How States Manage Prescription Drugs Under Medicaid

States are concerned about how to control Medicaid drug costs given the volume of people enrolled in the program, an influx of new drugs with high prices, and the requirement for Medicaid to cover almost all outpatient drugs. As they have historically, states still control drug costs through supplemental rebate negotiations and the use of prior authorization and preferred drug lists (PDLs). Some states have established more aggressive cost containment mechanisms in the past few years, including New York’s Medicaid drug spending cap. The Center for Medicare and Medicaid Services (CMS) has approved 7 states to enter into value-based agreements that can tie health outcomes or other factors to drug rebates. One of these models in use in Louisiana and Washington is referred to as the “Netflix Model,” because it caps state spending on a drug regardless of the number of beneficiaries that are treated. Many states have also taken control of the drug benefit back from managed care organizations (MCOs), either by carving the drug benefit out of MCOs’ contracts entirely or by requiring MCOs to follow state-generated unified PDLs.

What Cell and Gene Therapies Will Mean for Medicaid

There is currently a large pipeline of cell and gene therapies, many of which are targeted to patients—such as children—who are predominantly covered by Medicaid. These potentially curative treatments may need to be administered only once and thus are likely to carry a high up-front cost, which could have a big financial impact on Medicaid. One possible option is a pay-over-time model in which states could attempt to manage their year-to-year outlays for these treatments. This model would allow states to defer costs and pay them off over a specified period. This would also allow states to add an outcomes-based stipulation within the pay-over-time model to stop or reduce payments in line with a specific product’s durability of effect. Ultimately, cell and gene therapy manufacturers will need to clearly define the value of these therapies, give states ample notice as to how these treatments will affect Medicaid budgets, and prepare for novel payment or financing mechanisms that will ensure patient access.

How States Could Use the HAO Option

The new HAO demonstration is an option for states to gain additional flexibilities in the Medicaid program. At the end of January, the CMS unveiled the HAO with aggregate capped funding (“block grant”) or a per-capita cap on funding. Stakeholders have expressed concerns that states could limit services to beneficiaries in the demonstration population to stay within the capped funding. One example of limiting benefits that the CMS has proposed is the ability for states to use a closed formulary in their HAO population, which has not previously been allowed under the Medicaid Drug Rebate Program. States may choose to use the HAO to expand Medicaid to non-disabled adults or possibly to a subset of their non-disabled adult population such as people with HIV or substance use disorder, or to their homeless residents. Because this program is optional for states, the impact will vary widely depending on how a state chooses to implement the HAO demonstration.

Watch “What’s Next for Medicaid Drug Pricing?”

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