State Opportunities to Address Prescription Drug Costs in Medicaid

May 11, 2018

Outpatient prescription drug coverage is an optional Medicaid benefit that all 50 states and DC have opted to provide. State Medicaid programs establish their own payment design for outpatient prescription drugs within parameters established by the federal government. The entrance of high-cost specialty drugs into the market and rising prices for generic drugs are contributing to cost increases for public and private payers. However, the rate of drug spending growth is higher in Medicaid compared to other insurers. The purpose of this briefing is to inform federal policymakers and stakeholders to the legislative and regulatory actions that state officials are pursuing to address the rising cost of prescription drugs in Medicaid. The event featured prominent state officials from Oklahoma and Colorado, and the director of the CMS Division of Pharmacy at the Center for Medicaid and CHIP Services. Panelists outlined the rationale for these actions, detail the mechanisms of state policies, and described opportunities to leverage flexibility within federal parameters.


  • Shawn Bishop, MPP, Vice President, Controlling Health Care Costs and Advancing Medicare, The Commonwealth Fund
  • Mary Ella Payne, MSPH., R.N., Acting President and CEO, Alliance for Health Policy


  • John Coster, Ph.D., R.Ph., Director, Division of Pharmacy, Center for Medicaid and CHIP Services, Centers for Medicare and Medicaid Services
  • Trish Riley, M.S., Executive Director, National Academy for State Health Policy
  • Terry Cothran, R.Ph., Director, Pharmacy Management Consultants, University of Oklahoma College of Pharmacy
  • Cathy Traugott, R.Ph., J.D., Pharmacy Clinical Manager, Client and Clinical Care Office, Colorado Department of Health Care Policy & Financing

The Alliance for Health Policy gratefully acknowledges the support of The Commonwealth Fund for this event.


12:00 – 12:05 p.m.      Welcome and Introductions

  • Shawn Bishop, MPP, vice president, Controlling Health Care Costs and Advancing Medicare, The Commonwealth Fund, @commonwealthfnd
  • Mary Ella Payne, R.N., MSPH, acting president and chief executive officer, Alliance for Health Policy, @allhealthpolicy

12:05 – 12:45 p.m.      Presentations

  • John Coster, Ph.D., R.Ph., director, Division of Pharmacy, Center for Medicaid and CHIP Services, Centers for Medicare and Medicaid Services
  • Trish Riley, M.S., executive director, National Academy for State Health Policy, @TrishRiley207
  • Terry Cothran, R.Ph., director, Pharmacy Management Consultants, University of Oklahoma College of Pharmacy
  • Cathy Traugott, R.Ph., J.D., pharmacy clinical manager, Client and Clinical Care Office, Colorado Department of Health Care Policy & Financing


12:45 – 1:30 p.m.        Question and Answer Session



Event Resources

 Key Resources (listed chronologically, beginning with the most recent)

“Efforts to Cut Drug Prices in Medicaid.” Dworkowitz, A. Manatt on Health: Medicaid Addition. February 27, 2018. Available at

“Snapshots of Recent State Initiatives in Medicaid Prescription Drug Cost Control.” Young, K. and Garfield, R. Kaiser Family Foundation. February 21, 2018. Available at

 “Lower Drug Costs: The Next Frontier for State Flexibility.” Riley, T. Health Affairs Blog. February 16, 2018. Available at

Additional Resources (listed chronologically, beginning with the most recent)

“Statewide Prescription Drug Database: 2015-Present.” National Conference of State Legislatures. April 24, 2018. Available at

“New York’s Medicaid Drug Cap: A Look at the State’s New Effort to Manage Pharmaceutical Spending.” Issue Brief. The PEW Charitable Trusts. April 2, 2018. Available at

“Rising Prescription Drug Costs: A Report on State and Federal Efforts to Contain Costs.” Public Consulting Group. March 2018. Available at

“Overcoming Barriers to Value-Based Contracting in Medicaid.” Holderread, B., Cothran, T., Nesser, N. et al., The University of Oklahoma College of Pharmacy. February 26, 2018. Available at

“In An Effort to Curb Drug Costs, States Advance Bills to Prod Feds on Importation.” Luthra, S. Kaiser Health News. February 16, 2018. Available at

“Reigning in Rx Drug Costs: What States Achieved in 2017 and Where They’re Heading in 2018.” Alberts, C. State Health Policy Blog. National Academy for State Health Policy. December 19, 2017. Available at

“Curbing Unfair Drug Prices: A Primer for States.” Berman, A., Lee, T., Pan, A., Rizvi, Z., and Thomas, A. Global Health Justice Partnership. August 2017. Available at

“State Wholesale Importation Program Explained.” National Academy for State Health Policy. May 2017. Available at

“Medicaid Payment for Outpatient Prescription Drugs.” Issue Brief. Medicaid and CHIP Payment and Access Commission. March 2017. Available at

