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Medicaid VBP Rule May Facilitate Drug Contracts, But Questions Remain

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CMS proposes to alleviate drug price reporting barriers that have hindered the adoption of innovative contracting models for prescription drugs. Stakeholders should contemplate the details and implications of CMS’ proposals—including how the changes would impact current contracting—as well as remaining areas of ambiguity.

One of the bigger barriers to value- and outcomes-based contracts for prescription drugs has been Best Price (BP) reporting. BP requirements can lead manufacturers to take on increased pricing exposure in Medicaid and other government programs if a negative patient outcome triggers a significant price reduction under an innovative contract. This concern can discourage innovative arrangements or lead to innovative arrangements with lower price concessions.

Through the June 17 rule, CMS proposes a host of changes intended to address these BP barriers and facilitate innovative arrangements between states, commercial payers, and manufacturers. Specifically, CMS would adopt a broad definition of value-based purchasing arrangement (VBP) and tie Average Manufacturer Price (AMP) and BP flexibilities to VBPs meeting that definition, as displayed below:

AMP: Average Manufacturer Price; BP: Best Price; MDRP: Medicaid Drug Rebate Program; VBP: Value-Based Purchasing

These changes would offer new clarity and flexibility to manufacturers, potentially opening the door to new VBPs. However, the rule text and consideration of its impact raise several critical questions. The answers to these questions could significantly affect the rule’s eventual market impact.

Stakeholders should consider submitting comments to CMS. Comments are due July 20.

Outstanding Questions

How will CMS define VBP and how prescriptive will the definition be? CMS’ proposed definition of VBP leaves the key term “substantial” undefined. It is not clear whether CMS means that a substantial portion of the drug cost must be tied to its performance or that a substantial part of all rebates must be tied to performance under a VBP arrangement. Additionally, the types of performance metrics that would be considered “evidence-based” or “outcomes-based” are not fully defined, and could open the door to the use of value frameworks or other constructs to define “substantial” value in VBP. More broadly, it is worth contemplating if CMS will be more prescriptive in finalizing the rule or if these definitions will be left to stakeholder discretion.

How will existing innovative contracting arrangements be impacted? The rule proposes flexibilities to BP reporting for agreements that meet the definition of VBP. However, it is unclear whether existing value- or outcomes-based arrangements will satisfy the adopted definition. For arrangements that do not “substantially link” payment to outcomes, manufacturers likely will continue to use existing pathways to mitigate BP risk, including through bundled sales or free drug. Manufacturers would need to review their existing arrangements to assess how the rule would apply.

Which markets and payer types could be implicated? CMS notes that the rule aims to allow for greater use of VBPs in the commercial market and that this impact could extend into Medicaid. Beyond increasing focus on VBPs with commercial plans and state fee-for-service (FFS) Medicaid programs, the rule may also lead to new VBP conversations with Medicare Advantage (MA) plans, Medicaid managed care organizations (MCOs), and potentially CMMI. In Medicare, while Part D discounts offered to MA plans are already excluded from AMP and BP, Part B drug arrangements are not currently protected, nor can BP be waived by CMMI. In Medicaid, rebates paid to Medicaid MCOs are not excluded from AMP or BP. The possibility for MCOs to contract on their own for Medicaid VBPs is particularly interesting and could lead manufacturers to reconsider their Medicaid VBP contracting strategies to refocus on negotiations with MCOs.

Could FFS Medicaid programs directly adopt commercial VBPs or would states still be required to seek State Plan Amendment (SPA) approval? While the rule alludes to the potential for FFS Medicaid programs to adopt commercial VBPs, it also notes the requirement for states to go through the SPA process to gain CMS permission to establish VBPs as supplemental rebate agreements (SRAs). Today, rebates contracted through SRAs do not impact AMP or BP, so states use this pathway for implementing VBPs. However, with the creation of BPs tied to VBPs, it is unclear whether states would still be required to use the SPA/SRA pathway or if contracting for VBPs without an SRA would be an allowed pathway for the state to access VBPs and their accompanying BPs. If states must still seek SPA approval, this may slow VBP adoption and affect what types of VBPs states pursue.

Could the multiple potential BPs recorded for each drug create challenges for states, CMS, and manufacturers? Many of the operational and technical details of the proposal remain unclear. This includes how manufacturers would report—and CMS would record—the multiple BPs that could apply for VBPs and non-VBPs and for each dosage form and strength of a drug. CMS requested input on the steps stakeholders would need to take to implement VBPs and acknowledges that significant updates will need to be made to CMS’s own Drug Data Reporting system.

How might physician-administered drugs be differentially impacted by these changes? Medicare and other payers use Average Sales Price (ASP) as the basis for payment for many provider-administered drugs. The proposed rule does not address impacts to ASP. Therefore, larger rebates/discounts tied to poor outcomes under a VBP could still impact ASP and payment rates for provider-administered drugs.

How do the rule’s changes intersect with 340B? The 340B drug discount program’s ceiling price for 340B covered entities is calculated as AMP minus the Medicaid unit rebate amount (URA); URA for most brand drugs is the greater of 23.1% of AMP or AMP minus BP. If the URA relies on BP and multiple BPs are reported to CMS, it is unclear whether the VBP rate would be extended to 340B covered entities.

How would manufacturers “ensure” the full value of cost-sharing assistance is passed on to patients? CMS proposes that the value of manufacturer cost-sharing assistance would need to be deducted from AMP and BP if the manufacturer cannot “ensure” the full value of the assistance is passed on to the patient. This has implications for drugs that are subject to copay accumulator and maximizer programs. However, it is not clear whether manufacturers will be able to contract out of such programs or even whether a manufacturer is able to accurately tell if their product is subject to these programs to know when they may have to report a lower BP. It is also unclear how or if CMS plans to enforce this provision and whether manufacturers and plan sponsors may change their approaches to patient support programs in light of the rule, if finalized.

How could VBP flexibilities create new avenues for emerging cell and gene therapies, solving for challenges associated with their one-time, high cost nature? Previous rules prevented manufacturers from recalculating BP after 12 quarters. Therefore, many contracts were limited to looking at outcomes that could be quantified within 3 years. However, outcomes for some curative therapies may take longer than 3 years to be fully assessed. Allowing a longer duration may provide more VBP opportunities for these products. Yet, the proposal leaves unclear how pay-over-time (“drug mortgage”) or other innovative financing arrangements would be treated under BP.

When could the rule be finalized and operationalized? CMS Administrator Seema Verma announced that the agency plans to finalize this rule as soon as possible, as evidenced by the short, 30-day comment period. This could allow the rule to be finalized prior to the November election and potentially impact contracting as soon as late 2020 or early 2021. However, it is more likely to impact contracting for the 2022 plan year and beyond.

To learn more about Avalere’s work related to government price reporting, net pricing, and innovative contracting with Medicaid and other payers, connect with us.

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