Proposed Changes to the Medicaid Drug Rebate Program: What Might That Mean for Value-Based Contracts?

Ethan HeidornHealthcare Industry

Like it? Share It!

Quick Summary:

  • CMS proposes two potential rules for adjusting “best price” determinations
    • The “bundled sales” approach
    • The “reporting multiple best prices” approach
  • CMS defines Value-Based Purchasing (VBP)
  • CMS offers an exception to the 3-year (12 quarter) reporting period for allowing adjustments to “best price” if a VBP agreement with an outcome measure or annuity payment extends beyond that time period

Deeper Dive:

For the first time in 30 years, CMS will attempt to modernize the determination of “best price” with a proposed rule that would support, among other things, state flexibility to enter into innovative purchasing arrangements with manufacturers. As CMS Administrator Seema Verma stated,

“CMS’ rules…have not been updated in thirty years and are blocking the opportunity for markets to create innovative payment models.”

In an effort to facilitate access to newly approved therapies, payers and manufacturers have sought novel payment models carrying a myriad of names under the value-based contracting umbrella, including outcomes-based contracts, annuity contracts, subscription models, etc. For regulatory purposes, CMS has dubbed this Value-Based Purchasing (VBP) agreement.

At face-value, these arrangements make sense – if the drug doesn’t meet the expected outcomes, reimbursement is reduced. Both sides (i.e., payers and manufacturers) share some risk. However, the Medicaid “best price” policy, which requires drug manufacturers to give Medicaid programs the best price among nearly all purchasers, has served as a liability roadblock, discouraging the formation of VBP agreements in the market. Looking to combat the proverbial elephant in the room, CMS has proposed changes to the Medicaid Drug Rebate Program (MDRP) to tackle the issues around “best price.”

To date, only eight state Medicaid programs have pursued CMS’ approval for “supplemental rebate agreements” with drug manufacturers. The current requirement of CMS approval on a case-by-case basis for state Medicaid VBP agreements limits their widespread adoption. These proposed changes may encourage more interest in such agreements.


Under current interpretation of the law, contract arrangements in which a manufacturer offers money back if an individual patient does not meet an agreed upon outcome measure impact best price. That “refund” or “performance guarantee” is considered a price concession and thus becomes the new “best price” offered to the MDRP and therefore would apply to all Medicaid claims for that product.

CMS offers two potential options for circumventing this highlighted issue.

Bundled Sales Approach

The first strategy proposed by CMS is the “bundled sales” approach. In this approach, the sales and discounts for a drug subject to an outcomes-based performance measure would be treated as a bundle. The different discounts provided for the product would be calculated as a weighted average. This helps ensure that if a large discount is paid when one patient does not meet the target outcome, that single sale does not trigger a new “best price”. CMS outlines the rule with a very simple example.

Imagine offering a 50% rebate on a $200 drug if the patient does not meet a certain outcome. If 1000 patients are treated and the outcome is not met for a single patient, the new “best price” would be $100 under the existing rule, but under this proposed strategy, would be $199.90. The difference is due to the actual rebate paid due to not meeting the outcome is spread across all of the units in the bundle:

1,000 units × $200 = $200,000−$100 price concession = ($199,900/1,000 units) = $199.90 (new “best price”)

This proposal would enable more states, plans, and manufacturers to enter into different types of VBP agreements.

Multiple Best Prices Approach

The second proposal aims to establish “multiple best prices” for a single drug based on the discounts available in an applicable VBP agreement. The present day “best price” determination (“best price offered” or “AMP – minimum rebate percentage”) would still apply to the drug and be available for the MDRP. In addition, if a manufacturer enters into a VBP agreement, additional “best price(s)” for that drug would be unique to the conditions of the VBP agreement.

For example, if under a VBP agreement, the manufacturer pays one discount for patients who meet a target outcome and another discount for patients who do not, there would be a best price for each payment scenario. Best price 1 would apply to patients meeting the target and best price 2 would apply to those not meeting it.


Given the differing size and complexity of payers, it would be reasonable to assume an increased, yet still variable, level of participation in VBP arrangements among the commercial market if the “best price” rules are changed. These proposals should promote flexibility in VBP agreements unique to the capabilities of the payer, while allowing Medicaid to benefit from private market contracting solutions tailored to their own resources.

The adoption of these proposals could also serve as a differentiator for payers, allowing different models (IDNs, vertically-integrated health plan/PBM, stand-alone health plan/PBM, etc) to showcase their abilities to secure VBP agreements. The proposed changes should drive increased access and tie the value of innovative medicines to patient outcomes in a more clear, transparent manner serving to enhance the value proposition of one-time, near-curative, or curative therapies. VBP agreements have the potential to greatly reduce access barriers and assist payers in more effectively tying spend to improved patient outcomes. Given the pipelines for gene therapies, oncology, and rare diseases, having the flexibility and acumen to implement VBP agreements may help some payers stand out.

The overall headache surrounding contractual language, agreement on outcomes and associated metrics, as well as tracking and auditing those metrics/outcomes still remains, however lowering the hurdle of Medicaid best price concerns could be a win for getting VBPs off the ground in some cases.

Defining Value-Based Purchasing

Lastly, CMS proposes to define VBP as “an arrangement or agreement intended to align pricing and/or payments to an observed or expected therapeutic or clinical value in a population (that is, outcomes relative to costs) and includes (but is not limited to):

  • Evidence-based measures, which substantially link the cost of a drug to existing evidence of the effectiveness or potential value for specific uses of that product, and/or
  • Outcomes-based measures, which substantially link payment for the drug to that of the drug’s actual performance in a patient or a population, or a reduction in other medical expenses.”

The wording allows for a broader definition of VBP while attempting to be narrow enough in scope to limit misuse of the term.


It would be reasonable to expect this proposal will not be finalized prior to the election in November, however, this is a pressing issue which will certainly be addressed by CMS in an effort to move forward on facilitating value-based agreements. Due to the significance of the proposed change to the MDRP, and each state’s ability to audit the newly reported “best price(s)”, the adoption of these rules will likely result in lengthy implementation time. CMS acknowledges such in stating: “We understand the operational challenges this may bring to MDRP systems and that it will take us time to make such system changes.” The next meaningful update should come in Fall 2020 after CMS considers the public comments submitted at the end of July.

Viking Healthcare Solutions has established itself as the premier provider of corporate account services and strategic planning support for the pharmaceutical and biotech industries. VHS Insights, our research division, specializing in payer profiling, market research and analytics, can help you find answers to inform your payer strategy. We support traditional and rare/specialty organizations to create, maintain, defend, and protect access to your product throughout its lifecycle. Bank on our experience to help you achieve successful product commercialization. Contact us at