“Medicaid and Specialty Drugs: Current Policy Options.” Center for Evidence-based Policy: Oregon Health & Science University. June 2016. Available at

“Can Transparency Legislation Help Control Medication Costs?” Sarpatwari, A., Avorn, J. and Kesselheim, A. NEJM Catalyst. June 24, 2016. Available at

“Sticker Shock: Prescription Drug Affordability in Colorado.” Colorado Health Institute. June 17, 2016. Available at



State Opportunities to Address Prescription Drug Costs in Medicaid
Friday, May 11, 2018


Shawn Bishop The Commonwealth Fund, Vice President, Controlling Health Care Costs and Advancing Medicare

(202) 292-6740

Terry Cothran


University of Oklahoma College of Pharmacy, Director, Pharmacy Management Consultants

(405) 271-8225

John Coster Center for Medicaid and CHIP Services, Director, Division of Pharmacy

(410) 786-3000

Trish Riley National Academy for State Health Policy, Executive Director  


Cathy Traugott Colorado Medicaid, Pharmacy Section Manager, Department of Health Care Policy & Financing

(303) 866-6338


Experts and Analysts

Nicholas Bagley University of Michigan Law School, Professor of Law

(734) 615-7049

Alexander Dworkowitz Manatt, Phelps and Phillips, LLP, Associate

(212) 790-4605

Craig Garthwaite Northwestern University Kellogg School of Management, Associate Professor of Strategy

(847) 491-2509    

Darius Lakdawalla


University of Southern California, Quintiles Professor of Pharmaceutical Development and Regulatory Innovation

(213) 821-7025

Tricia McGiness Center for Health Care Strategies, Senior Vice President

Rachel Sachs


Washington University in St. Louis, Associate Professor of Law

(314) 935-8557

Ameet Sarpatwari Brigham and Women’s Hospital, Assistant Director,  Division of Pharmacoepidemiology and Pharmacoeconomics, Program on Regulation, Therapeutics, and Law

(617) 278-0930


Gregory Allen New York State Department of Health, Director, Program Development and Management, Office of Health Insurance Programs

(518) 473-0919

Tom Betlach State of Arizona, Director, Arizona Health Care Cost Containment System

(602) 417-4000

Nancy Nesser Oklahoma Health Care Authority, Pharmacy Director

(405) 522-7325


Other Experts

Bethany Holderread University of Oklahoma College of Pharmacy, Clinical Coordinator, Pharmacy Management Consultants

(405) 271-8220

Richard Cauchi


National Conference of State Legislatures, Program Director, Health Program

(303) 856-1367

Carly Putnam Oklahoma Policy Institute, Policy Director

(918) 794-3944

Matt Salo National Association of Medicaid Directors, Executive Director

(202) 403-8621



MARY ELLA PAYNE:  So I want to welcome everyone, thank you for joining us here today for a briefing on state opportunities to address prescription drug cost in Medicaid. My name is Mary Ella Payne, and I’m the Acting President and CEO of the Alliance for Health Policy. I was going to say I’m actually Sarah Dash, but you would probably say, no, you’re not. Sarah had a beautiful baby girl just a few weeks ago:  Skylar Rose, so she’ll be back at the end of July. And so I’m just filling in for her, so she can enjoy her time at home with her new baby girl.


So for those of you who are not familiar with The Alliance, I just want to say that we’re a non-partisan organization dedicated to advancing knowledge and understanding on health policy issues. We will be live tweeting during this event. You can join today’s conversation on Twitter using the hashtag, Allhealthlive. I think it might be up on the slide as well. Maybe not. Okay, but it’s #allhealthlive.  Feel free to submit question as well via Twitter.


Before we get started, I would like to thank the Commonwealth Fund for making today’s briefing possible. And I would also like to introduce Shawn Bishop, Vice President of the Commonwealth Funds Controlling Health Care Costs and Advancing Medicare Programs. Shawn is going to join me in co-moderating today’s panel. So I’m going to let Shawn give some remarks right now.


SHAWN BISHOP:   Thank you, Mary Ella.  I’m Shawn Bishop with the Commonwealth Fund, and I really do thank the Alliance for holding today’s briefing on this important topic related to prescription drug cost, and more specifically, strategies that states are developing to address drug cost in Medicaid and beyond.  Drug cost, drug spending, drug prices, it’s a really important topic for the United States, as we all know, and it’s an area of focus that the Fund has taken up in the last couple of years, and we are supporting research to help understand the roots of the problems that are leading to high drug spending, high drug cost, high drug prices, and we’re also looking to develop solutions.  And before we go to the panel, I want to just provide a couple of insights from research that we have prepared recently.


