States Want Control Over Drug Prices. Will the Feds Give It to Them?

In an attempt to lower health-care costs, Massachusetts is seeking to exclude certain drugs from its Medicaid program. It's a bold step, experts say, that will not only invite imitation but also lawsuits.
by | May 7, 2018

While Congress remains gridlocked on health-care reforms -- particularly regarding drug prices -- states are increasingly taking matters into their own hands.

In September, Massachusetts submitted a waiver to the Centers for Medicare and Medicaid Services (CMS) that asks permission to exclude certain drugs from its Medicaid program, MassHealth.

It’s a bold step, says Tom Dehner, Massachusetts' former Medicaid director. The move, he says, is an attemp to "take the next step in managing costs."

Indeed, Medicaid costs have ballooned in recent years, with MassHealth now accounting for 40 percent of the state’s budget. Massachusetts is hardly an outlier, as Medicaid programs on average make up around 25 percent to 30 percent of states’ budgets. Prescription drugs are often cited as a key factor in the rising costs, according to data from the Kaiser Family Foundation.

By declining to cover more expensive drugs in favor of cheaper alternatives, Massachusetts' Medicaid program will have greater leverage when negotiating drug prices, says Matt Salo, director of the National Association of Medicaid Directors. “The minute you cross that threshold and say, ‘We’re not going to cover that drug,’" he says, "that suddenly creates a different dynamic between the payers and the manufacturers. You exclude one drug, that enables you to get better pricing. It’s 100 percent a great option.”

As it stands, state Medicaid programs receive hefty rebates from drug manufacturers. In return, Medicaid programs are required to cover pretty much every drug approved by the Food and Drug Administration. To put that in perspective, most private insurance plans will decline to cover drugs when there is a cheaper or generic alternative.

Massachusetts is not alone in looking for more control over drug pricing. Arizona Medicaid Director Thomas Betlach sent a letter to CMS Administrator Seema Verma in November asking, among other things, for greater decision-making power in what drugs Medicaid covers. “States should be permitted the flexibility to exclude drugs until market prices are consistent with reasonable fiscal administration and sufficient data exists regarding the cost effectiveness of the drug,” he wrote.

Similarly, Maryland passed a law last year that allowed the state’s attorney general to sue drugmakers who hike prices without proper explanation. A judge struck down the law last month.

The federal government has sent mixed messages on whether or not it’ll approve Massachusetts' waiver. Verma has promised to give states more flexibility than was granted under the Obama administration. But some observers think it's unlikely she'll approve this waiver in its current form, arguing that the Trump administration is friendlier to pharmaceutical interests. Alex Azar, the current Health and Human Services secretary, is a former pharma executive.

Most experts, though, didn’t want to make any predictions on the timing or outcome of the waiver, merely speculating that some kind of compromise is likely. One thing seems certain: If Massachusetts is allowed more leverage over drug prices, more states will certainly follow with similar waivers.

Lawsuits are also expected to follow, from either advocacy groups concerned about limiting drugs or pharmaceutical interests.

Ross Margulies, a health-care lawyer with the law firm Foley Hoag, says the legal battle over work requirements will be a good limitus test for this kind of waiver. When CMS allowed Kentucky to enforce work requirements on its Medicaid beneficiaries, a lawsuit from patient advocacy groups was almost immediately filed and is still pending. If courts strike down the lawsuit and allow Kentucky to enforce work requirements, it could indicate that states will also be allowed to take more control over the drug pricing formulary.

However, while Margulies says that “there’s a technical legal argument to waive certain sections of the rebate program,” the bigger question is how drug companies will react to that. “If a state no longer guarantees coverage for products," he asks, "will a manufacturer hold up their end of the bargain for rebates? That’s trickier."

The Pharmaceutical Research and Manufacturers of America has said that Massachusetts’ waiver is “unnecessary on top of the rebates Medicaid already receives,” according to Kaiser Health News.

Meanwhile, regarding advocates' concerns about limiting drugs, Salo maintains that Medicaid recipients in Massachusetts won’t suddenly be denied life-savings drugs. Rather, drugs would be excluded after “a very carefully arrived at decision, taking into consideration expert advice," he says. "They also wouldn’t exclude anything if it hasn’t already been excluded in other plans.”

This appears in the Health newsletter. Subscribe for free.