Skip to main content

New Payment Models Tackle Medicaid Drug Spending

Health care expenses remain one of the fastest-growing portions of state budgets, and in recent years the emergence of new high-cost treatments has led to the exploration of different approaches for controlling prescription drug spending in particular. Alternative payment models for drugs in the Medicaid program are among the array of cost-cutting efforts now underway. 

There are two new models currently being implemented or considered by states, according to a paper released in September by Duke University’s Margolis Center for Health Policy. Outcomes-based models link Medicaid payment, through the Supplemental Rebate, to a specific measured outcome such as medication adherence, health care utilization, or total cost of care. Population-based models, on the other hand, look to expand access to a drug by setting an expenditure cap. 

The use of value-based payment models has been growing in popularity, especially in the commercial sector where manufacturers and private insurance companies strike up agreements. “We are just now starting to see the emergence of these types of arrangements on the state level,” said Marianne Hamilton Lopez, PhD, MPA, research director of value-based payment reform at Duke University’s Margolis Center for Health Policy.

There are a number of unique factors that come into play, however, when these types of arrangements enter the realm of Medicaid. Medicaid programs already receive hefty price discounts, for example, since The Medicaid Drug Rebate Program requires minimum rebates for prescription drugs and access to the “best price” of a product. In addition, states typically need to receive approval at the federal level before implementing a new payment model for drugs.

So why should managed care leaders take note of this development? “In most of the country, Medicaid is being implemented through managed care plans now, and so those plans would be tasked by the state to try to implement some of these [initiatives], or would at least need to coordinate with state rebate efforts that are ongoing,” explained Robert Saunders, PhD, research director of payment and delivery reform at Duke University’s Margolis Center for Health Policy.

States Explore New Payment Paths 

So far, Colorado, Oklahoma, and Michigan have all been approved to implement outcomes-based models, according to the paper, and Massachusetts has submitted a revised State Plan Amendment to initiate these contracts alongside their drug utilization review process. 

Oklahoma, for example, has several outcomes-based contracts in place with various drug companies for therapies that treat schizophrenia, bacterial skin infections, and epilepsy. The state’s initial agreements allow rebates to increase or decrease based on outcomes using measures like medication adherence or reduced emergency department visits. 

Michigan, meanwhile, intends to use outcomes-based contracts to tackle pricing uncertainty and work toward more appropriate use of high-priced specialty drugs. 

In population-based arrangements, a manufacturer agrees to provide therapies to a group of patients for a set payment. This can be carried out with fixed spending amounts on a per-patient basis, or it can be set up as a fixed fee for an entire population. A so-called “subscription” model is one form of a population-based arrangement, where agreements provide access to an unlimited amount of a particular drug based on a fixed payment. 

Louisiana and Washington are both looking to initiate modified subscription models, as both hone in on increasing access to hepatitis C treatments while curbing increases in spending. The hope is to improve population health while maintaining budget certainty for the state government. 

Louisiana intends to use the state’s historical spending as a reference point for determining a cap on total expenditures, and the Supplemental Rebate Agreement will apply to both managed care organizations and fee-for-service Medicaid. 

Similarly, Washington is aiming to eliminate hepatitis C in its Medicaid and incarcerated population. The state announced a partnership with AbbVie to provide direct-acting antiretroviral for patients in Medicaid, state prisons, state employees, retirees, and teachers. The agreement includes the payment of a reduced unit price up to a certain spending amount. After that threshold is met, all doses would be rebated at nearly 100%. 

Challenges to Implementation

States are expected to face several difficulties as they work to initiate alternative payment models. The main challenges, according to the Duke researchers, are operational in nature. 

Alternative payment models for drugs rely on “reliable and timely mechanisms to assess the impact of drugs on people’s health outcomes,” they noted, and these models would benefit from additional outcome measures and improved data systems to collect that information. 

Because there is a lack of well-established contracting models, Medicaid programs are up against additional administrative costs, too, whether implementation is handled through the state agency or its managed care plans.

Beyond that, regulatory and legal barriers are a factor. So far, states have used the State Plan Amendment as a means of implementing new value-based payment arrangements for drugs. While this has enabled progress, the State Plan Amendment cannot waive any Medicaid legal or regulatory restriction. 

This limits the ability to come up with true subscription models, where cost is completely delinked from the number of drugs administered. Legal and regulatory restrictions also limit the possibility of a “truly dynamic outcomes-based contract,” according to the paper, like when a drug is essentially free if a patient does not reach a specified health outcome. 

Without these types of restrictions, states may be able to come up with “even bolder” ways of addressing prescription drug costs.

Watching for Lessons Learned

There are a variety of steps—both short- and long-term—that can be taken to speed progress as states try new approaches, the researchers concluded, such as gaining greater clarity in terms of what is possible, requesting additional authority through State Plan Amendments to experiment with new models, or working toward an improved negotiation culture with drug manufacturers.

There is a sense that other states are watching closely, Dr Hamilton Lopez said, to see if there will be any lessons learned from frontrunners like Washington, Louisiana, Colorado, Oklahoma, and Michigan. Because states are so different from one another and because there is not a lot of publicly known information about these contracts, however, it can be a challenge to glean useful insight.

“We hope that can change with additional support, maybe at a policy level,” she said, “but we do think there’s a lot of interest from states to try innovative payment models.” What shape those models take or what barriers they face remains to be seen, she added, but it is expected to play out on a state by state basis.

Further down the road, Dr Saunders expects to see these types of payment models applied more broadly. Rather than carving out prescription drugs and paying for them differently, he anticipates broader value-based approaches that encompass care delivery as well. In the long-term future, he said, those two different streams will likely come together.

Back to Top