Researchers at the Fund have looked into drug spending levels and trends in nine high income countries, compared to the U.S., and what we find is this:  The U.S. spends the most per person on prescription drugs than any other high income country that we have looked at.  We did one particular study that looked at nine countries, and those countries include Australia, Canada, France, Germany, the Netherlands, Norway, Sweden, Switzerland, and the UK.  The country with the next highest per capita drug spending compared to the U.S. was Switzerland, was spending per person roughly 30% lower than what the U.S. spends. While we find that the U.S. and these countries use the same amount of drugs per person — so we both have the same drug utilization per person.  And most of these countries, including the U.S., use generic drugs at roughly the same rate.  The major difference in our spending pattern is price.  Compared to the U.S., prices in these other countries range from 95% of U.S. prices in Germany, to 46% of U.S. prices in the UK.  So why do high prices matter?  It seems like a rhetorical question, but it’s really not.  They matter a great deal to patients who are finding it harder to afford the drug treatments.  They matter to employers whose drug spending now comprises over 30% of premiums. And they matter to public programs like Medicare and Medicaid, that combined now comprise 40% of all drug spending in the U.S.  So as we know, these statistics show, and I know all of you know because you work every day on solving problems with your bosses, drug prices are having a far-reaching impact today in the U.S.


Beginning in 2014 — just a brief history here — beginning in 2014, my observation was that policy makers really started to take note of drug prices, when the treatment costs of Sovaldi was released, and that put payers, including Medicaid programs, really into a virtual tailspin.  Congress began to pay attention at the same time and started to notice other problems in the pharmaceutical system.  Some drug makers were raising prices astronomically, and also limiting supply at the same time.  So Congress held hearings, and that’s what Congress was supposed to do.  You have the oversight function, and that’s your role, is to find out what the issues are, what the problems are.  So you held hearings, you talked to some of these drug makers, and some bills have been introduced.  Recently, there have been — there was a small number of provisions three that were included in the Balanced Budget Act of 2018, to address some of the spending issues in Medicare and Medicaid.  And while those provisions are important, and they are meaningful, the Balanced Budget Act of 2018 is not enough to solve the problems that we’re facing with high drug prices in the U.S.  More needs to be done.  And as we know, the Federal Government is preparing to announce a set of policies and proposals to address drug costs as we speak.  We will hear more about that from President Trump at 2:00 p.m. this afternoon, so I know we’ll all be running back to our desks to watch that and listen.


But states have not waited for the Federal Government to act. States have taken steps through law, through regulation, and other actions, which is what we will hear more about, and discuss with you today on this panel.  On some issues, states are leading the way.  On other issues, they may need more leeway.  And we’d like to hear more about what states are doing, what they are experiencing, and maybe what some of that leeway might be from our panelists.  And with that, I will turn it back over to Mary Ella.


MARY ELLA PAYNE:   Thanks, Shawn.  Okay, so outpatient prescription drug coverage is optional Medicaid benefit that all 50 states and the D.C. have opted to provide.  The entrance of high specialty drugs into the market and rising prices for generics are contributing to cost increases for public and private payers, as Shawn just outlined. However, the rate of drug spending is higher in Medicaid, compared to other insurers. The purpose of this briefing is to orient Federal policymakers and stakeholders to the legislative and regulatory actions that state officials are pursuing to address the rising costs of prescription drugs. Panelists will outline the rationale for these actions, detail the mechanisms, and describe opportunities leverage flexibility within federal parameters. You will hear from four excellent speakers today, each of whom brings a different perspective to this issue.


I will go ahead and introduce them all at the same time, in order of their speaking. So, John Coster, who is Director of the Division of Pharmacy, at the Center for Medicare and CHIP at CMS.  He is responsible for policy and operational issues relating to the Medicaid pharmacy program, and the Medicaid drug rebate program. Prior to joining CMS, he has helped senior government affairs executive positions within the National Association of Chain Drug Stores, the National Community of Pharmacists Associations, and another organization now known as 340 B Health. He holds a MPS and PhD in Health Policy from the University of Maryland Graduate School in Baltimore, and a BS in Pharmacy from St. John’s University in New York.


Next, we’re going to hear from Trish Riley who was Executive Director of the National Academy for State Health Policy, and the President of it’s corporate board.  Trish has held multiple distinguished roles in the state of Maine, including Director of the Governor’s Office of Health Policy and Finance, leading the effort to develop a comprehensive coordinated health system in Maine. She was the principle architect of Dirigo Health, and served as the state’s liaison to the Federal government and Congress during deliberations of the National Health Reform.


Next to Trish is Terry Cothran. Terry is the Director of Pharmacy Management Consultants, a division of the University of Oklahoma College of Pharmacy, which administers the prescription drug benefit in Oklahoma’s Medicaid Program.  Terry has 27 years of pharmacy experience, and 24 years of that is in management. He previously served as operation manager of several other departments including Medication Therapy Management, Consulting Pharmacy, and prior authorization in a large pharmacy benefit management environment.


Then lastly, we will hear from Cathy Traugott.  Cathy is the Pharmacy Clinical Manager for the Colorado Department of Health Care Policy and Financing. The state agency that administers the Health First, which is Colorado’s Medicaid program, and the Child Health Plan Plus. In this capacity, she oversees staff and pharmacy initiatives at the department.  Cathy earned her Bachelors in Science degree from the University of Kansa, and attended law school at Chicago Kent College of Law.


