After 30 years of following the same rules to ensure Medicaid receives the lowest price available for prescription drugs, the U.S. Centers for Medicare & Medicaid Services (CMS) is starting to adapt those rules for the 21st century.

“By modernizing our rules, we are creating opportunities for drug manufacturers to have skin in the game through payment arrangements that challenge them to put their money where their mouth is,” CMS Administrator Seema Verma said Wednesday when the proposed rule was released.

In proposing the changes, CMS noted that therapies coming to market today fight disease in an entirely new way. “While the impact of these therapies can be transformative, their costs are unprecedented. New approaches to payment are needed to allow the market room to adapt to these types of curative treatments while ensuring that public programs like Medicaid remain sustainable,” the agency said.

Modernizing the regulations should encourage innovation and empower states, private payers and manufacturers to pay for prescription drugs based on clinical outcomes. And basing payment on the effectiveness of a therapy should foster the development of treatments that are the most impactful to patients, while reducing overall health care spending and hospital visits, CMS said.

Current Medicaid regulations have created a system in which states, as the payers, and manufacturers negotiate price based on the quantity of drugs sold rather than the value a drug offers, often giving preference to older treatments instead of a new cure.

The proposed rule breaks down some of those walls by giving states and manufacturers the flexibility to enter into value-based payment (VBP) agreements while still ensuring that Medicaid always gets the best deal, according to CMS. For starters, the proposal modifies the old Medicaid “best price” law that has only allowed one single best price for each drug – regardless of individual patient outcomes.

That’s been a regulatory hurdle for drug manufacturers as, by law, “best price” is defined as “the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, non-profit entity, or governmental entity within the United States,” according to a notice to be published in Friday’s Federal Register.

Given that definition, the manufacturer’s best price under a VBP could be reset based on the outcome of a drug treatment for one patient. If that happened, the manufacturer would be on the hook for a significantly higher Medicaid rebate, possibly as much as 100% of the drug’s average manufacturer price (AMP), CMS explained.

The proposed rule removes that obstacle by allowing manufacturers to report multiple “best prices” for a therapy if the prices are tied to a VBP arrangement. To further facilitate VBPs, the new rule would revise AMP and best price reporting beyond the current 36-month time limit to accommodate evidence or outcomes-based measures that extend beyond three years.

“The administration supports VBP because it believes it will assist states with providing Medicaid patients access to needed therapies while providing a payment arrangement that allows the state flexibility, including an option to only pay when a therapy actually works,” CMS said in the Federal Register notice.

Among other changes, the proposed rule would:

  • clarify that, in accordance with a provision in a continuing spending resolution enacted last September, the sales of authorized generics are to be excluded from a manufacturer’s AMP calculation for a brand drug;
  • impose an inflation penalty for noninnovator generics and modify the definitions of “single source drug,” “innovator multiple-source drug” and “multiple source drug”;
  • clarify how manufacturers calculate their AMP and best price when considering the value of patient assistance programs, especially when a health plan uses a pharmacy benefit manager accumulator program;
  • encourage the appropriate use of opioids and reduce prescription-related fraud, abuse and misuse.

Comments on the rule should reference file code CMS-2842-P and must be submitted by July 19, 2020.

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