Recommendation Two: Streamline procurement processes and create new purchasing models
A diverse range of mechanisms to control spending has emerged, which include streamlining current procurement efforts and creating novel ways to pay for drugs. However, any cost savings measure a state adopts applies only to state-regulated plans such as Medicaid, state employee health plans and fully insured health plans.
States already receive federal statutorily required rebates under the Medicaid Drug Rebate Program (MDRP) but states can achieve additional savings by negotiating optional supplemental rebate agreements (SRA) with manufacturers. States can enter into these agreements with approval from CMS under a state plan amendment (SPA). A state plan is the agreement each state has with the federal government outlining program specifics such as services and populations covered, reimbursement methodologies for providers and other administrative actions.
Leveraging the federal 340B Drug Pricing Program (340B) is another way states might find additional savings. Created in 1992, 340B stretches limited federal resources by providing reduced-price outpatient prescription drugs to over 42,000 eligible health care facilities, called “covered entities,” certified by the Health Resources and Services Administration (HRSA). The U.S. Government Accountability Office (GAO) estimates covered entities can achieve 20-50% savings off list prices. Covered entities—including disease-specific advocacy organizations, certain categories of hospitals and federally qualified health centers (FQHCs)—may use the savings generated by 340B discounts to increase prescription drug access to rural communities and underserved populations. These entities serve more than 10 million people in all 50 states, the commonwealths and territories.
Did You Know?
States do not regulate self-insured health plans as those are guided by the federal Employee Retirement Income and Security Act (ERISA). Plans of this type typically cover large employers of 500 or more who choose to take on the financial health risk of their employees. Even though states lack statutory authority over these plans, alternative payment models could be applied to self-insured contracts should those companies choose to adopt them.
Instead of patients receiving their prescriptions through Medicaid or a state employee health plan, patients treated by a 340B covered entity could utilize participating pharmacies, which may lower the reimbursement cost for that particular payer. States could also reduce their spending by leveraging 340B pricing in their state correctional health programs. According to a 2019 National Governors Association (NGA) report, at least 16 states have contracts with covered entities to care for and administer certain specialty medicines to people who are incarcerated.
An important note is that when the MDRP and 340B were created, critics voiced concerns that because certain Medicaid patients could also be eligible for 340B drugs, discounts for those drugs could be unintentionally duplicated. Thus, a key federal regulation stipulates that duplicate discounts are prohibited under 340B.
Adding another layer of complexity, covered entities may contract with non-affiliated pharmacies, known as contract pharmacies, to dispense drugs to patients on their behalf. Contract pharmacies increased 4000% between 2010-2020, which 340B providers say are vital to providing prescription drug access to their patients. Opponents contend contract pharmacies lie outside the original scope of 340B, and are being misused by large hospital and pharmacy systems to generate revenue.
As states consider how to optimize savings in their Medicaid and 340B programs, they might also think about how some of the same policy options might be applied to other state-regulated plans. As with other areas of the supply chain, the prescription drug procurement process offers a wide range of policy options for legislators and only three—purchasing pools, prescription drug importation and alternative payment models—are highlighted in this report.
Medicaid Drug Rebate Program
Created by the Omnibus Budget Reconciliation Act of 1990, the Medicaid Drug Rebate Program (MDRP) established mandated rebates. Rebates vary by drug and are based on several factors, including average manufacturer price (AMP), or list price, how fast AMPs rise relative to inflation and Medicaid Best Price.
Medicaid Best Price is an agreement that directs Medicaid programs to receive the lowest, or “best” price that a manufacturer offers most other purchasers, except certain other government programs—the Veterans Health Administration, for example.
For brand name drugs, the rebate amount is a percentage of the AMP (typically 23.1%) or the difference between AMP and the “best price,” whichever is greater. This is in addition to a rebate paid if AMPs rise faster than inflation over time.
Generic drugs have a statutory rebate amount of 13% of AMP with no ”best price” requirement and an additional rebate if prices grow faster than inflation.
