December 1, 2020

Volume X, Number 336

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November 30, 2020

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CMS’ Proposed Rule Promoting Value-Based Purchasing for Medicaid-Covered Drugs: The Comments are In!

On June 19, 2020, the Centers for Medicare and Medicaid Services (“CMS”) issued a proposed rule, “Medicaid Program; Establishing Minimum Standards in Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based Purchasing (VBP) for Drugs Covered in Medicaid, Revising Medicaid Drug Rebate and Third Party Liability (TPL) Requirements” (the “Proposed Rule”).  The Proposed Rule is designed to implement statutory amendments to the Medicaid Drug Rebate Program (“MDRP”) statute, and add new regulatory provisions to encourage value-based purchasing (“VBP”) arrangements between drug manufacturers and state Medicaid programs and Medicaid-contracting payors.

CMS allowed for a thirty (30) day comment period, expiring July 20, 2020, to provide responses to the Proposed Rule. Many key stakeholders took the opportunity to voice their criticisms regarding the Proposed Rule, and in particular, those aspects of the Proposed Rule relating to VBPs.

The following summarizes some of the key comments made by professional associations, public advocacy groups and others in response to the Proposed Rule’s VBP provisions.  Based upon these comments, this article considers which, if any, of these comments will impact the regulatory language as finalized by CMS in a final rule.  We say “if any” because the notably short comment period – 30 days – leaves some to wonder whether CMS intends to give anything more than a cursory consideration of the concerns evidenced by the comments.

VBP AND THE PROPOSED RULE: A HIGHLY ABRIDGED REVIEW

To provide context to the commentary discussed below, the following is a brief review of the VBP elements included in the Proposed Rule.

The MDPR and Best Price.  Under the MDRP and as a condition for having their drugs covered by the Medicaid program, drug manufacturers are obligated to sell their drugs to state Medicaid programs at the lowest price available to any wholesaler, retailer, or provider – such price being the manufacturer’s “best price.”  Many have cited the MDRP best price requirement as an obstacle to outcome-based VBPs – drug pricing programs that link payment for a drug to the drug’s actual clinical performance in a patient or a population, or a reduction in other medical expenses.  For example, a clinical outcome-based VBP may allow a manufacturer to charge $20,000.00 for a drug treatment that achieves its clinical objectives within a specified period of time while the charge for the same treatment would be $0.00 if the clinical objectives were not met.  In this scenario, the VBP when applied to the MDRP definition of best price would result in the best price being $0.00.  Based upon the foregoing, it is not surprising that drug manufacturers are resistant to innovative VBP models when the economic results could be perilous.

Proposed Rule Terms.  In an effort to encourage the use of VBP arrangements between state Medicaid programs, payors and drug manufacturers, the Proposed Rule addresses the challenges presented by the best price requirement as included in the MDRP calculation methodology.

If adopted in its current form, the Proposed Rule would modify the MDRP requirements to allow manufacturers to report multiple best prices based on measurable, clinical outcomes.  In particular, the Proposed Rule would allow manufacturers to either provide a best price that is averaged based on the sales of a drug under VBPs or to report multiple best prices that would be available under VBPs. The Proposed Rule would allow manufacturers to revise the best price provided outside of the current three year limit to reflect patient outcome data that would not be available sooner.  According to CMS, the proposed regulations would defeat the potential financial risks that would arise under outcome-based VBP agreements. As a result, CMS believes that state Medicaid programs and drug manufacturers will be encouraged to enter into VBP arrangements. Currently, five states (Colorado, Louisiana, Michigan, Oklahoma, and Washington) have prescription drug value-based arrangements in their Medicaid programs.

COMMENTS, OBSERVATIONS AND CRITIQUES

An Insufficient Comment Period.  As noted above, commenters identified the 30-day comment period as being extremely short given the complexity of the Proposed Rule.

As summarized by the Office of the Federal Register, comment periods for proposed rules are generally set for 30 to 60 days but the time period can vary based upon a number of factors.  For example, for complex rulemaking, federal agencies usually provide longer comment periods,
such
as
180
days
or more. Agencies may
also
use
shorter comment periods when that can be justified.
According to the most recent statistics from the Office of Management and Budget, Office of Information and Regulatory Affairs, 53% of all currently pending comment periods across all federal agencies are equal to or greater than 60 days and 37% are equal to or greater than 90 days.