So with that — and everyone has also these bios in your packed. Let’s go ahead and get started.  Each panelist will have eight minutes, and then we’re going to have about 45 minutes for Q & A’s, so I hope you start thinking about those questions as we hear from the panelists. I’m going to turn it over to John first.


JOHN COSTER:  Thank you, Mary Ella.  Good afternoon everybody, it’s good to be here with you.  Mary Ella said I’m the Director of the Division of Pharmacy at the Center for Medicaid and CHIP services.  So basically my staff and I helped to run the Medicaid Pharmacy program, the Medicaid drug rebate program. And as you know, Medicaid is basically state operated programs. There are 56 Medicaid programs. There is 50 states, the District, and then there is five territories, each of which has their own Medicaid program. Our responsibility at CMCS is to work with the states on their pharmacy programs, and one of the things we primarily do, is we run the Medicaid drug rebate program, which is a program that helps to bring in billions of dollars a year to the federal and states governments to help them manage the costs of their pharmacy programs.


Let me talk a little bit about the Medicaid drug program and the Rebate Program.  So the Rebate Program was established back many, many years ago, in 1990, to give states away to help reduce the cost of prescription drugs. So the Rebate Program — the players involved in the Rebate Program, of course there is CMS, there is the states, and then there is the drug manufacturers. So we have 650 drug manufacturers that participate in the Medicaid Drug Rebate Program, and the money that comes in from the Rebate Program, and the State Representatives here can attest to this, I think, that help off-set federal and state costs of most out-patient prescription drug spending dispensed to Medicaid patients. So one thing you have to remember about Medicaid, and this is also the case for Medicare Part D, is Medicaid, we don’t buy drugs. We don’t have truckloads of drugs pulling up, you know, the CMS and then distribute them to pharmacies. Pharmacies — retain pharmacies, independent chain pharmacies, they buy the prescription drugs, and Medicaid basically pays for those drugs, and then we realize a rebate on the drugs that pharmacies dispense. So we pay for drugs purchased by providers of retain pharmacies. There is also rebates that are paid on physician administered drugs — that was added later on down the road after the original program was enacted. And at the Division of Pharmacy, me and my division, and our staff, what we do is we don’t manage the individual state programs, we review the state parameters, how the states are reimbursing for these drugs, and how they are covering these drugs. And that’s primarily for fee-for-service.  Managed care, we have a little bit more of a hands-off approach to. The managed care plans in the states, they are under contract to the states and we review the rates that the states pay managed care plans, but we don’t get directly involved necessarily in the day-to-day management of the managed care programs in Medicaid, and right now, more than 75% of Medicaid patients are in some form of managed care.  So the Rebate Program has been operating for 26-27 years. It brings in — last year it brought in 42 billion dollars. That’s a lot of money that comes in from manufacturers into the states through the Rebate Program. And that amount has been growing.  In 2016, it brought in 38 billion, and the year before, 27 billion. So rebates are paid both on drugs dispensed to patients in fee-for-service Medicaid, as well as those in managed care. And the rebates, for those of you who are not familiar, are based on statutory formulas that are in current law, and they are based off benchmarks called Average Manufacturers Price, and Best Price. It gets pretty complicated when you talk about the rebates, but just to tell you that the rebates are based off a benchmark called Average Manufacturers Price. And Medicaid is entitled to the manufacturers best price in the market, with few exceptions. Meaning the Medicaid rebate is reflective of the best price that the manufacturer offers for its drug in the marketplace with few — with some exceptions. Manufacturers pay rebates to states each quarter. So just yesterday, we sent out to the states — what year are we in? Federal fiscal year 2018 first quarter rebate file. So one of the things we do at the federal level, is we get data from the manufacturers every quarter on their AMPs and their best prices, we turn around and we calculate unit rebate amounts, we send those out to the states, the states then bill manufacturers for rebates, based on utilization of those manufacturer’s drugs, in that states for the quarter. As I said, we’re about 650 manufacturers participate in the program. In order for federal financial participation to be available for a manufacturer’s drugs, they have to sign a rebate agreement with the Secretary. So suffice it to say, almost every manufacturer who sells drugs to Medicaid patients, who have some sort of Medicaid market, participates in the Rebate Program. And all the states in the district participate — the territories, the five territories will be given the ability to participate in the program in 2020. The rebate amounts, as I said, they are based on a statutory formula. Branded drugs pay a higher rebate, so those are signal source patented drugs, or drugs that come off patent, but were patented at a particular point in time. They pay about 23% of their average manufacturer’s price for the quarter. Blood clotting factors and drugs that have exclusively pediatric indications play a lower rebate, and generics pay an even lower rebate. So non-innovative drugs. Generic drugs pay 13% rebate. But both for brands and generics, there is an inflation penalty. Manufacturers, if they increase their prices faster than inflation, they pay an additional rebate back to Medicaid, or a price that increases faster than the rate of inflation. That’s been a very important protection for states against manufacture inflation, particularly in the branded market, but that was extended a couple of years ago to the generic market, because there was evidence that there was inflation happening on certain generic products, which traditionally had not been the case.