CMS estimates that 600 manufacturers currently have national rebate agreements with the federal government and, although voluntary, all 50 states and the District of Columbia participate in the MDRP.
Options and Strategies
Procure pharmaceuticals through purchasing pools.
Forming a bulk purchasing pool might capture additional state savings. By leveraging the purchasing power across states or agencies, the goal is for all parties in the pool to receive lower prices. Currently, five operational multi-state bulk-purchasing pools negotiate supplemental rebate agreements on behalf of the states with whom they contract.
“There is nothing that precludes states from purchasing in a different way than they do right now – from creating a multi-state compact or coalition that states could leverage, including utilization of a reference rate approach." Senator Louis DiPalma (D-R.I.)
Three purchasing pools are Medicaid-focused: the National Medicaid Pooling Initiative (NMPI), the Top Dollar Program (TOP$) and the Sovereign States Drug Consortium (SSDC). These pools generate savings through a preferred drug list or PDL. A PDL is a pre-approved list of outpatient medicines a payer authorizes based on its cost-effectiveness and, generally, how medically appropriate it is compared to other drugs. Drugs not included on the PDL may require prior authorization or a higher copayment.
According to program administrators, states using these strategies typically save between 3-5%, but amounts vary based on several factors including whether the state negotiates as a single purchaser, with a partner state or by entering into a multi-state agreement.
The three purchasing pools focused on state Medicaid programs are:
Operational since 2003. At present, 10 states—Alaska, Kentucky, Michigan, Minnesota, Montana, New Hampshire, New York, North Carolina, Rhode Island and South Carolina—plus the District of Columbia participate. NMPI covers 3.8 million people and has supplemental rebate agreements with more than 90 pharmaceutical manufacturers.
Starting with two member states in 2005, there are now six participating states: Connecticut, Idaho, Louisiana, Maryland, Nebraska and Wisconsin.
Founded as a non-profit structure in 2005, 13 states take part in the SSDC: Delaware, Iowa, Maine, Mississippi, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Utah, Vermont, West Virginia and Wyoming. Collectively, the consortium covers 5 million people.
In addition, two more pooling initiatives either apply to other non-Medicaid state and local government agencies or are open to citizens who live in certain states: the Northwest Prescription Drug Consortium (NPDC) and the Minnesota Multistate Contracting Alliance for Pharmacy (MMCAP).
The NPDC is an interstate agreement between Oregon and Washington that provides a discount card program to residents in those states. Discounts are applied point-of-sale at participating locations. According to the consortium’s website, the NPDC facilitates more than $800 million in annual drug purchases for over 1 million people in participating groups and facilities.
Founded in the mid-1990s, MMCAP combines the buying power of state agencies (such as public health departments), counties, cities and school districts in all 50 states.
Instead of pooling resources with other states, some lawmakers are consolidating the purchasing clout within their own borders. Created in 2019, New Mexico’s Interagency Pharmaceutical Purchasing Council is tasked with finding ways to leverage the collective purchasing power of the state’s agencies and report their findings annually to the legislature. Legislators use the information to inform fiscal policy in the state.
California embarked on a similar path in 2019 and state agencies—including Medi-Cal, the state Medicaid agency covering 12 million people—were directed, by executive order, to implement a combined drug procurement strategy. Implementation is in initial stages and, according to the California Legislative Analyst office, the potential savings generated could be hundreds of millions of dollars.
Purchasing through alternative payment models (APMs).
Alternative payment models—which often tie payment to the quality of care—are another potential cost-savings measure of mounting lawmaker interest. Federal rules in the MDRP require state Medicaid programs to cover all federal Food and Drug Administration (FDA) approved drugs produced by participating manufacturers, which means states may face even greater affordability challenges.
States might pursue a variety of APMs including:
- Subscription-based: A contracted, fixed amount paid to a manufacturer in exchange for unlimited access to a treatment.
- Outcomes-based: Payment is tied to key metrics or performance outcomes.
- Evidence-based: Existing evidence of effectiveness for a particular treatment is assessed to estimate potential value.