When highlighting the insufficient comment period, several commenters pointed to the Proposed Rule’s complexity and the inability to submit comprehensive and thoughtful comments on the diversity of subjects impacted by the Proposed Rule within the 30 days allotted for comment.   For example, both the National Health Law Program (“NHeLP”) and the Association of American Medical Colleges (“AAMC”) stated in their respective comment letters – NHeLP Comment Letter and AAMC Comment Letter – that the 30-day time period was insufficient to fully respond the Proposed Rule. NHeLP noted that not only was the Proposed Rule ambitious in its complicated subject matter, but the organization also felt that it has the potential to both increase the costs for Medicaid outpatient prescription drugs and limit the access that Medicaid enrollees have to those drugs.  The AAMC called out the unique and resource-strapped nature of the current state of the healthcare system in its criticism of the Proposed Rule’s comment period length.  It noted that hospitals and state Medicaid programs have very limited resources due to the COVID-19 pandemic, and therefore they need additional time to fully review, comprehend and provide thoughtful responses to this Proposed Rule.

In addition to the time that stakeholders needed to conduct their own analyses of the Proposed Rule, NHeLP went even further to suggest that a regulatory impact analysis should be conducted by CMS before moving forward with a final rule.  CMS acknowledged in the Proposed Rule that such an analysis is required for rules with economic effects greater than $100 million for any one year, but claimed that the Proposed Rule would not reach that threshold.  Given the impact on drug pricing and rebates, NHeLP found this claim to be dubious and recommended CMS withdraw the Proposed Rule until a regulatory impact analysis is completed.

Ambiguity in VBP Definition.  As defined in the Proposed Rule, a VBP agreement is:

an agreement intended to align pricing and/or payments to an observed or expected therapeutics or clinical value in a population and includes (but is not limited to): evidence-based measures, which substantially link the cost of a drug product to existing evidence of effectiveness and potential value for specific uses of that product; [and] outcomes-based measures, which substantially link payment for the drug to that of the drug’s actual performance in a patient or a population, or a reduction in other medical expenses.

CMS aimed for this definition to provide greater clarity to manufacturers for how to treat pricing in VBPs in contrast to non-VBPs.

Similar to the other complaints raised with regard to the Proposed Rule, many commenters felt that the VBP definition was vague and not sufficiently developed given the wide-ranging impact it will have on drug purchasing by state Medicaid programs.  One commenter, the Coalition for Affordable Prescription Drugs (“CAPD”), expressed concern in its comment letter that the proposed VBP definition is too narrow.  As noted by  the CAPD, the proposed definition of VBP agreement could be interpreted to exclude certain types of VBP arrangements currently in place or currently in development between payors and manufacturers, such as (i) indication-based model contracts (VBP contracts that include differentiated prices for a drug based upon the value of the drug’s use for specific disease states (indications) and/or patient groups); (ii) subscription model (often referred to as the “Netflix model) contracts (VBP contracts that provide access to a discounted drug fee schedule in exchange for a capped or flat rate); and (iii) other VBP models.

On a similar note to CAPD’s concern that the proposed VBP definition is too narrow, the Pharmaceutical Research and Manufacturers of America (“PhRMA”) commented that CMS should ensure that the VBP agreement definition retains “flexibility.”  In particular, PhRMA felt that the proposed definition should allow for a variety of “clinical endpoints” for clinical or health outcomes to ensure that a wide variety of arrangements can qualify as a VBP.  By allowing the use of a wider range of outcomes, PhRMA maintains that  VBPs will be able to have more accurate pricing while promoting more efficient and effective care.

In contrast to CAPD’s and PhRMA’s concerns that the proposed VBP agreement definition is too narrow/inflexible, other organizations commented that the VBP agreement definition in the Proposed Rule is either too broad or insufficiently focused. In its comment letter, the NHeLP expressed its concern that the VBP agreement definition does not include safeguards to ensure that cost effectiveness, as a central component of the definition, is not measured in a way that would encourage state Medicaid and other healthcare payor programs to limit drug access to patients who are considered heavy, and in turn, expensive utilizers of healthcare services – e.g., seniors and patients with chronic conditions and disabilities).

