CMS proposed rule aims to encourage value based purchasing for drugs, now open for comment

As part of the CMS’s ongoing effort to support and expand value based purchasing in healthcare, on June 19, 2020 the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule open for comment, intended to spur the development of contractual arrangements between insurers and biopharma companies that rely on the observed value from medicines in exchange for payment.  The proposed rule would remove a significant impediment to innovative arrangements based on “Best Price” rules in state Medicaid programs.  Promoting value-based pricing is intended to hold prescription drug manufacturers more accountable for outcomes achieved through use of their drug.   The comment period will end 30 days after the proposed rule was issued.

History

Under a traditional fee-for-services model, prescription brand drug net prices are based primarily on the quantity of drugs sold, net of rebates and discounts.  Under the Medicaid Drug Rebate Program biopharma manufacturers must report to CMS the lowest net price offered in the U.S. after factoring in all rebates and discounts, or the “Best Price.” Then for branded drugs, manufacturers pay to Medicaid programs the larger of rebates equal to 23.1 percent of a branded drug’s “Average Manufacturer Price” (a measure of list price), or the Best Price. As a result, the net price to Medicaid is no more than the lowest price offered to private insurers.

Medicaid Best Price regulations were written 30 years ago and have not been updated to reflect new drugs or new payment models.   In the interim, transformative, and high cost therapies have proliferated and the old rules have stymied new payment models.  For example, a manufacturer with a drug that cures a life-threatening disease might seek to structure an arrangement charging $50,000 per unit for patients who are cured after one year, and no payment for patients who remain symptomatic after one year.  In this example, $0 would be the Best Price for all state Medicaid programs for all patients under current rules. The financial impact of the Best Price rule in that context has made such a pricing innovation uneconomic for manufacturers. Moreover, in the absence of applicable legal guidance regarding how to report Best Pricing as a result of VBP, manufacturers have been discouraged from offering alternative payment methods. 

The proposed rule

The new rule proposes a definition for value-based purchasing for drugs to give clarity on what is in scope and offers alternative methods to calculate best price for value-based arrangements fitting within that definition.  

First, CMS proposes to define a value-based purchasing for drugs  as “an arrangement or agreement intended to align pricing and/or payments to an observed or expected therapeutic or clinical value in a population (that is, outcomes relative to costs) and includes (but is not limited to):

• Evidence-based measures, which substantially link the cost of a drug to existing evidence of the effectiveness or potential value for specific uses of that product, and/or
• Outcomes-based measures, which substantially link payment for the drug to that of the drug’s actual performance in a patient or a population, or a reduction in other medical expenses.”

One open question is the meaning of the term “substantial” in this context.  In the proposed rule, CMS specifically asks for comments on how “substantial” the link between outcome and payment should be to qualify as a value-based arrangement. This could take the form of specifying a threshold for the portion of the total price is tied to value, for example 90 percent of the discounts are tied to an endpoint. CMS also encourages feedback to create more clarity on the types measures that could be used to assess value from the drug. This lack of clarity has other regulatory implications as manufacturers hesitate to create a contract connected to an outcome that was not measured in the clinical trial and therefore not in the drug’s FDA approved label.  Furthermore, CMS acknowledges in the proposal that outcomes are often measured over time but does not propose on how to address outcome measures that are measured over multiple quarters or years.

Second, the proposed rule permits manufacturers to report Best Price in two different ways. One is as a “bundled sale.”  Under such an arrangement, the Best Price is the weighted average net price for the entire quantity of the product in the value-based arrangement. In the “cure” example, if the manufacturer were paid $50,000 for ten units of drugs given to patients who were cured of all symptoms at one year, $40,000 for five patients whose symptoms were 80 percent improved at one year, and $0 for five units of drugs given to patients who were still symptomatic, the Best Price would be $35,000 ((10*$50,000 + 5*$40,000+ 5*$0)/(10+5+5)). 

The other “Best Price” proposal would allow multiple best prices per drug. Following the example, the manufacturer would report a best price of $50,000, $40,000 and $0, connected to the three different outcomes. The Best Price would apply to Medicaid value-based agreement with those outcomes. It is unclear how Best Price would apply to a value-based arrangement in Medicaid with endpoints that are new or different from endpoints that are not already a part of existing value-based contracts in the private market. Continuing with the example, it is unclear what the Best Price would be if the state and manufacturer engaged in a value based contract with a distinct net price for 50 percent improvement after one year, and the manufacturer only had value-based arrangements in the private market for 80 percent improvement

Finally, a proposal in CMS’s rule would permit modifications to be made to Best Price after more than three years for changes related to a value-based agreement. Payors have expressed interest in negotiating rebates based on outcomes that are measured at longer intervals after the initial administration of a drug. Current rules prohibit manufacturers from adjusting Best Price that long after a sale. For example, a discount for the curative therapy if the disease returned four years later could be prohibited. Such long-term value-based arrangements could lead to more widespread collection of clinical data.  

CMS also asks for comments on how this proposed rule would affect manufacturers’ willingness to engage in value-based arrangements and how these changes would affect cost and quality. Furthermore, CMS asks manufacturers to comment on what processes and what resources would be needed to report multiple Best Prices.

For example, contractual arrangements between manufacturers and payers are confidential, and revealing details of those contracts to qualify under value based arrangement protocols may result in a loss of competitive advantage. Manufacturers may want to consider commenting on how to keep this information private while preserving the intent of the rule.