As Mary Ella said, prescribed drugs to this day are an optional benefit, but all states cover them. As I said, all manufacturers who want their drugs covered in Medicaid, meaning having FFP available, have to sign a rebate agreement. States use what are known as preferred drug lists. Now, as a condition of Medicaid participation in the program, manufacturers pay rebates, but states are required to cover all the drugs of a manufacturer that participates in the program. It doesn’t mean that they can’t subject those drugs to a preferred drug list, a prior authorization, or step therapy, or some other utilization mechanism. But the rules require that states cover all drugs of manufacturers that participate in the program, if it’s prescribed for medically accepted indication.


The rules in MCOs, as I said, MCOs, those prescription claims were added to the rebate program in 2010. Prior to that, prescriptions dispensed to Medicaid patients and MCOs were not subject to rebates. MCOs can use their own formularies or PDLs, they do not have to be the same as the fee-for-service PDL that’s being used. But just like the rules in fee-for-service, the MCO must cover a drug of a manufacturer that has signed a rebate agreement. Some states align the fee-for-service preferred drug list with the MCOs preferred drug list, depending upon the state and number of MCOs, but that does not have to be the case.


A couple additional points:  Beyond the Federal Statutory Rebates — I know I’m out of time, so I will wrap up — beyond the Federal Statutory Rebates that are required to be paid by manufacturers, almost every state has what’s called supplemental rebates. These supplemental rebates are negotiated directly between states and manufacturers, and the state used preferred drug lists to do this, so in a crowded therapeutic class, where there is multiple competitors, the states will leverage that ability to negotiate with manufacturers of drugs that are relatively the same in terms of therapeutic outcomes and they will create preferred drug lists. So we’ll try to steer patients for a drug that is going to give the state the best rebate in that particular class, and those are called supplemental rebates. Those rebates are exempt from a manufacturers best price.


Couple other things quickly to wrap up. You may hear more about this today, I don’t know, in terms of later. There is a proposal that was in the President’s budget, a drug formulary proposal to allow certain states to negotiate prices on their own. In other words, opt out of the Rebate Program and see if they are able to do a better job than participating in the Rebate Program. The Rebate Program does bring in a lot of money every year to most states, but there are some states who have indicated a desire to have more flexibility than having to cover every drug, which is the requirements under the rules. And we’re also working with manufacturers on value-based purchasing. This is something that’s a high priority. It was for the previous administration, it is for this administration as well. So there have been certain releases that we’ve put out about our interest in working with manufacturers on outcomes based contracting, meaning payment to manufacture would be made if the drug performed the way it was labeled. Meaning, if the outcomes are what you say they are going to be, we pay. If they’re not, then you may not get the full price.


So that’s a quick overview of the program, and I will hand this over to Trish.


MARY ELLA PAYNE:  Thanks, John. And you’ll have an opportunity to ask questions during the Q & A, so we can get back to John.


TRISH RILEY:  Okay. That was a quick overview of a very complicated procedure, thank you. Let me just take you for a quick overview of the states, and where they’re at. Obviously what drives states is the incapacity to use Power Point — is the costs of the program. And that’s an obvious. But think about a state. A state buys coverage for Medicaid beneficiaries, public employees, teachers, university employees, they regulate insurance and watch the premiums rise, driven largely by pharmaceutical costs. So clearly states have a keen interest here, and importantly, they have balanced budget requirements. So it’s not just the stunning launch prices for some new drugs, it’s also the unpredictable increases in those drugs, that when you’re balancing a budget, is a pretty tough nut to crack, as these things just go through the roof and you’ve got to go back to your legislature and ask for more dollars.


It is true that the states have not historically waited for the Federal government, though we are very eager to see what the President has to say, in an hour, and we have a long history of states as experimenters, as innovators, as testing new ideas. 20 states had children’s health programs, before Congress passed CHIP. Many states have mental health parity, before the Congress passed mental health parity, and we think the experimentation at the state level around drug prices, is the next wave.


States are approaching drug pricing comprehensively, not just looking at Medicaid, and in fact, Medicaid is sometimes a challenging barrier to some of these initiatives. So we saw, even though these were short sessions in the states, 160 bills introduced, and as you can see, a variety of approaches — PBMs, transparency, wholesale importation, price gauging, rate setting — we can talk more about this. The one thing you know as a state, is if you do pass it, and several states have, you will immediately be sued. So the pharma lobby has bene significant. There have been suits ongoing, and yet, still, work continues. You’ll hear more as we switch to Medicaid about the three demonstrations underway. We have great funding from the Laura and John Arnold Foundation to work with states, and both Terry and Cathy will give you the deep dive into those. The challenge for the states at the moment, as John pointed out, these are big numbers. These are big dollars, and when you’re running a state budget, it’s significant to see these rebate dollars come in. States don’t get all of the 23%, they still get the 15%, I guess, don’t they? As a share?  But it’s really a grand bargain. So the agreement was, okay states, we’ll give you these rebates, we’ll give you best price, in exchange, you have to include every drug, which limits the state’s capacities to use tools that the commercial industry uses, to really address costs. And many states are suggesting it’s time to revisit.


