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Our Take: Proposed CMS rule facilitates outcomes-based contracts between drug companies, payers

Jun 22, 2020

On Wednesday CMS issued a proposed rule that would provide more flexibility in how pharmaceutical companies report their prices to Medicaid. The intent is to make it easier for drugmakers and commercial insurers to establish value- or outcomes-based contracts.

In a Health Affairs blog post, CMS Administrator Seema Verma referred to the changes as a “proposed overhaul of Medicaid regulations that have long inhibited payment innovation among prescription drugs across the entire system.”

The rule would give payers and drugmakers the ability to explore alternative pricing strategies similar to value-based arrangements that have been in place for years between payers and providers.

In the press release announcing the proposed rule, Verma said, “By modernizing our rules, we are creating opportunities for drug manufacturers to have skin in the game through payment arrangements that challenge them to put their money where their mouth is.”

She added that tying reimbursement to outcomes for prescription drugs could create alternatives to traditional utilization management practices, such as prior authorization and step therapy, as well as other cost controls “that impede patient access.”

Our Take: This “overhaul” is long overdue. If we’re truly going to move away from fee-for-service payment arrangements and fully embrace value-based purchasing in our health care system, then prescriptions drugs have to be part of the deal.

Contracts between pharmaceutical companies and payers often center on volume — basically, the more a drug is prescribed, the larger the rebate a payer gets from the manufacturer. While there have been some notable exceptions to this pricing structure in recent years, they’ve been few and far between. Drugmakers say that CMS’ price reporting requirements often interfere with attempts to negotiate other types of arrangements.

Here’s why: Currently, under the Medicaid Drug Rebate Program, manufacturers have to report to CMS the “best price” they offer on their drugs in the U.S., after rebates and discounts have been taken into consideration. They must then match that price for the drugs they sell to Medicaid or pay a 23.1% rebate.

When it comes to negotiating deals with insurers, drug companies usually don’t want to offer higher rebates than those they are required to give Medicaid.

Verma pointed out that the best price reporting requirement hasn’t been updated in the last 30 years, and that current regulations don’t accommodate value-based payment arrangements. She’s absolutely right.

But as she also noted, next-generation treatments, including expensive gene therapies, are providing the impetus for reform. While these therapies “hold the potential to transform the practice of medicine for some of the most devastating diseases,” she wrote, their list prices can approach or exceed $1 million for a single course of treatment.

To illustrate her point, Verma provided the following example: If a drug company were to enter into a value-based payment arrangement for one of these expensive therapies, the manufacturer could provide the drug at no cost if it failed to work as intended. But under the existing best price reporting requirements, that $0 price tag could be considered a rebate and would thus set the “best price” at $0 for all state Medicaid programs — even when the drug works.

The proposed changes would make it possible for drug manufacturers to report their prices to Medicaid using other strategies. For example, they could report their best price under what CMS is calling “bundled sales” — in other words, the best price would be an average of the prices they charge based on different outcomes, including both failures and successes.

Or, they could report more than one best price for a drug, as long as the prices are tied to a value-based purchasing arrangement. In this scenario, each payer could agree to pay a certain price for a drug based on the outcome it achieves. The drugmaker would report the lowest price negotiated by any payer for each outcome as the best price. Participating Medicaid programs would pay the lowest price offered for each outcome — which could save the programs millions of dolls annually, and they wouldn’t have to be involved in price negotiations.

Other proposed changes in the rule would encourage long-term value-based agreements by permitting modifications to a given drug’s best price after more than three years (which is currently prohibited). Such agreements would make it possible for payers to require outcomes to be sustained for four years or longer, in order for drug manufacturers to be paid.

Yet another proposed change would affect the calculation of the average manufacturer price (AMP) for brand-name products, by excluding the sales of authorized generic drugs. Currently, sales of authorized generics are included in the AMP of the brand-name drug, which lowers the AMP and reduces rebates paid for the brand-name product.

The proposed rule is open for public comment for 30 days. If you’re interested in the nitty-gritty details, check out the fact sheet.

What else you need to know

Atrium Health, Duke Health, and Novant Health made public presentations of their proposals to acquire or partner with Wilmington, N.C.-based New Hanover Regional Medical Center (NHRMC). The New Hanover County Board of Commissioners voted last year to explore options for the medical center and, in May, a board-appointed advisory group chose these three health systems as the finalists from among the six proposals received.

