United States: Medicaid Waivers In Conservative States Hold Hints For What Is To Come For Drug Manufacturers

Last Updated: December 29 2016
Article by Christian Springer and Ross Margulies

The nomination of Seema Verma by President-Elect Trump for the position of CMS Administrator sends a clear signal that the Trump Administration considers Medicaid one of its top healthcare reform priorities.  Seema Verma is the the "architect" of the Healthy Indiana Plan 2.0" waiver (HIP 2.0), a consumer-driven Medicaid expansion demonstration approved by the Obama Administration under a Section 1115 waiver.  Most recently, Verma was also involved in designing Kentucky's proposed "Kentucky HEALTH" ("HEALTH") Section 1115 waiver, which is heavily modeled after HIP 2.0.  Verma's nomination suggests that CMS, under a Trump Administration, will offer states greater flexibility in designing their Medicaid programs than was previously allowed under the Obama Administration.  Looking at the terms of the approved Indiana waiver, as well as the pending Kentucky waiver, is a helpful exercise in understanding the direction Medicaid might move over the next four years.

The analysis that follows briefly summarizes the most salient features of the HIP 2.0 and HEALTH waivers, and draws particular attention to how features of these waivers may impact the pharmaceutical industry.  In general, manufacturers should anticipate an increased number of Medicaid beneficiaries facing some sort of cost-sharing (either in the form of small co-payments, or deductibles), as well as a general push by states to negotiate new supplemental rebate agreements in exchange for preferred formulary status.  If CMS ultimately permits expanded use of "lock-out" periods for failure to comply with some aspect of the state's program (for example, failure to pay a premium), demand for free or reduced price drug will certain increase.

Overview of Healthy Indiana Plan 2.0 Waiver

The HIP 2.0 waiver provides health insurance coverage to those newly eligible individuals under the Affordable Care Act ("ACA's") Medicaid expansion.  The program is divided into two different benefit plans: "HIP Basic" and "HIP Plus."  Medicaid beneficiaries in the HIP Basic and HIP Plus plans are paired with a "POWER" account valued at $2,500, which can be used pay the required $2,500 plan deductible associated with both plans.  This POWER account operates similar to a Health Savings Account ("HSA") and is the most prominent feature of HIP 2.0.  Beneficiaries who select not to make any POWER account contributions are automatically enrolled in the HIP Basic plan; while beneficiaries who do make these contributions are enrolled in the HIP Plus plan.  HIP Basic enrollees receive a standard set of benefits and are responsible for co-pays for most services; HIP Plus enrollees receive extra benefits (like vision, dental and comprehensive drug coverage) and are not responsible for making co-payments Notably, HIP Plus members who are above 100% of the FPL and fail to make a contribution to their POWER account for 60 days are locked-out of Medicaid entirely for 6 months.  Conversely, HIP Plus members who are below 100% of the FPL are downgraded to the HIP Basic plan, but are not entirely locked out.

As alluded to previously, HIP Plus members enjoy a more generous pharmacy benefit than their Basic counterparts.  HIP Basic plan members cannot receive medications by mail order and all drugs have a 30-day supply limit.  In addition, HIP Basic members are required to make co-payments on their prescriptions ($4 for preferred drugs, $8 for non-preferred drugs).  In contrast, HIP Plus members can receive medications by mail order and enjoy a 90-day supply limit for maintenance drugs and a 30-day supply limit for non-maintenance drugs.  In addition, HIP Plus do not have any co-payments associated with prescription refills.

Overview of Kentucky Helping to Engage and Achieve Long Term Health (HEALTH) Waiver

The HEALTH waiver proposal (currently pending before CMS), if approved, would impact both Medicaid expansion beneficiaries and traditional non-disabled Medicaid beneficiaries in Kentucky.  Beneficiaries at income levels below 138% of FPL would be required, in lieu of co-payments, to pay monthly premiums on an income-based sliding scale, beginning at $1 per month and maxing out at $15 per month.  They would also be paired with two separate, but related, accounts.  The first "deductible" account is similar to an HSA and would be valued at $1,000 and could be used to pay medical expenses up to the required $1,000 plan deductible.  The second account is referred to as the "My Rewards Account."  Funds for this account are accrued by completing specified health-related community engagement activities, such as participating in community service or job training. Furthermore, at the end of the year, 50% of the remaining balance (if any) from the deductible account can be carried over to the My Rewards Account.  The My Rewards Account can be used to purchase extra benefits like dental, vision, OTC medications, and gym memberships.  The benchmark plan (the base coverage for plan offerings) would be the Kentucky State Employees Health Plan.

