United States: Senate Finance Committee Proposes Significant Drug Pricing Reforms in Medicaid

Last Updated: August 16 2019
Article by Ross Margulies

On July 25, 2019 the Senate Finance Committee voted to advance their long-awaited drug pricing package to the Senate floor (we anticipate a Floor vote sometime this Fall). The Prescription Drug Pricing Reduction Act (PDPRA) of 2019, as the package is called, proposes numerous drug pricing reforms across Federal healthcare programs (including Part B and Part D), but for today's blog post we will focus on some of the many Medicaid provisions included in the final mark-up. A note for our nerdy readers: there is currently no actual text for the bill, and so we must work off of the Committee's own provision-by-provision summary. We do expect there to be further revisions and amendments before PDPRA makes is to the Floor for a vote.

Penalties for Price Increases Above Inflation (Section 209)

Unlike in Medicare Parts B and D, where drug manufacturers are not currently penalized for taking price increases, Medicaid already has in place inflationary rebates which penalize manufacturers for price increases beyond the rate of inflation. Under current law, an inflation rebate is applied whenever a drug manufacturer participating in the Medicaid drug rebate program increases the price of a drug faster than the drug's inflation adjusted AMP. However, drug manufacturers' Medicaid rebate obligations attributable to the inflation rebate are currently capped at 100% of the product's rebate period AMP. MACPAC has previously suggested removing this cap on inflationary rebates, and the Senate Finance package partially adopts this recommendation. Under Section 209, the maximum allowable Medicaid rebate permissible in a rebate period would be increased from 100% to 125%, beginning October 1, 2022. The Congressional Budget Office (CBO) estimates this proposal would save more than $12 billion over the next decade.

Excluding Authorized Generics from AMP (Section 205)

Another MACPAC recommendation, we have written previously about the tricky subject of authorized generics. An authorized generic drug is a drug that is sold under the brand manufacturer's New Drug Application but is sold under a different National Drug Code. In the typical case, the manufacturer of the brand name drug either sells the authorized generic in its own right, or else it permits another manufacturer to do so on its behalf. Under the Federal Food, Drug and Cosmetic Act, the first generic manufacturer of a brand name product is entitled to six month's exclusivity in the marketplace, thereby making authorized generics a financially attractive proposition for a brand name manufacturer. As has been previously pointed out by the HHS Office of Inspector General, the Medicaid statute currently specifies that the sale of authorized generics is to be included with the sales of the related brand product, with the effect of lowering the brand product's AMP (and therefore the manufacturer's rebate obligations) in most cases. The Senate Finance package would amend section 1927 to exclude authorized generics from the calculation of AMP. The provision would be effective on the first day of the first fiscal quarter that begins after the enactment date. CBO estimates this proposal would save more than $3 billion over the next decade.

Including Hospital Outpatient Drugs in MDRP (Section 210)

The Medicaid statute in section 1927 contains an expansive definition of the term "covered outpatient drug" for purposes of the Medicaid drug rebate program — but notably excludes from this definition (and therefore from the rebate program) drugs that are paid as part of a bundled payment system (such as a hospital inpatient or outpatient prospective payment system). So, for example, to the extent a state Medicaid agency bundles a particular drug with an inpatient or outpatient procedure (this is quite common), the drug would not be considered a "covered outpatient drug" and a manufacturer would not pay rebates on such a drug. Section 210 would, at the option of a state, permit the state to treat a drug provided as part of a bundle as a "covered outpatient drug", so long as the drug is provided on an outpatient basis as part of, or incident to, a physician's services or outpatient hospital services. This provision would take effect one year after the date of enactment.

We note that this provision comes at an important time for the drug rebate program — manufacturers are increasingly creating innovative therapies that straddle the line between an item and a service. For example, most new on-market gene therapies (as well as those in the pipeline), are provided not by a pharmacist, but as part of a complicated medical procedure in the hospital. To the extent such a drug is currently being provided as part of a bundled payment, a state would not be entitled to rebates under current law. Section 210 opens up the possibility for gene therapy manufacturers and states to enter into value-based rebate agreements, an important potential development.

Risk-Sharing Value-Based Arrangements (Section 208)

Like section 210, proposed section 208 of the Senate Finance package could have big implications for manufacturers of gene therapies, and for states that pay for these high-cost treatments. Section 208 would provide states the option to enter into risk-sharing value-based arrangements for certain gene therapies treating rare diseases. We have written previously about ongoing efforts by states to cover and pay for innovative treatments using value-based arrangements – and section 208 would presumably expand this growth. Under the provision as described, effective January 1, 2022, manufacturers completing phase II clinical trials for gene therapy drugs for the treatment of a rare disease that is expected to cure or reduce the symptoms of the disease after not more than three administrations would notify HHS of a desire to enter into a risk-sharing arrangement with a state, or states. Subject to CMS approval, a manufacturer and state would be permitted to enter into a risk-sharing agreement in which the state agrees to pay the manufacturer of the gene therapy in installments (not to exceed 5-years in time), and the manufacturer agrees to certain price reductions or price forgivenesses if the drug fails to meet certain relevant clinical parameters.

Notably, payments under such an agreement would be exempt from AMP and Medicaid Best Price and the Secretary would treat any rebates under such an agreement the same as rebates under a state supplemental rebate agreement. Payments under the agreement would also be in lieu of rebates that would otherwise be paid under the MDRP. Section 208 also includes a review and assessment period by HHS, as well as a requirement that HHS issue guidance for states and manufacturers interested in participating in such an agreement.

Enhancing Medicaid P&T Committees (Section 203)

Recent press reports have highlighted the issue of conflicts in Medicaid Pharmacy and Therapeutics (P&T) Committees. In many cases, these P&T Committees wield extraordinary power, setting a state's preferred drug list which is used to leverage supplemental rebates and is often tied to prior authorization requirements. In addition, all states are required to operate prospective and retrospective drug utilization review (DUR) programs that screen for duplication, contraindications, interactions with other drugs, incorrect dosage and abuse and misuse and review claims and other data for overuse, inappropriate or medically unnecessary care, appropriate use of generics and fraud and abuse. Section 203 would establish new conflict of interest policies for members of P&T Committees and Medicaid DUR boards (effective one year after enactment), and would also provide states the option for the state DUR board to serve as the P&T committee as long as the DUR board meets the enhanced P&T committee requirements.

Prohibiting the Use of Spread Pricing by PBMs (Section 206)

We recently highlighted a guidance document from the Trump Administration clarifying the use of spread pricing in Medicaid managed care – but as the Senate Finance package indicates, this issue continues to grow. "Spread pricing" generally refers to the practice of a pharmacy benefit manager (PBM) charging its health plan client (in the case here, Medicaid managed care plans or a state fee-for-service program, which typically pay PBMs an AWP-based payment) more than actual costs of reimbursing a pharmacy for the drug dispensed. The "spread" is the difference between these two amounts (the AWP-based payment from the state or MCO to the PBM, and the amount the PBM pays the pharmacy), and many have alleged it is profit that comes at a substantial cost to state Medicaid budgets.

Section 206 would have the effect of banning spread pricing in Medicaid fee-for-service and in Medicaid managed care programs. In particular, if enacted, section 206 would require PBMs to pass-through actual pharmacy costs (net of rebates) to managed care plans or the state, charge only the actual ingredient cost of the drug plus a dispensing fee, and be provided only a reasonable administrative fee.

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

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