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Six Initiatives States May Pursue to Curb Drug Prices and the 340B Factor

For much of the past 18 months, the Trump Administration, and in particular CMS, have talked a good game regarding reducing pharmaceutical prices.  On October 16, 2018, a key component of the Administration’s strategy was revealed in the form of CMS’ Proposed Rule requiring manufacturers to include the “list price” for prescription drugs reimbursable by Medicaid or Medicare in television advertisements.

No one doubts the strength of the arguments that manufacturers and First Amendment attorneys will throw at the Proposed Rule.  Some will also question the relevance of a “list price” for drugs that federal beneficiaries never pay because they are insured by Medicaid or Medicare.  Moreover, the inevitable legal challenge could rest on CMS’ admission that while it has clear Congressional authorization to operate the Medicare and Medicaid Programs efficiently, it really has no explicit Congressional authority to compel disclosure of drug list prices.

So while I do think that there will be new initiatives to address drug pricing, I believe most will come through the state and not the federal level. Which is why I read with interest the recent National Governor’s Association Report: Public Health Crises and Pharmaceutical Interventions: Improving Access while Ensuring Fiscal Sustainability.  The Report pragmatically assesses a number of potential state strategies to address drug access and costs. 

Some of the strategies discussed in the Report require state legislative buy-in, and some require federal approval.  And yes, at least two involve leveraging 340B Discounts. Here is my take on six potential initiatives states may pursue to curb drug prices and the hurdles states may face in implementing such initiatives. 

  1. Establish a Medicaid Spending Cap and/or Pursue Waivers to Exclude Medicaid Coverage of Certain Drugs

Individual states may seek to enact legislation to create a target or cap for Medicaid spending on drug products, or may enact legislation authorizing the State Medicaid Program to implement such a cap.  In fact, New York recently enacted a cap for its Medicaid program.  A spending cap may provide leverage for individual states in formulary negotiations with manufacturers.  But before enacting such an approach, states need to ensure they have the necessary expertise and capacity to conduct actuarial and data analyses in the pharmaceutical marketplace, as well as experience in price negotiations involving drug products.  Spending caps will not work if the state lacks the necessary expertise to leverage the caps into real savings.

States may also consider options for excluding select drugs from Medicaid formularies. Massachusetts developed such a program last year, but in June 2018 CMS refused to provide the necessary waiver to allow Massachusetts to implement its program.  CMS was hesitant to provide broad authority for a state to exclude drugs from formularies but indicated it may consider doing so if the state addresses up front how it will deal with Best Price and Medicaid Drug Rebate issues.   More recently, other states are reporting that targeted waiver requests are receiving more favorable reception from CMS, especially those where the state is willing to opt out of the Medicaid Drug Rebate program for specified Medicaid formularies.     

  1. Pursue State Legal and Regulatory Options to Foster Greater Transparency in the Marketplace

Personally, I am not sure that transparency is a panacea, but it makes for a good talking point.  More states may look to pass laws and regulations that require manufacturers or other stakeholders, such as wholesalers, health plans and PBMs, to publicly report pricing related metrics such as: list prices, price changes, amounts spent on specific costs such as marketing or research, or amounts received or paid through discounts or rebates.

There are challenges to successfully enacting such measures.  For example, issues such as zeroing in on the data necessary to achieve specified policy goals or determining metrics that can legally be made public can be complicated.  Indeed, federal law presently protects the confidentiality of certain standard drug price measures such as Average Manufacturer Price, 340B ceiling price, and Medicaid Drug Unit Rebate Amount.  

Still, states are actively considering transparency legislation, including such measures as:

  • Requiring manufacturers to collect and report specified pricing measures such as Wholesale Acquisition Cost

  • Require manufacturer reporting on planned price increases or launch prices over specified cost thresholds

  • Health Plan reporting on drug costs and utilization

  • PBM reporting on rebates

  • Requiring hospitals to identify the drugs that they acquire through the 340B Drug Discount Program, so the state can ensure they are receiving the benefits of the discounts for Medicaid beneficiaries.  Colorado and Mississippi have pursued such legislation.

As I previously wrote, the biggest challenge may not be developing the transparency metrics, but rather developing the in-house expertise for the state to use the metrics in a manner that results in actual savings.  State drug pricing settlements in the late 1990’s and early 2000’s resulted in manufacturers submitting price reports to the state that state personnel routinely ignored in setting Medicaid reimbursement rates.  These new legislative measures may create more hoops for stakeholders to jump through, but it remains to be seen if they will make a dent in drug prices. 

  1. Explore Federal Waivers to Pursue Value-Based Initiatives for Medicaid

CMS has been advocating the use of value based initiatives for several years.  But when it comes to Medicaid, there are major legal impediments to implementing these initiatives at the state level, mainly involving Best Price, the Medicaid Drug Rebate Program, and the risk of qui tam litigation alleging the initiative constitutes an unlawful kickback.