While APM strategies are growing in state Medicaid plans, they may run contrary to the federal Anti-Kickback Statute, which prohibits anyone from receiving compensation in exchange for inducing business from a federal health program. Moreover, Medicaid Best Price could mean that any price concession offered by a manufacturer under an APM might set the benchmark for all Medicaid programs. Providing some clarity, a recent final rule from CMS allows manufacturers who enter into APMs with state Medicaid programs to report multiple best prices for a particular drug, as long as they offer the same APM to all states.
In an effort to eliminate hepatitis C in the state Medicaid and incarcerated populations, Louisiana was the first state to adopt a subscription-based model to manage the state spend on hepatitis C drugs. Hepatitis C virus (HCV) is a liver disease that can have serious health complications such as liver cancer and cirrhosis, or scarring, of the liver. If left untreated, HCV can lead to liver failure and death. HCV is curable, but available anti-viral products can cost tens of thousands of dollars for a full course of treatment. In addition, researchers who followed inmates infected with HCV determined that the disease, if unchecked, can result in costly hospitalizations – approximately $155,000 per person, per year in additional costs to the state.
In the contract, one manufacturer will provide Louisiana unlimited access to its HCV treatment for no more than $35 million a year (Louisiana’s previous average annual cost for HCV anti-viral) until 2024. As of summer 2021, the Louisiana Department of Health reports more than 7,500 of the 31,000 people identified with HCV have been treated since the program began in July 2019. Plans to eliminate HCV in Washington by 2030 using a similar model are also underway. According to Hep C Free Washington, preventing new infections and providing treatment to people living with HCV will reduce state expenditures in the long term because of the decrease in overall health care costs.
Using outcomes-based agreements, Oklahoma pegged payment to metrics such as hospitalizations and patient adherence. For example, in one contract the state receives a higher rebate if patients adhering to their regimen are hospitalized. In return, the state will not require prior authorization for patients to receive that specific treatment. Colorado, Massachusetts and Michigan have also gained approval from CMS to enter into outcomes-based APMs with manufacturers, but as of publication no other state contracts have been announced.
Did You Know?
Scientific advances in gene or cell therapies are bringing new hope to patients who previously had limited treatment options.
For instance, researchers who evaluated children diagnosed with spinal muscular atrophy (SMA) found those who received a type of gene therapy showed remarkable results after two years. None of the children required mechanical ventilation to assist with breathing when, in comparison, only 8% of patients left untreated survived to the same age without permanent ventilation.
With costs of these treatments reaching into the millions, purchasers are considering different ways to pay for these treatments. Reinsurance, high-risk pools and mortgage-based payments—similar to an amortized loan—are just a few of the models being explored.
Leverage savings and prevent duplicate discounts under the federal 340B program.
Under 340B, manufacturers sell products to covered entities at steeper discounts (20-50% according to the GAO) than what is offered through Medicaid Best Price. As noted, federal law prohibits state Medicaid programs from receiving manufacturer rebates for drugs already discounted under the 340B Program. A 50-state Kaiser Family Foundation survey of Medicaid pharmacy directors revealed that avoiding duplicate discounts has been costly as well as administratively burdensome for some states, leading certain lawmakers to pursue a variety of ways to ease this obligation.
Both manufacturers and covered entities are subject to audits from HRSA to ensure program compliance, but states are ultimately responsible for making sure 340B drugs are excluded from Medicaid rebates billed to manufacturers. States using a fee-for-service payment model in their Medicaid program must choose and identify which drugs will be carved in to the program or carved out and covered under 340B. To help states accomplish this, HRSA established the Medicaid Exclusion File that requires covered entities to report which products will be included under 340B. Managed-care plans who administer a state Medicaid program must also have an exclusion process for 340B drugs in place before a contract is finalized.
