Senior Policy Analyst
When the Centers for Medicare & Medicaid Services (CMS) rightly rejected a Massachusetts proposal to restrict Medicaid beneficiaries’ access to prescription drugs last month, it opened the door to much more radical, harmful changes to Medicaid prescription drug coverage. Specifically, it suggested that states could submit proposals drastically limiting drug coverage provided they also leave the federal program that requires drug makers to give states big rebates on prescription drug purchases. CMS’s alternative is a terrible deal for states, since it would force states to choose between higher costs (if they maintain their existing drug coverage) or severe restrictions on Medicaid drug coverage.
Medicaid requires states that include prescription drug coverage in their Medicaid programs — as all of them now do — to cover all drugs that the Food and Drug Administration (FDA) approves (with limited exceptions). In return, Medicaid requires drug companies to provide substantial rebates for states and the federal government, giving states significantly lower net prices than drug makers offer to commercial health plans.
States can and do negotiate supplemental rebates (in addition to the rebates that the Medicaid drug rebate program requires). They can also use a range of financial and clinical tools to limit enrollees’ access to specialized, high-cost drugs, both to ensure these drugs are used appropriately and to create bargaining power with drug makers. States, for example, can establish “preferred drug lists” that encourage providers to prescribe drugs that are lower cost or are more likely to be effective. But while states can use these tools to prioritize the use of some prescription drugs over others, CMS has never waived the requirement to cover all FDA-approved drugs while maintaining other requirements related to prescription drugs — and it may not have the legal authority to do so.
Last year, Massachusetts proposed to restrict Medicaid coverage to as few as one FDA-approved drug per class, similar to commercial insurers — an approach known as a closed formulary — while continuing to participate in the Medicaid drug rebate program. Massachusetts argued that this approach would enable it to secure substantial additional rebates from prescription drug manufacturers.
As we’ve written, allowing closed formularies in Medicaid won’t likely enable states to secure large additional savings, but it could endanger beneficiary access to drugs if states were permitted to exclude drugs significantly more than they are today. Last month, CMS rightly announced that it wouldn’t approve Massachusetts’ proposal. But instead, it offered states a more radical option, suggesting that a state could drop coverage of prescription drugs altogether, which would also mean leaving the Medicaid drug rebate program. A state could then use a Medicaid waiver to offer a limited prescription drug benefit that could include a closed formulary. Under such an approach, states would likely be able to impose much more drastic restrictions on enrollee access to drugs than what Massachusetts proposed, since CMS apparently wouldn’t require states to otherwise meet the law’s prescription drug requirements.
This option isn’t likely to save states money by boosting their bargaining power to reduce prices. Under CMS’s scheme, a state would have to rely solely on its own bargaining power to achieve any drug rebates. The additional tool of a closed formulary is unlikely to make up for losing access to the nationwide drug rebate program. For example, while Medicare Part D plans can use closed formularies (subject to various limitations and beneficiary protections), a recent Medicare trustees report found that the rebates negotiated between private insurers and drug manufacturers lowered overall Medicare Part D costs by about 20 percent in 2016. In contrast, the existing Medicaid drug rebate program lowered Medicaid prescription drugs costs by more than 51 percent in the same year.
States must show that, under a Medicaid waiver, federal spending on the state’s Medicaid program is no higher than it would be without the waiver. Because it’s very unlikely that a state could achieve comparable discounts without the rebate program, a state seeking such a waiver would likely need to severely restrict access to high-cost drugs — by eliminating coverage of entire classes of high-cost drugs, for example. That would impose a considerable burden on beneficiaries who need drugs that aren’t covered, which would likely lead some people to go without needed care.
High prescription drug prices are an issue across the health system — not solely in Medicaid. However, policymakers could take some positive steps to reduce drug spending in Medicaid. For example, federal policymakers should consider recent modest proposals from the Medicaid and CHIP Payment and Access Commission to strengthen the rebate program, and states could consider ideas like Oklahoma’s for experimenting with outcome-based purchasing arrangements as part of supplemental rebate negotiations within the framework of Medicaid’s current drug rebate program. States can also maximize their bargaining power by joining with other states to negotiate supplemental rebates, as many already do. CMS, however, should reconsider — and states should reject — the option to opt out of Medicaid’s drug rebate program and restrict access to prescription drugs for beneficiaries.