Federal law mandates that manufacturers pay states Medicaid Drug Rebates based in part on the “Best Price” the manufacturer charges any payor for the product, inclusive of discounts and other price concessions.  Value-based initiatives, where the manufacturer provides price concessions based on drug efficacy, potentially put manufacturers and providers in the cross-hairs of these existing federal laws. 

There are numerous pending false claims qui tams alleging that manufacturers and practitioners caused false health care claims to be submitted to Medicare or Medicaid based on price concessions tied to the provision of certain health care products or services. When these price concessions create an inducement for health care providers to purchase or prescribe that particular product or service, even the best of intentions may not save the arrangement from a challenge that it operates as a kickback.    

Development of truly effective value-based arrangements in Medicaid will take considerable effort on the front end in designing compliant policies, including negotiation of appropriate waivers where necessary.  Manufacturers will be open to value-based arrangements only if they are convinced that entering the arrangement does not materially increase the risk of false claims liability from whistleblowers aware of the arrangement and the price concessions provided.     

  1. Greater Use of Subscription Models

A subscription model is an arrangement in which a state pays a manufacturer a negotiated price for a certain volume of a specified drug over a defined time period.  Subscription arrangements are especially attractive to increase access to a particular product or line of products in light of state budget constraints.

The benefits of such arrangements is that they may take into account a state’s individual budgeting structure, as well as account for changes in administration.  Yet, there may be a risk for a state if the time period of the agreement does not take into account potential medical breakthroughs that may make other treatment options more cost effective. 

While subscription models are used more routinely for state populations outside of Medicaid, they can be used for Medicaid if the arrangement accounts for existing Medicaid pricing and Medicaid Best Price considerations as discussed above. 

States may especially be interested in pursuing future innovative subscription models targeting specific medications  - especially those that may involve creative financing structures that help a state address budgeting challenges. 

  1. Engage in Bulk and Pooled Purchasing

A number of states already use bulk and/or pooled purchasing arrangements to leverage their purchasing power. 

The National Governor’s Association Report notes that bulk purchasing may be particularly impactful when focused on a limited amount of products, especially when linked to particular public health issues.  Pooled purchasing arrangements can be done on a limited basis but also on a broader basis, such as for formularies. 

The Report cites to a recent Pew Charitable Trusts study of pharmaceutical purchasing arrangements for state prison populations that provides a national snapshot on various arrangements the states are presently using.  One caveat regarding arrangements involving state prison populations – Medicaid Best Price is also a consideration and risk issue for the drug manufacturers.  States may want to consider pursuing waivers that allow the state to obtain discounts in purchasing drugs for prison populations that are exempt from Medicaid Best Price reporting. Of course, an exception to Medicaid Best Price reporting is sales under the 340B Drug Discount Program. 

  1. Leverage the 340B Program to Obtain Discounted Drugs for State Prison Populations

The National Governor’s Associate Report recommends that more states explore contracting with covered entities enrolled with the 340B Drug Discount Program, such as state University Health and Hospital Systems, to provide health services to its prison population.  In that way, the Health System can leverage its status as a 340B Covered Entity, and obtain discounted 340B drugs for the state prison population.

Interestingly, the Report does not specifically reference the Texas model. For a number of years now, Texas has contracted with its state University Health System, which is a 340B Covered Entity, to provide health services to the state prison population specifically because the state can thus obtain 340B discounted drugs for that population - an arrangement authorized by the Texas State legislature. 

The Pew study cited in the National Governor’s Association Report does reference the Texas model, and reported that Texas Corrections reduced drug costs by 60% based in large part on its access to 340B discounted drugs.  Pew also notes that sixteen states now use some form of the Texas model and obtain at least some of their high cost drugs for state prisoners through 340B.

I have written extensively about 340B, and the myriad of federal legislation presently pending that would alter the way the 340B Program operates.  As I wrote in late July, one pending bill would narrow the definition of a 340B eligible patient to exclude state prisoners.  But as I also wrote in July, the Trump Administration has refused to implement existing rules imposing penalties for drug manufacturers who overcharge for 340B drugs. 

Which is why in late August, a bipartisan group of Congressional leaders from both the House and Senate took the unusual step of stating they would not pursue federal legislative changes to 340B given the Administration’s refusal to implement existing laws.  Meaning it is not likely that Congress will act to rein in the 340B Drug Discount Program and it is likely that more states will look to leverage 340B for their state prisons.

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About this Author

Ellyn Sternfield, Mintz Levin, Law Firm, Washington DC, Health Care Law Attorney
Special Counsel

Ellyn has more than 30 years of legal experience, with an extensive background in the field of government health care enforcement.

Ellyn’s experience enables her to provide valuable insight to clients facing potential state or federal investigations, or who have general compliance concerns. Ellyn currently represents a variety of health care product and service providers in federal and state administrative, civil, and criminal matters around the country. She conducts internal reviews and investigations for clients concerned about potential compliance issues. Ellyn advises clients on...

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