The HEALTH waiver is intended to familiarize members with commercial market coverage, and therefore it institutes several requirements that have parallels to commercial insurance.  For example, retroactive coverage is eliminated for newly enrolled individuals, and their benefits do not kick-in until they make their first premium payment. Failure to pay outstanding premiums for 60 days would result in disenrollment, and members could re-enroll only after they pay off the entire premium balance, the premium for the reinstatement month, and participate in a financial and health literacy program. However, members below 100% FPL who fail to pay premiums will instead make co-payments for all services. Additionally, there are member-specific open enrollment periods which would require enrollment during a set time frame, and failure to comply with annual eligibility redetermination requirements could lead to a 6-month lockout from the program.  "Able-bodied" working age adults would also be required to participate in a work activity to maintain enrollment, which includes volunteer work, employment, job searching, job training, etc.

As alluded to above, the Kentucky HEALTH Plan does include prescription drug coverage as a standard benefit, but it excludes OTC medications.  The OTC medication benefit can be purchased as an additional benefit by a plan member with funds in their My Rewards Account.

Implications for the Pharmaceutical Industry

Novel lock-out periods and elimination of retroactive coverage could inject substantial fluctuations into the demand for drugs

As states increasingly seek to introduce lock-out periods and eliminate retroactive coverage in the Medicaid program, manufacturers could an increased demand for free drugs and other related patient assistance programs as individuals are locked out of coverage.  In general, efforts to place limits or conditions on an individual's eligibility for Medicaid will inevitably create a new coverage gap in a population that has traditionally had full, if not robust, prescription drug coverage.

Models with tiered benefit plans could reduce demand for branded drugs

As described above, the HIP 2.0 waiver has a tiered benefit design (Basic v. Plus).  HIP Plus plan members enjoy, among other benefits, comprehensive drug coverage, and unlike their Basic member counterparts, they do not need to make any co-payments.  Although the co-payments that Basic members must make for their drugs are modest ($4 for preferred v. $8 for non-preferred), Medicaid beneficiaries by definition do not have much disposable income, and they are therefore much likelier to select the cheapest option possible—more often than not these options are generics.  Therefore if the tiered benefit plan is expanded to other Medicaid waivers, brand pharmaceutical companies could experience reduced demand for drugs in competitive markets.1

Increased cost-sharing and tiered benefit design may place pressure on drug companies to offer more generous Medicaid rebates

Related to the first point, the demand elasticity for drugs in the context of Medicaid patients, whom have extremely limited disposable incomes, could prove to be highly elastic. Therefore, as Medicaid beneficiaries experience greater cost-sharing at the point of care through differential co-payments, manufacturers will have a stronger incentive to offer more attractive rebates to state governments with the goal of being placed on a higher tier and thereby temper the effects of high demand elasticity.

Community-oriented features could create opportunities for pharmaceutical companies to offer innovative ways to support low-income patients

A common theme among emerging conservative waiver proposals is a need to reconnect the Medicaid beneficiary with the community around them through an interplay of incentives and penalties built into the Medicaid program.  Manufacturers could engage state governments to develop subprograms that aim to improve things like patient healthy literacy (including medication adherence), financial literacy, employment prospects, and other areas. States (and managed care organizations) may be more willing to engage in activities not traditionally considered direct health care services as they creative ways to reduce costs.

Increased waiver flexibility could open up opportunities for innovative purchasing models

The incoming Administration is likely to be much more deferential to states in reviewing waiver proposals than the Obama Administration, and may be willing to consider proposals from manufacturers that have previously proven difficult to implement without clear guidance from CMS. In recent years, CMS has attempted to provide reassurances to States and manufacturers in order to encourage the use of value-based drug purchasing. In a new Administration under Seema Verma, we may see an increased effort and willingness to lend administrative flexibility to this process to encourage greater use of these models.


1. Indeed, one study of HIP 2.0  found "a measurable impact on access to prescription drugs" with members enrolled in HIP Plus being significantly more likely to use their prescription drug benefit than members enrolled in Basic.  Importantly, the study found that "differential cost sharing for preferred and non-preferred drugs may be influencing members enrolled in Basic to select drugs from the preferred list which helps increase the use of generic prescriptions.

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