There are some promising approaches: In New York, the state of New York recently, through it’s budget — created a budget cap for healthcare, medical services, and a budget cap for drugs. If the budget cap was exceeded, as it was this year, they could target high cost prescriptions, the drivers of those costs, and negotiate for effectively supplemental supplemental rebates. So states already bargained for supplemental rebates, they would ask manufacturers, can you give us a deeper discount, so that we can bring these costs under our budget cap? And if they don’t achieve the supplemental supplemental, that drug goes before a drug utilization review committee, and the state has a number of tools in its toolbox to really try to convince the manufacturers to help them get below budget. They recently had — last week they had a test of this new process, so we can talk more about it in Q & A, I think you may not have time at the moment, but it’s an interesting approach, complicated, and requires drug by drug review, but I think there are clearly other states interested in it.


In Massachusetts, sort of the next wave, Massachusetts had a waiver in February, that is still under review by CMS, that would really allow it to be, as the President’s budget suggests, there will be state demonstrations. The Massachusetts waiver is the first step in what that might look like, at least from a state perspective what it might look like. They seek to close the formulary where there are multiple drugs to pick the drug of greatest value, and choose that, and negotiate for greater discounts. They want to limit what fast track drugs come under the formulary — this is an important area. the 21st Century Cures Act made it possible for drugs to come to market through FDA faster than the usual clinical trials and reviews. For many states, that’s worrisome, and they suggest that maybe they should have the authority to wait until there is more experience and knowledge about the efficacy of those drugs, before putting them on a formulary.


Finally, the hope that they can create a specialty pharmacy, and do negotiations for specialty drugs. Think about who the Medicaid population is. Disproportionate numbers of chronically ill people, high users of drugs, so specialty pharmacies may be a vehicle to bring costs down. Now of course, whenever you try to close a formulary or restrict choice, you run into the conundrum — on the one hand, you’re doing it to bring — in the commercial side, to bring costs down for the beneficiary, by limited choice. On the Medicaid side, because beneficiaries don’t pay high co-pays, they are poor folks, and they can’t, by law. You loose that tool, but you are saving money for the program, to ensure that the Medicaid program as a whole has the financing it needs, and the tax payer burden is appropriate, so you are paying for the appropriate and most valuable drugs. So Massachusetts waiver does create in it’s proposals a number of checks and balances, opportunities for consumers to weigh in, and to have appeals. But it’s also important — and I know that there are consumer groups here, it’s important to recognize that the voice of consumers is no longer as pure as it once was. And as the Kaiser Family Foundation has pointed out, in 2015, 14 companies paid 116 million dollars to consumer disease groups, to both educate them about the value of their drug, and potentially influence what their action is, and that compares to 63 million dollars that they spent on Federal lobbying. So the consumer voice is absolutely, essentially important in this discussion, but it has be a true consumer voice, and we have to have the capacity to have that discussion, consumer to policy maker.


So what should the Federal government do?  And with the support from the Commonwealth Fund, we convened a group, and John was kind enough to be their federal officials and state officials, and they thought through what might be possible. One of the concerns of the states is this grand [inaudible] in itself. The best price AMP discussion, the rebate question, is a black box. It clearly is trade secrets, it’s protected, you sign a contract, I was a Medicaid Director, you sign your life away to make sure you never give this information out. It might be useful to take a deeper dive. Another IG audit of, how are these best prices determined? What is the AMP? How is it determined? Is it truly the best price? On the last bullet, does it disclose manufactured discounts to plans? How do we determine the best price? Can we allow Medicaid to work with other public purchases? Increasingly, Medicaid wants to work with public employees and try to use the Medicaid vehicle as a way to gain supplemental rebates and leverage the Medicaid possibilities. Can they share supplemental rebate information? The one thing — I’ve been in this field a long time, and it is curious that wherever you go, and I think Terry and Cathy will agree — wherever you go, some state will tell you that they are assured by a pharmaceutical manufacturer that they are getting the best rebate in the country. And every state can’t be getting the best rebate. So the black box of those rebates, is an area of interest and concern. Again, like the Massachusetts model, can we use commercial tools, can we delay the fast track of coverage, and is it time to revisit the rebate program itself? So I’m sure we’ll have plenty of questions, and my time is up too.


MARY ELLA PAYNE:  Thank you, Trish, and we’ll turn to Terry now.


