Supply Chain Council of European Union |

A Potential Boost To Value-Based Contracting

For well over a decade policymakers have declared the healthcare system is moving towards value-based pricing of services and technologies. However, the movement from volume- to a value-based system of pricing has occurred at a snail’s pace, especially in the pharmaceutical sector. Numerous barriers have prevented value-based pricing from being implemented.

Now, one of those barriers, namely Medicaid’s “best price” rule, may change, to accommodate value-based pricing arrangements. In June, the Centers for Medicare and Medicaid Services (CMS) issued a proposed rule change to adapt (update) the best price rule to the modern era of value-based pricing. Rather than only allowing one best price for each drug, CMS is permitting arrangements in which there is more than one price for a drug, based on health outcomes.

The proposed CMS rule aims to help commercial insurers negotiate value-based outcome deals with drugmakers, which until now have seen relatively little uptake, due in part to the best price rule barrier.

The draft rule was open for public comment until July 20th. Hundreds, if not thousands, of comments must now be considered. It’s unlikely a final rule will be issued by the end of this year.

Since 1990, the statutory Medicaid rebate ensures that states obtain lower priced pharmaceuticals. For brand name drugs, the rebate is 23.1% of Average Manufacturer Price (AMP) or the difference between AMP and “best price,” whichever is greater. Here, best price is defined as the lowest available price to any wholesaler, retailer, or provider, excluding certain government programs, such as the Department of Veteran Affairs program. AMP is the average price paid to drug manufacturers by wholesalers and retail pharmacies. It is proprietary and therefore not publicly available.

The best price stipulation can hamper manufacturers and payers who wish to experiment with value-based arrangements. Suppose a manufacturer offers a payer a money-back guarantee in case a treatment it’s selling is ineffective. This implies the possibility of a Medicaid best price of zero dollars if the treatment fails to work, which in turn would require that the drug be given away free of charge to every state Medicaid program.

The proposed new rule would allow manufacturers to report multiple “best prices” for a therapy if the prices are tied to one or more value-based pricing arrangements. Specifically, in determining their best price of a product, manufacturers could “proportionally allocate the discounts provided under a value-based pricing arrangement, based on actual patient outcomes across the total dollar value of the drugs dispensed to all patients under that arrangement.” Alternatively, manufacturers may report a best price range, depending on the different discounts incorporated in the value-based pricing arrangement. 

Critics of the rule change have urged CMS to “protect and strengthen the statutory discounts drug manufacturers pay to Medicaid.” In particular, there is concern that the changes would imply removal of guarantee best price discounts, critical to ensuring affordability of prescription drugs to the Medicaid program.

Indeed, though CMS says the intent of value-based contracting agreements is to lower drug prices, the government acknowledges this is not guaranteed. In reality, value-based contracting arrangements are not necessarily aimed at lowering prices. They’re more subtle than that; they’re about aligning price and value.

In announcing the rule change, CMS Administrator Seema Verma has made it clear that the new rules are to be viewed as tools which facilitate value-based pricing arrangements: “Tools for health plans to negotiate with manufacturers. It also shifts us away from our typical negotiations around drug pricing — which are usually volume-based – [towards] … having negotiations around outcomes.”

Specifically, the introduction of multiple best prices could incentivize uptake of newly approved cell and gene therapies. The growing pipeline of promising products has faced stiff headwinds, due to very high per unit prices, uncertainty regarding outcomes, and questions regarding durability of efficacy over time.

With respect to cell and gene therapies, small single-arm studies have formed the basis for Food and Drug Administration approvals. However, the limited data this provides can imply a a wide margin of unpredictability for payers regarding estimates on how many patients will need such therapies, the proportion of patients who will respond positively, how durable the effect will be, and how much value will ultimately be generated. Value can be calculated in many different ways, which include health outcomes, but may also comprise reductions in downstream healthcare costs, decrease in absenteeism, and productivity gains.

There is an emerging consensus among key stakeholders, such as pharmaceutical manufacturers and payers, that reimbursement models for cell and gene therapies that contain installment plans to help defray upfront costs, and pay-for-performance schemes, would represent constructive steps that address affordability and health outcomes concerns.

Government controls key levers to achieve changes in policy and ways of doing business in the pharmaceutical marketplace. As such, the proposed changes to the Medicaid best price rule put forward by CMS may give drug manufacturers and payers regulatory flexibility to encourage more use of value-based contracting arrangements for expensive, but promising therapies.

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