Almost as a direct response to the PhRMA comment letter, the AARP comment letter reflects the AARP’s concern that the Proposed Rule’s definition of VBP agreement would allow for nearly any arrangement to be treated as a VBP, providing opportunities for drug manufacturers to increase their revenues while decreasing rebates to Medicaid programs. In particular, the AARP cited the lack of a definition of value and the need for standards to evaluate the value of prescription drugs.

Impacts on Medicaid “Best Price” Calculations.  As noted above, the Proposed Rule creates new methods for manufacturers utilizing VBPs to report the “best price” for their drugs, a benchmark which is utilized to determine pricing and rebates for drugs purchased by state Medicaid programs. Amongst other concerns, several commenters to the Proposed Rule are concerned that the changes to the “best price” model as included in the Proposed Rule could result in rising drug prices and a lack of MDRP-compliance enforcement against drug manufacturers.

Comments Regarding Modifications to Best Price Methodology

In its comment letter, AARP wrote that the changes to the best price model would “only exacerbate known best price reporting challenges” and that manufacturers would potentially use the change to “game the system.”  According to the AARP, if the Proposed Rule were finalized in its current form, the burden on state Medicaid programs to calculate the applicable benchmarks for each manufacturer and subsequently ensure that each manufacturer is in compliance with the MDRP would be substantially greater than what it is under the current best price methodology.  As a result, Medicaid programs would be challenged to conduct the necessary manufacturer compliance reviews with the care and deliberateness that such reviews require.

In its comment letter, the National Association of Medicaid Directors (“NAMD”) echoed AARP’s concerns about manufacturer’s taking advantage of the multiple best price approach. In particular NAMD is concerned that manufacturers might use the change to create different prices for commercial payers and state Medicaid programs. If true, manufacturers would likely provide a lower best price to its commercial payer customers and a higher best price to its Medicaid customers.  In addition, NAMD calls out the Proposed Rule as not being clear as to whether state Medicaid programs would be given the opportunity to participate in these VBPs or even that manufacturers would be able to share the details of such VBPs for state Medicaid programs to use in their negotiations with manufacturers.

In addition to the concerns expressed by NAMD and AARP regarding the way the Proposed Rule could encourage manufacturers to act in ways that would disfavor state Medicaid programs and in turn, disfavor Medicaid beneficiaries, AAMC’s comment letter raises concerns regarding the impact that the Proposed Rule’s best price modification could have on state Medicaid programs and their ability to offer drug benefits to Medicaid beneficiaries while maintaining program stability.  According to the AAMC, the proposed changes to the best price model could “considerably reduce” the amount of rebates paid to state Medicaid programs by manufacturers, a particularly harmful consequence given the current state budget constraints imposed by the COVID-19 pandemic. Given this concern, AAMC called upon CMS to conduct an analysis of the costs and coverage of the Proposed Rule and its multiple provisions before issuing the final rule.

Comments Regarding Three-Year Extension of Best Price Adjustment

In its comment letter, AARP describes its significant reservations regarding the Proposed Rule’s three-year extended best price adjustment period.   As described in the Proposed Rule, CMS proposes to amend the current best price rules that require manufacturers to revise Medicaid pricing data within three years after the data is initially due.  However, because VBP arrangements are based upon outcomes- or evidence-based measures that extend beyond three years, or include installment payments outside a three-year span, CMS proposes to allow manufacturers to make changes beyond the three-year window – up to an additional three-year period – in the case of VBP arrangements that expand beyond this period.

Based upon its concern that drug manufacturers would utilize the extension to delay the payments of MDRP rebates to state Medicaid programs, AARP objects to the proposed three-year extension.  AARP fears that manufacturers would set artificially inflated best price amounts for their Medicaid-covered drugs during the additional three-year period and only adjust the amounts to the actual, and lower, levels at the end of the three-year period when best price reporting is required.  As a result, drug manufacturers would be able to generate inflated revenues at the expense of state Medicaid programs during the extended three-year period given that the manufacturers would be able to make adjustments to comply with law when it comes time to report.