According to a summary by Becker’s Hospital Review, Atrium Health, which is based in Charlotte, N.C., said it would spend $3.1 billion, including $2.17 billion for capital improvements, to enter into a 40-year operating lease — after which it would become the medical center’s owner. Duke Health, based in Durham, N.C., offered to acquire NHRMC for $1.4 billion and invest another $1.9 billion in capital improvements within the next five years. In its proposal, Novant, a 15-hospital, not-for-profit health system based in Winston-Salem, N.C., agreed to invest more than $5 billion in the medical center — $2 billion would be paid up front to the county and $3.1 billion would be earmarked for capital projects — and said it is open to owning, managing, or partnering with NHRMC. Each of the health systems also offered a strategy for increasing medical education opportunities at NHRMC.

‘Smart pill’ maker Proteus Digital Health filed for Chapter 11 bankruptcy last Monday. Founded in 2001 and based in Redwood City, Calif., the digital therapeutics firm was valued at $1.5 billion not so long ago, Forbes noted in an article about Proteus Discover, a digital ingestion tracking system designed to improve adherence through a tiny sensor embedded in pills. Novartis, Kaiser Permanente, Sutter Health, Medtronic, Oracle, and Otsuka Pharmaceutical are among Proteus’ past investors. The firm holds roughly 400 patents and just signed an outcomes-based initiative in May with Tennessee’s Medicaid program for patients receiving hepatitis C treatment. Proteus’ financial problems started in late 2018, when Otsuka truncated a recently expanded five-year partnership between the two firms. Afterward, Proteus struggled to secure more funding, and Otsuka officially terminated their agreement in January of this year. The bankruptcy document indicates that Otsuka and Proteus have had “fruitful discussions regarding a potential transaction that could serve as a stalking horse bid in a Chapter 11 sale process.”

Beaumont Health and Advocate Aurora Health are exploring a merger. The two health systems — the former based in Southfield, Mich., and the later having headquarters in both Downers Grove, Ill., and Milwaukee — signed a nonbinding letter of intent to form a single health care system that would serve patients in Michigan, Wisconsin, and Illinois. A press release issued Wednesday states that the two health systems began their discussions late last year but put them on hold to focus instead on the pandemic. Beaumont just announced less than a month ago that its plans to merge with Akron, Ohio-based Summa Health had ended. Advocate Health Care and Aurora Health Care merged in 2018, creating Advocate Aurora Health Care. The talks between Beaumont and Advocate Aurora are in “early stages,” but the boards of both organizations have approved the potential merger.

A bipartisan group of 30 senators wants to make expanded telehealth access permanent. Congress took steps earlier this year that allowed CMS to expand Medicare coverage of telehealth services during the pandemic. Given the massive increase in telehealth usage that ensued, provider groups have been pressing for those changes to continue beyond the public health emergency. The senators wrote a letter to Majority Leader Mitch McConnell and Minority Leader Chuck Schumer asking them to make permanent the relevant provisions from the CONNECT for Health Act. They also said it is important to measure the impact of telehealth on Medicare — specifically, on utilization, quality, health outcomes, and spending. Citing reporting by Healthcare Dive, the letter states that the number of Medicare beneficiaries using telehealth services increased more than 11,718% in just a month and a half.

Two high-priced collaboration agreements between drugmakers were signed last week. One is an oncology-focused discovery research collaboration between AbbVie and Genmab, a biotech firm based in Copenhagen, Denmark, to develop and commercialize three of Genmab’s next-generation bispecific antibody product candidates, including epcoritamab. AbbVie will pay Genmab $750 million up front and could pay up to an additional $3.15 billion in milestone payments, along with royalties.

The other is a strategic partnership agreement that gives San Diego-based Neurocrine Biosciences exclusive global rights to seven of Takeda’s pipeline programs, including three clinical-stage compounds for schizophrenia, treatment-resistant depression, and anhedonia (the inability to feel pleasure). Neurocrine will pay Takeda $120 million up front, and Takeda could also receive $1.9 billion in milestone payments, as well as royalties.

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