Medicaid Drug Price Verification Survey and Pharmacy Benefit Manager Drug Price Transparency

CMS is proposing to verify certain drug prices reported by manufacturers through an annual Medicaid Drug Price Verification Survey. By verifying drug prices and publishing non-proprietary information about the drug prices, the survey would increase public transparency for high-cost drugs in a way that would help state Medicaid agencies more effectively negotiate covered outpatient drug (COD) prices with manufacturers. The survey is being proposed as part of the Drug Misclassification Notice of Proposed Rule Making (NPRM).

CMS is also proposing to address the lack of transparency in drug pricing that may occur with payment arrangements between pharmacy benefit managers (PBMs) and Medicaid-managed care plans. These arrangements can make it difficult to distinguish between the amount paid for the drug and its dispensing versus other fees charged by the PBM.

What’s the challenge?

• CMS is committed to ensuring robust coverage and access to prescription drugs for Medicaid and Children’s Health Insurance Program (CHIP) beneficiaries, but rapid increases in drug costs are putting the Medicaid program’s financial sustainability at significant risk.
• Many of these increased costs are driven by new, high-cost drugs with no competition in the market. These drugs can cost more than $1 million per patient per course of treatment.
• Because state Medicaid agencies are required by federal statute to cover all U.S. Food and Drug Administration (FDA)-approved covered outpatient drugs in most circumstances, they have very limited leverage to negotiate lower prices with the manufacturers of these high-cost drugs.[1]
• Non-transparent PBM profit margins (also known as “spread pricing”) have also created cost concerns, especially in the context of Medicaid-managed care.
• Our goal is to reward innovation, foster transparency, and ensure a fair and competitive market that supports access to drugs for the Medicaid population.

How does CMS propose to address this?

• As part of the Drug Misclassification Proposed Rule, CMS is proposing to implement a “Medicaid Drug Price Verification Survey” through which certain manufacturers of high-cost drugs would be required to submit detailed pricing and other data to CMS.
• This survey’s sole purpose would be to verify drug prices in order to:
  • Increase transparency into why certain drug prices are so high for Medicaid, and
  • Help states better negotiate what the Medicaid program pays for high-cost drugs.
• The survey would have no effect on coverage of drugs for Medicaid beneficiaries.
• CMS is also proposing that Medicaid-managed care plans structure contracts with PBMs to require that PBMs report the cost of the covered outpatient drug and dispensing or administration fees separately from any administrative costs, fees, and expenses of the PBM to enhance transparency into the actual drug price paid and ensure accurate calculation of the managed care plan’s medical loss ratio (MLR).
• The Biden-Harris Administration is committed to maintaining all requirements for drug coverage in Medicaid. Adjustments to these requirements (e.g., through limited or closed drug formularies) will not be permitted under any circumstance.

How would the annual Medicaid Drug Price Verification survey work?

• On an annual basis, CMS would compile a list of single-source CODs that could be subject to a survey based on one or more of the following criteria.
• Step 1: CMS would look at objective measures of drug spending in Medicaid using CMS and publicly available data to develop an initial list of high-price CODs (~160 drug products or 200 national drug codes (NDCs)). This list would include drugs that have:
  • The highest Medicaid drug spending per claim, meaning the claim is in the top 5th percentile of Medicaid spending per claim (>$35k/claim);
  • The highest total Medicaid drug spending, meaning the annual spending on a drug is greater than 0.5% of total annual Medicaid drug spending, net of federal Medicaid drug rebates(~$80M/drug);
  • The highest 1-year price increase among single source CODs, (~20 NDCs); or,
  • The highest launch price, which is a launch price estimated to be in the top 5th percentile of Medicaid spending per claim, or a launch price that is estimated to result in a total annual treatment price that is greater than $500,000 ($35k/claim or ~$500k/year).
• Step 2: CMS would then narrow the list to 3-10 NDCs by excluding those CODs of manufacturers for which the manufacturers:
  • Participated in any CMS drug pricing program or initiative under which participating manufacturers negotiate a COD’s price directly with CMS; or,
  • Negotiated supplemental rebates with at least 50% of states such that, when combined with federal rebates, the total rebate for the COD is greater than the average rebate (state and federal) for all CODs nationally.
• Step 3 (if necessary): If, after application of the criteria above, more than 10 CODs remain on the survey list, CMS would consider narrowing the list based on one or more factors including:
  • State-specific Medicaid program input; or
  • Highest cost CODs using factors outlined from Step 1 before application of Step 2.

Once the final list of 3-10 drugs is developed, CMS would send the Medicaid Drug Price Verification Survey to selected drug manufacturers to collect information to verify the selected drugs’ prices.

• After receiving and reviewing survey responses, CMS would publish the non-proprietary elements of the survey publicly on Medicaid.gov.
• The verification survey process would NOT be used for coverage determinations or to limit access for beneficiaries of medically necessary CODs.

How would the proposed changes to the Medicaid managed care plan contracts with PBMs assist in drug price transparency?

• When a PBM contracts with a Medicaid managed care plan to administer the plan’s Medicaid drug benefit and the PBM retains the difference between what it is paid by the managed care plan and what the PBM pays a provider for the cost and dispensing of the drug, this action is called “spread pricing.”

• Some states may not be aware of the extent spread pricing is occurring if the PBM is not transparent with the managed care plan about the actual cost to buy and dispense the drug. This lack of transparency could potentially cause the managed care plan to overpay for drug benefits.
• CMS is proposing that managed care plans structure contracts with PBMs to require PBMs to report the cost of the covered outpatient drug and dispensing separately from any other fees charged to the managed care plan by the PBM.
• As a result, any payments for costs over and above the cost of the drug and dispensing fee would be separately identified by the managed care plan and could not be included in the numerator of the MLR ratio, thus not inflating the medical loss ratio (MLR) inappropriately. MLRs generally reflect how much of the capitation payments paid by the State to the plan go toward covering the cost of enrollees’ medical care. More accurate MLRs would result in more accurate managed care capitation rates.

For more information, please visit the Medicaid Drug Policy page.