TERRY COTHRAN:  I’m going to give you a little overview of Oklahoma, and kind of what direction we’re taking in this space.


As mentioned before, I’m an employee of the University of Oklahoma College of Pharmacy, and we work under a company called Pharmacy Management Consultants to operate the pharmacy benefits for Medicaid.


What we are doing in Oklahoma is we are trying to be one of the first Medicaid states to have an alternate payment model. That term is used with other terms — value-based contracting, outcomes-based contracting, many other acronyms that mean similar or same thing, that people use universally. As we get into this, I do not have any conflicts of interest, and as mentioned, I am an employee of the university.


Just a little bit of background:  As we’ve talked up and down the line here, drug spending is a key driver in increasing healthcare cost. The pharmacy drug spend rose 12% for all payers in 2014, as shown on the slide here, with 24% of that in Medicaid. Now, part of that was due to expansion, and then the drug spend increased 9% to almost 325 billion in 2015. The growth in ’15 was a little slower than it was in ’14, but pharmacy spend still outpaced all of the other spend in that space. Increase in high cost specialty items, as we’ve mentioned here, have contributed to that. Oklahoma Medicaid spend almost 38% of their total pharmacy expenditures on less than 1% of claims for medications costing greater than $1,000 a claim. So you can see the expense tied to some of those.


Just for Oklahoma, we service about a million members annually — at any one time, a little over $800,000 per month, is generally where we stand. We are 100% fee-for-service, so no managed care in the state at this time. That allows us to go down this alternate payment model path without a lot of resistance or other parties to work with. It’s just payer versus manufacturer, which makes it a little simpler for us. We do belong to a purchasing pool, which helps with some of those supplemental rebates. You do have to have a discussion with these folks if you’re going to get into this space and work on an agreement with them. And then as we talked before, pharmacy benefit management, pharmacy consultants, we have access to both medical and pharmacy claims in Oklahoma, being part of the university in that contract. That also gives our researchers capabilities to look at a lot of other pieces of these contracts and outcomes. We don’t just research what’s in the agreement, we can look at any other influences that it has caused in the market as well, with having the staff that we have.


Generally, there are two types of APMs, alternative payment models — the financial kind, which are more of a discount. They are geared more to limit spending, predictability. They are easier to administer, the data piece is a lot less owneress.  What we’re looking at is more the health outcomes-based payments. Now, this is where, as John mentioned, the drugs were tied to a clinical outcome based on its performance. And this does a few things. It does require a little bit more planning and data collection involved. It provides an opportunity for manufacturers to really validate their product, or stand behind their product. They usually tell us how good the product is, but this also gives them an opportunity to kind of put a little money where their mouth is. And then it also looks at some of the real world outcomes. A lot of studies for products, as we talked about, and the clinical trials, it’s a very specific population that they’ve ran the trial on. So when you put it out in the real world, sometimes it doesn’t always look exactly the same.


We do have a couple of partners that have helped us get this off the ground  — Smart D, you can see the long name up there that goes with that. They provided the initial contact to us to maybe look into this area, and then they have also provided a contract template that we have sent to John’s office for CMS to provide approval for us to be able to operate in this space. And we’re getting close to that. NASHP, which Trisha’s group here, has also provided support and some funding, and our goal with that is to kind of pave the way for other states, as we mentioned here on the slide. You know, identify some challenges, eliminate some of the barriers, look at lessons learned, and try to eliminate a lot of that for other states that want to follow in this path and save them the cost that’s associated with that. So it will be a smoother path for them, and less costly.


As we got into the discussions with some of the pharmaceutical manufacturers, we have had some lessons learned already. There definitely has to be a level of trust between the manufacturer and the payer. More efficient process when you get into these discussions. If you have the stakeholders, the key people from the pharmaceutical companies, at the table, a lot of times you have to go through several levels to get to those people, but once you get those people at the table, you can kind of find out if the company is really serious, and how fast they want to move, or if they want to move at all.


Down here, we had to pull a little bit of utilization data, as you get into these discussions also. You kind of have to look at the disease state, and the product, and make sure it’s the right fit for you and the company both. Whether it’s the risk benefit model, or just if there’s enough patients to even perform a study, and then it also gives both parties an idea of how to measure that outcome, and they are both on the same page at that point.


Perspective does come into play. A manufacturer and a payer are not going to have the same view on this. They have different goals, I want to say, of how this is supposed to work. So a manufacturer would want to improve their market access, their market share. They want to avoid any restrictions, avoid best prices we’ve had in some of this discussion, and basically, kind of gain a competitive edge against any of their competitors. A payer, we want to reduce cost and waste. We want to improve outcomes. Those outcomes do have a cost associated with those as well. So reducing financial risk if we can, and then obviously have something that we can have a good measurement at the end, and then basically just better value for the money spent. That’s the ultimate goal.