Interestingly, and maybe not surprisingly, PhRMA generally favors the three-year extended best price adjustment period.  Although PhRMA’s comment letter is critical of a number of provisions in the Proposed Rule (See above), PhRMA expressed its appreciation for the additional flexibility provided to manufacturers by the three year extension as follows:

We appreciate the flexibility this change would afford manufacturers entering VBAs. PhRMA thanks CMS for its attention to this issue and supports the proposal, provided that the extended restatement period is voluntary and applies only to VBAs. Further, PhRMA encourages CMS to allow manufacturers to make these VBA-related restatements at any time (including after the 3-year period), without requiring CMS approval.

Comments Regarding Supplemental Rebate Payments.

As an alternative to the proposed best price methodology, NAMD offered the value-based supplemental rebate agreements that are currently being implement in eight states (AL, AZ, CO, LA, MA, MI, OR, and WA), which successfully address the issues that CMS is targeting in the Proposed Rule. Under these arrangements, CMS grants approval for a state plan amendment that allows the state Medicaid program to enter into an outcome-based contract with manufacturers. If the manufacturer fails to meet established clinical outcomes then the manufacturer must pay a larger rebate to the state Medicaid program. NAMD felt that this program already provides those states that wish to participate in VBPs the ability and encouragement to do so, while not subjecting those states that don’t wish to participate to the other elements of the Proposed Rule, such as the best price modifications, that they do not feel are appropriate for their respective state Medicaid program.

PhRMA’s comment letter includes several comments regarding the Proposed Rule’s impact on supplemental rebate agreements and state plan amendments.  For example, PhRMA calls upon CMS to expand the definition of supplemental rebate agreements to include VBPs of any amount, as long as “the combined rebate payment under the SRA and national rebate agreement is greater than or equal to the rebate under the national rebate agreement alone. PhRMA felt that the expansion of this definition will encourage more states to engage in VBP agreements which will in turn leads to better clinical outcomes at equal or lower prices to patients.

CONCLUSION

At this time, CMS has not given any indication for its timetable in promulgating a final rule, nor has it indicated its willingness to consider and incorporate the comments above and others from those stakeholders potentially impacted by the Proposed Rule.  Some have conjectured that the short comment period reflects a general unwillingness by CMS to consider the submitted comments and make modifications to the Proposed Rule prior to the issuance of the final rule.  Time will tell.

As evidenced by the submitted comments including the comments summarized above, a wide-range of stakeholders in the world of Medicaid drug pricing – specifically, state Medicaid programs and their advocacy groups, and advocacy groups for Medicaid beneficiaries and healthcare providers – believe that there is an urgent need for changes to the Proposed Rule in order to avoid the negative impacts that the Proposed Rule could have on state Medicaid programs and Medicaid beneficiaries if it is finalized in its current form.  Although most commenters are not calling for the complete abandonment of the Proposed Rule, there appears to be universal support amongst both proponents and detractors of the Proposed Rule that the VBP provisions require further thought, clarification and, in the end, modifications.  As evidence by the comments, pharmaceutical manufacturers are concerned that the Proposed Rule does not provide enough flexibility to promote the significant amount of VBP innovation and expansion that the Administration and Congress is looking for.  As for state Medicaid programs, Medicaid advocacy groups and provider associations, their concerns focus on the Proposed Rule’s potential negative impact on the financial stability of state Medicaid programs and the ongoing availability of discounted drugs to Medicaid beneficiaries.

More information regarding the rulemaking process and the eventual issuance of a final rule will be available here as it becomes available.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume X, Number 231
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Kenneth Yood Healthcare Attorney SheppardMullin
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Ken is a partner in the Corporate practice group in the firm's Los Angeles office. Chambers USAranks him highly for Healthcare, where he was commended for his "broad-based ability in the regulatory area." Clients appreciate that "his explanations are clear, and he understands the business side of things," notes Chambers 2016.

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Patrick advises health care corporations on mergers and acquisitions, joint ventures, and other corporate transactions. His clients include nonprofit and for-profit health systems, academic medical centers, community hospitals, and post-acute and sub-acute providers such as home health and hospice providers, therapy providers, behavioral health providers, and senior living facilities...

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