: July 20 2016
Article by Ross Margulies

In light of the growing cost (and demand for) specialty pharmaceutical products, and the corresponding stress this growth has had on state Medicaid coffers, CMS is now actively encouraging states Medicaid programs to engage in value based purchasing (VBP) arrangements with manufacturers.  On Thursday July 14, CMS released guidance documents to state Medicaid agencies and manufacturers regarding participation in these VBP arrangements.


As states consider creative ways to finance high cost drug spend, and as frustrated manufacturers seek to have their drugs covered by Medicaid programs with none or very few restrictions, one model that has emerged as a hopeful cure are VBP arrangements. Already a hot topic in Medicare payment policy (see the proposed Medicare Part B Payment Model), VBP arrangements refer generally to a broad set of tools currently employed in the commercial market, such as value-based pricing, clinical decision support tools, and rebates and discounts, to improve patient outcomes and manage drug costs.  Under one of the most likely scenarios, a state Medicaid agency (or a Medicaid managed care organization) would enter into a risk sharing agreement with a manufacturer under which a product's payment (or a portion of the payment) would be linked to whether it is used appropriately (according to defined clinical guidelines) or to clinical outcomes.  For example, a manufacturer may agree to issue a supplemental rebate to a state Medicaid agency in cases where a drug does not meet a set of defined clinical outcomes for a particular patient.  Although an increasing number of commercial payers in the United States have begun to use such strategies, risk sharing agreements have generally not been applied by Medicaid due to concerns over impacting best price (see bel0w).  Most recently in the commercial market, Harvard Pilgrim reached agreement with Amgen for its PCSK9 inhibitor for the treatment of high cholesterol, Repatha®, and Merck and Cigna have an arrangement with diabetes drugs, but even these arrangements are not yet widespread.

In November 2015 ( as reported on this blog), CMS requested information from some manufacturers of the new wave of DAA Hepatitis C therapies about value-based purchasing arrangements that they have entered into and has requested comments regarding statutory barriers that may prohibit widespread adoption of these arrangements.  One of the central concerns from the perspective of manufacturers, is the impact of these arrangements on "best price." In other words, if a rebate paid under a contract by a manufacturer for better outcomes reduces their net cost below Medicaid Best Price, would that trigger the requirement that they provide that "price" to all Medicaid programs?

Brief Summary of Medicaid Best Price Policy

By way of background, under the Medicaid drug rebate program, Congress has required manufacturers to provide rebates on covered outpatient drug sales to states and the federal government as a condition of payment for those drugs under Medicaid.  The amount of the rebate for each drug is the greater of two amounts: either a flat percentage multiplied by the average manufacturer's price (AMP) of the drug or the AMP for the drug minus its "best price," i.e., the highest discount granted to a purchaser of the drug.  Both of these requirements are detailed in section 1927 of the Social Security Act.

The best price policy dates back to the beginnings of the Medicaid Prescription Drug Rebate Program (passed as part of the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508) which had at its core the idea that state Medicaid programs should be granted a most-favored customer status.  In general, best price is the lowest price offered any other customer, with a few exceptions (e.g. Federal Supply Schedule prices, prices to state pharmaceutical assistance programs, and prices that are "nominal in amount.")  Best price is defined to mean the lowest price available to any wholesaler, retailer, providers, HMO, nonprofit or most governmental entities.

According to the terms of the rebate agreement signed between manufacturers and CMS, best price is inclusive of cash discounts, free goods, volume discounts and other rebates.  Best price is determined on a unit basis without regard to special packaging, labeling or identifiers on the dosage form or product or package.  Manufacturers are required to include their best price calculation in their monthly AMP reporting to CMS. As manufacturers consider entering into agreements with state Medicaid programs (or Medicaid MCOs) around drug pricing, one of the central questions (and concerns) is the impact of these arrangements on best price.

July 14, 2016 Guidance to States and Manufactures

In light of the growing interest in VBP arrangements, and the corresponding concerns around how such arrangements may implicate best price, it is no great surprise that CMS has issued a guidance document encouraging states and manufacturers to negotiate CMS-approved supplemental rebates that would be excluded from Medicaid best price.  However, despite the intent, the guidance document is sorely lacking in detail or in any of the "assurances" that manufacturers are likely seeking.  In the guidance documents, CMS notes manufacturers' real concerns that the variety of price concessions and services in a VBP arrangement could lower a drug's best price, increase the manufacturer's Medicaid rebate obligations, and be a disincentive to pursuing such arrangements. While CMS acknowledges that these arrangements may be structured so as not to implicate best price,  CMS concluded the changes' effect on best price "will differ depending on the structure of the VBP arrangement."

CMS also said in the documents that manufacturers should consult the statute and other regulations on determining Medicaid best price when negotiating value-based prices, and should "continue to document the calculation of best price, including any reasonable assumptions about the impact of their arrangements."  The agency said it will "seek to generalize lessons learned regarding common questions and arrangements" on the matter in subsequent guidance, but did not provide a time frame.

As these arrangements and mature (assuming manufacturers are willing to take the risk of entering into such agreements), it is likely that CMS will update guidance to states and manufacturers to provide more defined criteria. In the meantime, it appears that the world of Medicaid and VBP arrangements is still the wild west.

To view Foley Hoag's Medicaid and the Law blog please click here

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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