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Medicaid Drug Pricing Rule May Inhibit Value-Based Contracts

The Medicaid best-price drug rule presents a possible barrier to value-based contracts between payers and drug companies.

Medicaid best-price rule may create barriers to value based contracts

Source: Thinkstock

By Thomas Beaton

- A Medicaid drug pricing rule which safeguards deep discounts for the public program can potentially inhibit value-based contracts agreements between payers and pharmaceutical companies, according to research from the Journal of Health Politics, Policy and Law.

Under the best-price rule, Medicaid is legally entitled to a minimum rebate of 23.1 percent for a manufacturer's price for FDA-approved new drugs. The program is entitled to even lower prices if a drug manufacturer offered extended discounts to another payer or organization.

“A number of articles have flagged the best-price rule as a potential obstacle to novel pricing arrangements; typically, the rule is invoked as a monolithic barrier against the nebulous idea of ‘value-based’ pricing,” said a team of researchers from Washington University in St. Louis, the University of Michigan, and the University of Southern California,

“Public and private payers have expressed interest in innovative models of pharmaceutical contracting that link price to value, not just volume. Does the best-price rule impede adoption of these new models, as drug manufacturers have claimed?” the team continued.

Manufacturers in an indication-specific pricing contract with payers could enact at least two self-supported strategies that would lessen the impact of the best-price rule on their Medicaid revenues, the article suggests, reducing the potential barriers to profits.

READ MORE: How Medicare, Medicaid, and CHIP Guide the Health Payer Industry

Since indication-specific pricing is designed to reflect how effective medicines are for multiple symptoms or conditions, pharmaceutical companies could enter into contracts that use weighted average pricing on drugs. This average would be based on the amount of conditions a drug treats rather than setting a price for each separate condition.

“Say that the manufacturer of a drug used to treat both cancer and macular degeneration wants to price the former indication at $10 per unit and the latter at $100 per unit (each dose in the treatment of macular degeneration requires much less of the drug by volume),” the team explained.

“Where an insurer knows that the drug is likely to be used roughly an equal number of times for the two indications across its patient population, the two companies may enter into a contract pricing the drug at $55.”

Conversely, drug manufacturers in indication-pricing agreements could implement product differentiation, which would allow one drug to be considered two drugs for best-price purposes.

The FDA can supply a drug with a single national drug code (NDC) even though it treats multiple conditions, meaning that the best price is calculated without regard to the actual conditions a drug treats. Product differentiation would then allow manufacturers to retail drugs for each separate condition, instead of only having one retail purpose, which avoids a large best-price cut.

READ MORE: Pharmaceutical Industry Slow to Embrace Value-Based Contracts

Outcome-based pricing may also incentivize drug manufacturers to invest in research that identifies patient populations with a higher chance of responding positively to specific drugs..

Contracts that include outcome-based pricing may be appealing to consumers who believe that it is unfair to ask a patient who does not benefit from a drug to pay as much as someone who does.

Even with targeted outreach that promotes regular product use, some pharmaceutical companies believe that possible benefits from outcome-based pricing do not outweigh the cuts from the best-price rule.

“If a manufacturer pays a $75 rebate on a $100 drug that fails to work, the ‘best price’ for that drug is $25, not $100,” the team said. “By the same token, if a drug manufacturer sells a drug for $25 with the promise of $75 in future payments if the drug is effective, $25 is the drug’s ‘best price’ as long as someone pays only that amount.”

The article suggests that federal policymakers in Congress could adjust the best-price rule to accommodate outcome-based pricing. Before any major policy is enacted surrounding the best-price rule, manufacturers can offer a rebate based on the performance of the drug across a patient population to limit Medicaid revenue cuts.

READ MORE: Pharmacy Benefit Manager Accountability is Key for Employers

If a drug manufacturer sells a drug for $100, but offers a rebate on the drug performance within a 1000 person patient population, they could set prices without sizeable cuts. If the drug was only 75 percent effective on a 1000 person cohort, the manufacturer could offer a 25 percent rebate which only reduces the price of the drug to $75.

Manufacturers that are participating in either value-based contracts with price-per-dose payment models or in “drug mortgages,” where patients pay for expensive prescription drugs in spread-out payments over time, are not nearly as inhibited by the best-price rule as other contracts. These challenges come from CMS unit-price regulations outside of the best-price rule and other patient liabilities.

The Center for Medicare and Medicaid Innovation (CMMI) has the authority to waive statutory rules for the purposes of testing and implementing novel healthcare payment, the team explained.

CMMI could relax the best pricing rule to experiment with novel pricing models that encourage manufacturers and private payers to experiment with outcome-based pricing, and reduce spending in CMS programs by waiving the best-price rule for drugs purchased under Medicare Part A and B.

CMMI cannot simply waive Medicaid rules in order to reduce private medical spending, but would have to prove that waiving those rules could improve quality and costs of drugs within Medicare or Medicaid. Future CMMI demonstration projects, Medicaid waivers, or binding recommendations from the Independent Payment Advisory Board may be the administrative approach towards this.

The best-price is a barrier to some value-based contracts and payment models, but there are solutions that payers, manufacturers, and regulatory bodies can pursue that helps facilitate these contracts.

“The law here is complex, and fostering the adoption of new pricing models will require close coordination among manufacturers, payers, and regulators. CMS’s recent openness to clarifying the effect of the best-price rule offers reason for cautious optimism that such coordination may be in the works,” the team concluded.

“Perhaps we are on the cusp of a new era of paying for value in prescription drugs.”

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