Best practices released in 2019 from CMS outline seven strategies states might use to avoid duplicating discounts, including limiting the ability of contract pharmacies to dispense 340B drugs. 340B Health, an organization representing 1,400 covered entities, raised concerns that restricting the use of contract pharmacies may decrease access to medication and care for the most vulnerable patients. As mentioned previously, opponents point to the significant increase in contract pharmacies as expanding the intended scope (or use) of 340B.
340B Management Strategies
Source: 2019 KFF and Health Management Associates (HMA) survey fo Medicaid officials in 50 states and DC, April 2020, and NCPDP Reference Guide
- Use of Medicaid Exclusion File (MEF) — 38 states
- Prohibition on contract pharmacies in FFS – 36 states
- Use of NCPDP fields* to identify 340B claims – 31 states
- Prohibition on contract pharmacies in managed care – 18 states
- 340B entities not allowed to carve into managed care – 5 states
- Use of medical claims modifiers to identify 340B claims – 7 states
- 340B entities not allowed to carve into FFS – 2 states
Notes: *NCPDP fields allow pharmacies to indicate on a claim that a drug was purchased through the 340B program.
States have pursued a variety of activities to manage duplicative discounts. In addition to the strategies listed in the table, several states—including Massachusetts, Minnesota, Montana, Oregon, Rhode Island, South Dakota, Utah and West Virginia—prohibit covered entities, or a contract pharmacy acting on their behalf, from receiving a lower reimbursement than Medicaid for drugs provided under 340B. Montana’s law goes a step further by setting a reimbursement floor based on a calculation using national average drug acquisition costs or NADAC—the national average at which retail pharmacies purchase prescription drugs from manufacturers or wholesalers.
Legislators may want to convene key stakeholders, including state Medicaid pharmacy directors, to determine which 340B strategies are already in place, and ascertain where modifications can be made that are appropriate for their state.
Pursue importation agreements with other countries.
Analysis from researchers at the RAND Corporation reports that medicines in many other economically developed countries are less costly than in the U.S. This is due, in large part, to price controls used by other nation’s governments. As such, many state lawmakers are interested in the safe importation of medicines from other countries, particularly Canada.
Before a pharmaceutical can be sold in the U.S., it must go through a rigorous approval process by the FDA prior to its distribution. Current federal law bars states from pursuing importation arrangements unless a drug’s safety and efficacy can be certified by the FDA.
A landmark FDA final rule issued in September 2020 permits states, wholesalers and pharmacists seeking to import pharmaceuticals from Canadian sources to submit proposals to the federal government outlining how their plan would generate savings while not posing any additional threat to patient safety. Litigation filed in federal court after the rule’s release argues the rule not only runs contrary to federal law, but evidence to support that imported products can be safely guaranteed or effective at reducing costs is lacking.
One primary concern to importation strategies is that the drug supply chain could be compromised with counterfeit or substandard products. Even with support from the U.S. government, the prescription drug market in Canada is considerably smaller than in the U.S., so finding a Canadian partner could prove challenging. Critics also suggest that because some high-cost drugs such as biologics and specialty drugs do not qualify for importation, the impact of these policies may be limited.
As of summer 2021, eight states—Colorado, Florida, Maine, New Hampshire, New Mexico, North Dakota, Vermont and Wisconsin—have laws to allow a process for prescription drug importation. Some state policies limit the importation of drugs to those purchased from Canada, but laws in Florida and Colorado provide a second pathway to purchase drugs from countries other than Canada.
Agencies in Florida and Colorado have pursued requests for proposals from wholesalers and suppliers, but as of summer 2021 no contractual agreements have been announced from either state.
Did You Know?
Interest in pharmacy tourism, a somewhat related policy, is now an alternative for one state’s employee health plan. Utah’s “Health Insurance Right to Shop” law enacted in 2018 allows state employees who use certain high-cost, specialty medications to participate in a pharmacy tourism program. The Public Employee Health Plan has contracted locations in Mexico and Canada where members receive roundtrip airfare, transportation to and from the clinic or pharmacy in the desired country, and $500 cash back for taking part. Program administrators report saving $225,000 in the first year alone.