Massachusetts grabs spotlight by proposing new twist on Medicaid drug coverage

In the absence of new federal policies to tame break-the-bank drug prices, the Massachusetts Medicaid program wants to test a market-driven approach. It wants the power to negotiate discounts for the drugs it purchases and to exclude drugs with limited treatment value.

“This is a serious demonstration proposal,” said Sara Rosenbaum, a health policy expert at George Washington University. “They’re not simply using this idea as an excuse to cut Medicaid. They’re trying to take a step toward efficiency.”

If federal health officials approve the plan, other states will probably take similar action. According to the most recent government data, Medicaid spending on prescription drugs increased about 25 percent in 2014 and nearly 14 percent in 2015. On average, between 25 and 30 percent of state budgets go to Medicaid, and program directors across the country identify rising drug costs as a major contributor to spending increases.

State Medicaid programs are required to cover almost all drugs that have received Food and Drug Administration approval, including drugs from different manufacturers that fall into the same category and are used for the same purpose. In exchange, manufacturers must discount those drugs – typically based on a set percentage of the list price, as specified by federal law. The goal is for Medicaid’s vulnerable beneficiaries to get medications they need without a state going broke paying for them.

As drug prices soar, states say, those fractional rebates no longer suffice to defray the burden of rising costs.

Take, for example, the hepatitis C cures released in recent years. The price tags come in tens or even hundreds of thousands of dollars and – even after rebates – have cost Medicaid programs billions. Some states tried to restrict access to the sickest patients. Advocates sued, successfully arguing that such limits violated Medicaid’s statutory drug benefit.

The Medicaid rebate system may actually encourage drug price inflation, policy experts say, since a set percentage of a higher price yields a greater profit. They also say the legal requirement to cover most prescriptions leaves little wiggle room to negotiate a better price.

So Massachusetts wants to go a different route. It is requesting a federal exemption known as a Section 1115 waiver, which allows states to test ways of improving Medicaid. The Bay State wants to pick the drugs it covers based on most beneficiaries’ medical needs and the medicines with the highest rates of cost effectiveness – much as happens with commercial insurance.

Massachusetts says it will be able to negotiate better prices as a result, saving public dollars while maintaining patients’ access to needed therapies.

The federal Centers for Medicare and Medicaid Services, which will ultimately approve or reject the proposal, has no deadline for its decision. A Massachusetts spokesperson said officials are pushing for an answer by year’s end.

But the pitch is turning heads.

“This is absolutely something a lot of other states are looking very closely at,” said Matt Salo, executive director of the National Association of Medicaid Directors.

The Pharmaceutical Research and Manufacturers of America, the drug industry’s trade group, has lodged its displeasure. It says that the approach would limit consumer access and is unnecessary on top of the rebates Medicaid programs receive.

“This would be a big deal for them,” said Andy Schneider, a Medicaid expert who worked at CMS under the Obama administration. He and other analysts expect the agency’s approval would prompt litigation by the industry. The trade group wouldn’t comment on potential legal action.

But federal approval is no sure thing.

On the one hand, President Donald Trump has said his administration intends to bring drug prices “way down,” and CMS is encouraging states to test changes that would run Medicaid more like a private insurance plan. Through that frame, Massachusetts’ approach seems a logical fit.

On the other hand, analysts note, CMS decisions regarding waivers have proven unpredictable. The agency declined to comment beyond confirming it was reviewing the state’s request.

The numbers show why Massachusetts in particular is so interested. Medicaid accounts for about 40 percent of its budget. Prescription drug spending has in the past seven years more than doubled – from about $917 million in 2010 to about $1.94 billion last year, according to figures provided by the state health department.

If the waiver is approved, the state’s Medicaid program would cover at least one medication per therapeutic class – that is, per specific medical need. It also would have an appeals process for people to get their off-formulary drugs covered, if those prescriptions are medically necessary.

Number crunchers say it’s hard to estimate how much this would save. It depends on how the state negotiates, how the industry responds and what the program covers. The potential result is significant, though.

“You’d have to be foolish not to consider this,” said Ameet Sarpatwari, an epidemiologist and lawyer at Harvard Medical School who studies drug pricing and related legislation.

Although they acknowledge that state budgets cannot sustain rising drug costs, consumer groups worry that the plan could make it harder for Medicaid’s low-income beneficiaries to get needed medications.

“The Medicaid population is different from the commercially insured – they’re more vulnerable and have a lot more going on in their lives… . So they have fewer resources to try to get the services and prescription drugs they need,” said Suzanne Curry, associate director of policy and government relations at Health Care For All, a Massachusetts-based advocacy group.

Although Massachusetts has committed to making sure patients get needed medicine, “you have to ask what will real-world implementation look like,” said Benjamin Sommers, an associate professor of health policy and economics at Harvard’s public health school.

And even if Massachusetts receives federal approval, it still couldn’t challenge the cost of certain expensive drugs that are the only offering in their therapeutic class. For instance, Spinraza, used to treat the rare but debilitating disease spinal muscular atrophy, has a price tag of $750,000 for an initial year of treatment. With no therapeutic equivalent, it would still have to be covered.

But states are desperate to push back however they can. “We have seen in the past year … drugs that have almost bankrupted state budgets,” Sarpatwari said. “There will be many other states that will be interested in following this lead.”