There has been increased enthusiasm for value-based reimbursement schemes to help balance patient access to innovative medical technologies and conditions of significant uncertainty and cost pressures.
To provide regulatory flexibilities for states and manufacturers to enter into innovative value-based purchasing arrangements (VBPs), on December 21, 2020, the Center for Medicare & Medicaid Services (CMS) issued a Final Rule that makes significant modifications to the Medicaid Drug Rebate Program (MDRP) in several areas, including permitting the reporting of multiple Best Prices (BPs) under VBPs.
The Final Rule intends to avoid the situation where a significant discount on a unit of a drug that does not satisfy a performance metric under a VBP arrangement would set a Best Price for the drug, even if all other units perform successfully. To take advantage of the multiple Best Price reporting rule, any value-based purchasing arrangements must meet the new definition for VBPs set by CMS.
Medicaid Drug Rebate Program Background
Medicaid was established by the Social Security Act of 1965 to provide health care services to low-income individuals. The program is funded jointly by federal and state governments. States are not required to participate in Medicaid, but all 50 states, Washington, D.C., and the U.S. territories have chosen to participate. The federal Medicaid statute establishes federal requirements that states must satisfy in order to receive matching federal funds. However, the statute also provides flexibility for states to design their programs within the federal guidelines.
Under the Medicaid program, states may provide coverage for outpatient prescription drugs as an optional benefit, but all states have chosen to offer it. If a state provides coverage for outpatient drugs (“CODs”), then the state must comply with the federal requirements governing the MDRP and payment for CODs.
Under the MDRP, state Medicaid programs must maintain an “open formulary” covering all drugs by a participating manufacturer. In exchange, manufacturers must make rebate payments to the state’s Medicaid agency, which are then shared between the federal and state governments. For single source and innovator multiple source drugs, Medicaid’s basic rebate formula is set to be the greater of the difference between a drug’s quarterly Average Manufacturer Price (AMP) and the Best Price for the same period, or a flat percentage (23.1%) of the drug’s quarterly AMP (see “pricing terms” below). Drug manufacturers owe an additional rebate when their AMPs for individual products increased faster than inflation. For other drug products, separate rebate structures apply (e.g., Affordable Cares Act created a different rebate formula for line extension products).
Many states also have developed preferred drug lists (“PDLs”), which include drugs for which manufacturers offer supplemental rebates beyond those offered by the MDRP.
Pricing Terms
Average Manufacturer Price (AMP). The average price paid to the manufacturer for a drug in the U.S. by (1) wholesalers for drugs distributed to retail community pharmacies, and (2) retail community pharmacies that purchase the drug directly from the manufacturer.
Best Price (BP). The lowest available price offered by the manufacturer to any wholesaler, retailer, or provider, excluding certain government programs (e.g., 340B programs).
Value-Based Purchasing Arrangements – the New CMS Definition
As mentioned before, any value-based purchasing arrangements must meet the new VBP definition set by CMS to take advantage of the multiple BP reporting flexibility.
The Final Rule defines VBPs as arrangements:
• align pricing and/or payments to an observed or expected therapeutic or clinical value in a select population,
• including evidence-based measures that substantially link the cost of a covered outpatient drug to existing evidence of effectiveness and potential value for specific uses; and/or
• outcomes-based measures that substantially link payment for the covered outpatient drug to that of the drug’s actual performance in a patient or a population, or a reduction in other medical expenses.
As such, under the new definition, VBPs are: (1) for outpatient drugs; (2) concerning select patient populations; (3) substantially linking payments to a drug’s clinical value via evidence-based or outcomes-based measures.
CMS declined to further define terms within this definition such as “effectiveness,” “performance,” or “substantially,” noting that these terms are fact-specific, and manufacturers may make reasonable assumptions in documenting how their arrangement substantially links the payment to the outcome of the drug, thus qualifies as a VBP arrangement under the Final Rule.
The new definition of VBP will be effective on March 1, 2021 (post inauguration). Thus, may be subject to the “freeze” an incoming administration typically imposes on regulations that are not yet effective.
Multiple Best Price Reporting under VBPs
To avoid the situation where a significant discount on a unit of a drug that does not satisfy a performance metric under a VBP arrangement would set a BP for the drug, even if all other units perform successfully, the Final Rule modifies the BP definition such that the “lowest price available from a manufacturer may include varying best price points for a single dosage form and strength as a result of a value based purchasing arrangement,” thus permitting reporting of different BPs associated with different outcomes or evidence-based measures. A distinct Medicaid rebate amount will then be calculated for each reported BP. Additionally, the manufacturer must continue to report “a single Best Price for the drug not affiliated with a VBP arrangement.”
To take advantage of multiple BP reporting flexibility, a manufacturer must offer the VBP arrangement to all state Medicaid programs. Each state Medicaid program can then elect whether to receive Medicaid rebates based on the “traditional” single BP, or to participate in the VBP. CMS does not require states or payers to enter into VBPs and it is entirely up to the state Medicaid programs.
CMS is delaying the effective date for multiple BP reporting under a VBP arrangement until January 1, 2022, which will allow manufacturers, states and CMS to make the necessary system changes, and CMS to issue operational guidance regarding the final policy as necessary.
CMS does not anticipate multiple BP reporting under VBPs will reduce a drug’s AMP or affect 340B ceiling price (AMP minus the Unit Rebate Amount) which will continue to be based on non-VBP Best Price.
Bundled Sales Approach – An Alternative for Multiple BP Reporting
Additionally, manufacturers can also elect not to report multiple BPs, instead follow existing rules such as the bundled sales approach in calculating and reporting Best Prices.
Existing regulations allow manufacturers to allocate any VBP discounts across the products in a product bundle if they are tied to a performance requirement. Thus, smooth out the discount that resulted from a single non-performing unit over all the units in the bundle sold under the arrangement in the rebate period.
Whether a manufacturer reports pricing using a bundled sale or multiple Best Price approach, the arrangement must meet the new definition of VBPs to take advantage of the regulatory flexibilities.
AMP and BP Restatements Outside the Three-Year Window
Limiting an outcome measurement to less than the historical 12-quarter maximum, regardless of the clinical data associated with a given treatment, might jeopardize the usefulness of a VBP arrangement.
Thus, the Final Rule has added an exception to the 12-quarter rule that allows a manufacturer to request revisions to price reporting (including quarterly AMP and Best Price reporting) that exceed 12 quarters from which the data was due when the change is due to a VBP arrangement and the outcome must be evaluated outside of the 12-quarter period.
Any retrospective changes to MDRP pricing metrics also affect 340B ceiling prices. CMS expects manufacturers to adjust their 340B ceiling prices accordingly.
References:
1. Pricing and Reimbursement, USA 2020, Covington, https://www.globallegalinsights.com/practice-areas/pricing-and-reimbursement-laws-and-regulations/usa, Accessed 12/8/20
2. MDRP: CMS Final Rule on value-based purchasing, line extension definition, PBM accumulator programs, Hogan Lovells, https://www.lexology.com/library/detail.aspx?g=5d1ad937-6859-46bd-947c-0e2d55cda816, Accessed 12/29/20
3. Medicaid Program: Establishing Minimum Standards in Medicaid State Drug Utilization Review and Supporting Value-Based Purchasing for Drugs Covered in Medicaid, Revising Medicaid Drug Rebate and Third Party Liability Requirements, the Centers for Medicare & Medicaid Services, 12/31/2020, https://www.federalregister.gov/public-inspection/2020-28567/medicaid-program-establishing-minimum-standards-in-medicaid-state-drug-utilization-review-and, Accessed 12/29/20