Public Payers News

Alternative Payment Models Rein in State Prescription Drug Spending

The two primary alternative payment models that states use to control prescription drug spending are outcomes-based and population-based.

prescription drug spending, Alternative payment models, Medicaid, value-based contracting

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By Kelsey Waddill

- As Medicaid programs look to provide costly gene therapies, specialty drugs, and other potentially life-saving medications to beneficiaries, states are getting creative by implementing alternative payment models, explained a recent study from Duke’s Margolis Center for Health Policy.

With drug prices rocketing higher each year, it is no surprise that states struggle to control high prescription drug spending. Although Medicaid programs’ prescription drug spending began to go down in 2017 and 2018, following a 24 percent increase in spending in 2014, gene therapies and other expensive treatments bolster the upward spending trajectory.

For some therapies, even simple factors such as location—whether the patient is at home or in a hospital when it is administered—can signify a price difference.

Private payers are using innovative solutions to give members access to gene therapies. Cigna, for example, used vertical consolidation to engineer a payment cycle that leaves qualifying members with no out-of-pocket costs.

And states have been no less innovative than the private sector, despite facing unique challenges, the Duke researchers outlined in their report.

READ MORE: CMS Proposes Alternative Payment Models for Chronic Kidney Disease

For both private payers and Medicaid programs, it can be difficult to decipher whether the treatments have been administered and successful. Both tend to rely on claims to assess whether the member filled a prescription, was readmitted after a procedure, or identify other meaningful indicators of success.

Medicaid programs specifically can struggle to provide access to care for rural beneficiaries or beneficiaries in overlooked regions with small or few provider groups. Offering incentives for providers, improving marketing and outreach techniques, as well as using data analytics to home in on underserved areas are among the most potent strategies for tackling this issue.

States also face more intricate administrative processes than private payers, needing to loop in more people and leading to higher costs.

Accessing data can be another challenge. Medicaid programs are also unaccustomed to interacting with drug manufacturers and establishing contracts like the ones they are creating. The process for negotiating these contracts are mandatorily secretive, making the states’ learning curve even higher.

In spite of these difficulties, two alternative payment models have emerged, based on the kind of drug that states are looking to secure, the Duke researchers said.

READ MORE: Proposed Rule to Expand Value-Based Payment in Home Healthcare

Outcomes-based payment models, such as those used in Oklahoma, Michigan, and Colorado, match the reimbursement to the results. At present, most outcomes-based payment models are used to drive medication adherence.

Oklahoma’s four outcomes-based contracts use rebates tied to adherence outcomes as incentive. At present, Oklahoma seeks lower pharmaceutical costs, but in the future Oklahoma also hopes to create more targeted interventions to ensure patients are utilizing low-cost drugs.

However, the state has not had great success with landing larger manufacturers in their contracts nor has it been able to consistently produce the outcomes data for its contracted manufacturers.

In the future, the study anticipates that outcomes-based payment models will be less focused on adherence and more focused on indicators that truly reflect successful treatment.

The study also recommends that future similar payment models eschew all ties to utilization. Current models have higher costs as more beneficiaries utilize these services. Instead, the writers suggest tying the payments to outcomes that lower costs.

READ MORE: Majority of States Have Committed to Value-Based Care, Payment Reform

For population-based payment models, the state pays a “per-patient capitation model” to the manufacturer, offering a fixed price to provide medications to a certain population of beneficiaries.

One variation of this approach is the “subscription model” or the “Netflix model.” The study corrects that language, noting that to apply a model wherein a state pays a set fee for unlimited drugs would require greater flexibility from CMS. Additionally, it would be unwise if the state expected utilization to drop, the researchers said. Any decrease in utilization would eventually result in overpayment, as the state would be paying for more drugs than needed.

Instead of a true subscription model, Washington and Louisiana arranged contracts with manufacturers that cap the drugs’ prices at a certain threshold. After hitting the threshold, the prices cannot increase, no matter how much of the product the states require.

The study noted that subscription models are known to work best when the market for therapies is competitive, the drug is not for chronic conditions, the population size for the drug is large, and the drug is easily substituted—for example, providers are not likely to resist implementing it in favor of another drug. Given these factors, most states implementing this model use it for hepatitis C treatment.

Washington state contracted with AbbVie to offer hepatitis C treatment to the Medicaid, incarcerated, state-employed, retired, and academic populations.

The state pays a low price until it hits a specified threshold, at which point the state no longer has to pay for the drug to receive it (or has an extremely low fee).

Washington’s primary challenge has been in ensuring that the entire population is aware of and has access to hepatitis C treatment. To overcome this hurdle, the state has been encouraging widespread education in public arenas and healthcare networks.

“There are several short and long-term steps that can accelerate states piloting new approaches to advance value-based payment arrangements for prescription drugs, illustrated in the table below,” the study concludes. “This can include getting greater clarity on what is possible, additional authority to implement new types of contracts, and improvements in the negotiation culture between manufacturers and states. States will likely continue to lead and work to drive their programs towards greater value.”