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

Ethan HeidornHealthcare Policy

Like it? Share It!

Quick Summary:

  • Finalizes new definition of Value-Based Purchasing (VBP) arrangements
    • Took effect February 2021
  • Finalizes the 2 proposed avenues for “best price” determinations specific to a qualifying VBP arrangement
    • The “bundled sales” approach
    • The “reporting multiple best prices” approach
    • The rule becomes effective January 1, 2022
  • Finalizes exception to the 12-quarter reporting period for allowing adjustments to “best price” if an applicable VBP arrangement extends beyond that time period effective January 1, 2022

Deeper Dive:

CMS offered a bevy of proposed changes to the Medicaid Drug Rebate Program (MDRP) back in June of 2019 as covered in a previous VHS article. At the end of 2020, CMS finalized the broad stroke proposal which incorporated several changes into the Final Rule.

In the rulemaking, CMS desired to modernize the determination of “best price” to facilitate the novel payment models contained within Value-Based Purchasing (VBP) arrangements. As mentioned previously, the Medicaid “best price” policy, which, simply put, 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 finalized changes to the Medicaid Drug Rebate Program (MDRP) to tackle the issues around “best price.” The first line of business was to finalize which arrangements may be considered Value-Based Purchasing.

Defining Value-Based Purchasing:

Following closely to the proposed rule, CMS will define a Value-Based Purchasing (VBP) arrangement as “an arrangement or agreement intended to align pricing and/or payments to an observed or expected therapeutic or clinical value in a select population and includes, but is not limited to:

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

CMS mostly retained its broad definition, however, the agency added the term “select” before “populations” in the finalized definition to emphasize that the value-based arrangements must apply to specific populations using the drug therapy.

Reluctant to narrowly define “evidence or outcomes-based measures,” CMS intended to maintain maximum flexibility for VBP agreements. In responding to comments concerned that a reduction in non-medical spending would land outside “evidence or outcomes-based measures,” CMS mentioned that “measures derived by observing and recording the absence of disease over a period of time, reducing a patient’s medical spending, or improving a patient’s activities of daily living thus resulting in reduced non-medical spending” would fit within the definition of outcomes-based measures.

CMS did not define “substantially” or address whether a specific percentage threshold is necessary. CMS advises manufacturers to make reasonable assumptions and document how their VBP arrangement satisfies the “substantial” element in the definition. Given the complexity of developing, monitoring, and auditing VBP agreements, it would reason that a payer would not enter into an agreement without substantial risk-sharing involved.

CMS also notes that VBP agreements offered on the commercial market before this regulation that do not meet the new regulatory definition will have to be restructured to meet the new definition and requirements if a manufacturer wants to take advantage of the regulatory flexibilities included in this final rule. Since the revised definition does not apply to VBPs negotiated under a CMS-authorized supplemental rebate agreement, those arrangements will not need to be restructured.

Incorporating VBP Agreements into “Best Price” Calculations:

Under the 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 impacts “best price.” That “refund” or “performance guarantee” is considered a price concession and thus becomes the new “best price” offered in the MDRP and therefore would apply to all Medicaid claims for that product.

In the final rule, CMS offered two potential options for circumventing this highlighted issue. Manufacturers will have the option, if they wish, of choosing which method may be most appropriate for the pricing of their drug. The present-day “best price” determination (“best price offered” or “AMP – minimum rebate percentage”) would still apply to the drug and be available to states that do not desire to enter into an available VBP agreement.

Bundled Sales Approach:

In the “bundled sales” approach, the sales and discounts for a drug subject to a VBP arrangement 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”)

To accommodate this change, CMS amended the existing definition of “bundled sale” as defined in the 2016 Coverage of Outpatient Drugs (COD) final rule to state that “VBP arrangements may qualify as a bundled sale.” In response to comments, CMS removed the phrase “if the arrangement contains a performance requirement such as an outcome(s) measurement metric” due to the redundancy in the definition.

CMS notes that some manufacturers have been using the bundled sales approach for VBP arrangements, under the reasonable assumption that a VBP arrangement represents a type of performance requirement. After the regulation is finalized, any VBP arrangement would have to meet the new definition of VBP arrangement in order to avail itself of potential regulatory flexibilities effective January 2022 as mentioned.

