The Centers for Medicare & Medicaid Services (CMS) has taken another step to further the adoption of value-based purchasing within the health care industry. (Readers may recall the Department of Health & Human Services’ two proposed rules – one from CMS and another from the Office of Inspector General –  issued late last year, aimed at reducing barriers to value-based arrangements, which we discussed here.) CMS released its new proposed rule to “support state flexibility to enter into innovative value-based purchasing arrangements (VBPs) with manufacturers, and to provide manufacturers with regulatory support to enter into VBPs with payers, including Medicaid.” 

Medicaid Best Price Reporting Requirements Seen as an Impediment to VBPs

As rising drug costs continue to draw attention and ire from the public, Congress, and the Trump Administration, CMS’s proposed rule would ease some of the regulatory roadblocks that drug industry stakeholders have identified as barriers to VBPs that may play a role in managing drug costs. Manufacturers cited “best price” requirements as the major barrier to VBPs. 

Statutorily, to secure Medicaid coverage of their outpatient drugs, manufacturers must ensure that Medicaid has the benefit of the “best price” the manufacturer accepts from any payor. Thus, the Medicaid Drug Rebate Program assesses manufacturers rebates based on the lower of: (a) a certain percentage of the drug’s reported Average Manufacturer Price (AMP), or (b) the lowest net price available to anyone in the private market, inclusive of all discounts and rebates. For many years, manufacturers and commercial payors have expressed concern that Medicaid best price reporting requirements hinder or prevent the adoption of VBPs by creating unintended best price liability for manufacturers. 

The need to address regulatory barriers to VBPs became even more acute as the FDA has started to approve innovative gene therapy products that promise to provide a one-time cure to patients as opposed to maintenance medication therapy. Given the limited patient usage window, these products come with a high price tag. For example, Zolgensma, approved for the treatment of children with spinal muscular atrophy, has a list price of approximately $2 million. Given that expensive gene therapies are likely to become an increasing proportion of drug spend in the future, payors want the flexibility to enter into innovative purchase arrangements with manufactures that are tied to value and efficacy, without the threat of a best price violation.

Proposed Rule Creates Pathway for Broader Adoption of VBPs

CMS’s proposed rule is intended to address the concerns of payors and manufacturers and to modernize outdated Medicaid drug pricing rules that, as CMS Administrator Seema Verma stated, “have not been updated in thirty years and are blocking the opportunity for markets to create innovative payment models.” The primary changes in the proposed rule are to create a broad definition of VBPs and to adjust Medicaid best price reporting requirements within the context of a VBP. Among other proposals, the proposed rule would:

• Establish a definition of VBP arrangement that would permit arrangements intended to align pricing or payments to therapeutic or clinical value, including evidence-based or outcomes-based measures;

• Adjust certain aspects of the Medicaid Drug Rebate Program to provide increased flexibility for manufacturers to report multiple best prices for a drug therapy if the best price(s) are tied to a VBP;

• Include qualifying VBP arrangements within the definition of a “bundled sale”;

• Permit revisions to best price and AMP reporting beyond the current time limit to allow for revisions to pricing metrics resulting from VBP arrangements;

• Instruct drug manufacturers on how to consider implementation of certain manufacturer-sponsored patient assistance programs when determining best price and AMP for purposes of Medicaid drug rebates;

• Implement new legislation to prohibit manufacturers from including the sale of authorized generics when calculating AMP for brand name drugs; and

• Introduce definitions of “CMS-authorized supplemental rebate agreement,” “line extension,” and “new formulation,” along with revising the “innovator multiple source drug,” “multiple source drug,” “oral solid dosage form,” and “single source drug” definitions to help manufacturers and states comply with the Medicaid drug rebate statute.

Proposed Rule is Another Facet of the Trump Administration’s Drug Pricing Agenda

Ever since President Trump announced his Blueprint to Lower Drug Prices in May 2018, the Administration has issued a wide variety of drug pricing proposals, but very few of the proposals have been able to advance to final form. It is yet to be determined whether the Administration will be able to advance the proposed rule into final form, but CMS views the proposal as a new tool for negotiating prices for the next generation of drug therapies. Given the Administration’s interest in the potential for VBPs across the entire health care industry, it will be interesting to see if additional VBP proposals are issued before the November elections.  In particular, we will be watching to see if the Department of Health & Human Services chooses to tackle perceived fraud and abuse risks associated with drug purchasing VBPs through the proposal of a VBP safe harbor to the federal anti-kickback statute. In the meantime, comments on the proposed rule are due July 20, 2020.