Multiple Best Prices Approach:

CMS finalized the alternative “best price” reporting for instances in which the “bundled sales” approach would not be palatable for a manufacturer. CMS revised the definition of “best price” to allow for the submission of “multiple best prices” reported for a single drug based on the discounts available in an applicable VBP agreement. The revision states that “that if a manufacturer offers a value-based purchasing arrangement to all states, the lowest price available from a manufacturer may include varying best price points for a single dosage form and strength as a result of that value-based purchasing arrangement.” To accomplish the definitional revision, the agency expanded their interpretation of the “best price” statute and regulations that the “lowest price available” “in any pricing structure” could be interpreted as a VBP arrangement under which different prices are available based on different outcomes.

In this approach, if a manufacturer enters into a VBP agreement, additional “best price(s)” for that drug may be reported that 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.

These additional “best price(s)” would be available to the MDRP, but only offered contingent on the state Medicaid program’s participation in the applicable VBP agreement. That way, if Medicaid programs are unable to develop the tools necessary to track the outcomes in their patients, Medicaid programs would still have access to the traditional “best price” absent a VBP.

This approach will likely be reserved for very rare disease medications. Specifically, certain manufacturers of drugs indicated for use in limited populations may not have a large number of sales in a quarter to spread out discounts as a result of a bundled sale. This being the case, a VBP arrangement that results in a significant discount (for example, 75 percent discount) will impact the best price significantly if only 1-3 units are dispensed per quarter. The “multiple best prices” approach would mitigate the financial impact of treatment failure in a single Medicaid patient for that quarter. Although states may lack the ability to track individual outcomes for patients on a mass scale, the drugs for which the “multiple best prices” approach are likely to be pursued contain a much smaller patient population more palatable to the states. When offered for ultra-rare, tiny patient population, single administration drugs, states are far more likely to enter into a VBP containing multiple best prices. Even so, uptick will be limited given manufacturers exploring this price reporting method would require data from PBMs and health plans with sufficient detail to support a per product, per customer, per quarter, per unit price to report and certify an accurate “best price.”

Reporting Period and 340B Ceiling Price:

CMS finalized, without modification, an exception to the 12-quarter rule that allows a manufacturer to request revisions to price reporting (including quarterly AMP and “best price” reporting) that exceed 12 quarters from which the data was due when the change is a result of a VBP arrangement, and the outcome must be evaluated outside of the 12-quarter period. CMS did not add a specific length of time for the applicability of the exception outside of the 12 quarters. In their justification, CMS notes the 5 exceptions to the 12-quarter price reporting rule that currently exist do not contain a time limitation either.

CMS states that manufacturers will continue to be required to report a non-VBP best price when reporting multiple best prices generated from a VBP arrangement, and that non-VBP best price will be used to calculate the 340B ceiling price. However, to address implementation challenges, CMS intends to issue operational guidance to assist manufacturers in the price reporting to the extent there is no guidance specific to a manufacturer’s VBP arrangement.


Encouraging the use of VBP arrangements by permitting manufacturers to report multiple best price points also alleviates burdens on states to submit a SPA to enter into their own CMS-authorized SRAs in order to participate in VBP arrangements with manufacturers. That is because this approach allows states to take advantage of the approaches made available to commercial payers. Thus, the administrative burden of participating in VBP arrangements through the submission of a CMS-authorized SRA is no longer required unless a state wants to negotiate its own VBP arrangements with manufacturers. However, there will be costs to states and manufacturers of tracking patients and engaging with health care professionals to track and evaluate outcomes of these VBP arrangements.

Important to note, states entering a VBP will be guaranteed at least the minimum statutory rebate if greater than the VBP “best price” that results from the ensuing contract.

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. These price reporting methods 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 overall headache surrounding contractual language, agreement on outcomes and associated metrics, as well as tracking and auditing those outcomes still remain, however, lowering the “best price” hurdle may be a win for getting VBPs off the ground in some cases.


CMS finalized the rule at the end of 2020, however, implementation for the “bundled sales” and “multiple best prices” reporting were pushed off to January 1, 2022. The new definition of VBP arrangements took effect in February of 2021. The current Administration has been mum on this particular ‘end of Trump administration’ rulemaking while offering strong support for some initiatives. Once HHS and CMS secretary appointments are finalized in Spring 2021, the waves of rulemaking will become clearer. However, the sentiment around addressing payment models for high-cost therapies will not be retired anytime soon. CMS noted the development of the new Medicaid Drug Program (MDP) system that will replace both the current Drug Data Reporting (DDR) and Medicaid Drug Reporting (MDR) systems by July 2021. The rollout of the new system should coincide with additional operational guidance from CMS as well.


Contact Viking Healthcare Solutions for help with your strategic planning.

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 www.vikinghcs.com/connect.