So some of the challenges that manufacturers have had along the path, is off-label, or beyond label, if you hear those terms, that’s where a manufacturer gets a product approved for a certain indication, and they are kind of limited to only say, this is what this product will do. They cannot assume that it might fix another piece of a disease, or some other outcome. And that worries some of their attorneys, if they get into those discussions. Best price, which we’ve talked about. Anti-kickback concerns; that does bring the lawyers into the discussion even more. Depending on the product, there may not be enough people in the study, so you have to look at that, if it’s a very — some of the specialty drugs that are coming out, a very small portion of patients that these are for, so that may not be enough to even have an APM around it. And then some outcomes may take longer. As you look down there, hospital readmissions, reductions, people missing days from work and school, and things like that, where things would be measured long-term, so you won’t see those immediate results in these types of agreements.


And then there is also — I’ve heard talk recently, where manufacturers are starting to get into this space a lot more, and there is concern that they may go to what they call the new car sales approach, to where they put a new product out with a sticker price, knowing that they are going to have a negotiation to reduce it down the road, so it kind of comes out of the elevated price with the intent to lower it at some point. So we just want to make sure that that doesn’t start happening, if possible.


Then just a quick “by the numbers” where we’re at. We’ve initiated talks with 20 manufacturers. At this point, eight have opted out. Two are on hold and want to do a little research on their side. We have four that are still in discussions, and then six, we’re actually doing some type of contract negotiation, whether it be a disclosure agreement, or even more of a contract around a product. And then questions, I guess, after Cathy.


MARY ELLA PAYNE:  Thank you, Terry, and now our last panelist, Cathy, from Colorado.


CATHY TRAUGOTT:  Thank you.  In Colorado, we agree that there are big fundamental issues out there that are much bigger than Medicaid about drug pricing. But in those eight minutes, what I’m really going to focus on, is what we in Colorado are trying to do, given the current construct of drug pricing and how it impacts Medicaid.


In every slide show we do, we always put our mission up here, and I think this is actually an important piece to remember throughout this presentation. Everything we are doing, is based on this. We are trying to maintain access, increase health outcomes, and all trying to do it in a cost effective way. Just to give a quick summary of Colorado, just so you have a flavor for where we are as well, we cover about 1.3 million Coloradoans through Medicaid. That’s about 24% of our state population. We are an expansion state, so as you can see, about 429,000 of those folks came through expansion. We are predominantly a fee-for-service state as well. We have two small regional managed care entities, but we really are fee-for-service, which again, does open more opportunities, I think, in this space that we’re talking about. We are not a member of a purchasing pool, so again, that opens some opportunities for us as well. And of course, we’re actively pursuing these concepts that we’re talking about today.


John went over this, and it’s been talked about a couple times: The Rebate Program. I think the key piece to remember, is that Medicaid can’t say “no” once these agreements are in place. That’s the fundamental difference between Medicaid and commercial insurance. And there is reasons for that, and there’s good reasons for that. But what we want to do, is talk about, does it make sense in every situation to not to be able to say “no”? Are there certain circumstances where we should be able to say “no”, or at least talk about, are there other opportunities other than just, we have to, at the end of the day, cover the drug? So what we do in Colorado, since we can’t say “no”, we do the preferred drug list, we do what all the other states do. We use a preferred drug list, we use prior authorizations, we use quantity limits, dosing limits, we do different things — all based on clinical evidence, all trying to always get at making sure people have what they need, when they need it, but doing it in a cost effective manner. And all of these things touch on that.


The one other piece that we have in Colorado that’s a little bit different than some other states, is there is certain categories that we cannot force the use of the generics. What we’re trying to do next, is we’re following in Oklahoma’s steps as looking at those same kinds of ideas that they’re looking at, as far as these contracts go, and are interested also at getting a template contract in place, much like what Oklahoma is doing, so that we’re ready to enter into any agreements that we can do value-based contracts with the manufacturers.


The other piece that we’re talking about in our state is an 1115 waiver. Again, very targeted, as you’ll see, but trying to get at — are there certain circumstances, again, where we need something that’s slightly different, that gives us a little bit more leverage in these certain circumstances. An 1115 waiver basically — very quickly — gives states the opportunity in certain circumstances, to waive some of the federal requirements that are out there. The key piece for us is, it has to show that it’s improving care, increasing efficiency, or reducing costs. That’s where we’re focused in what we’re trying to do. The 1115 waiver current state, historically, this really hasn’t been talked a lot about, when you’re talking about the rebate world. But in the last year or so, it’s been coming up. As I mentioned, Colorado’s been kind of kicking this idea around for at least a year now, and since we started thinking about it, a fair amount has actually happened. Again, we’re going to hear very soon some more about some of these ideas from the administration. But there is increasing interest in this area. But what does that really look like? And then of course Massachusetts filed their 1115 waiver, and Arizona, in their upcoming waiver, has also expressed interest in something along these lines as well.


What are we really talking about?  What we’re talking about, again, is trying to achieve best health outcomes through the best use of public funds. What we really want to do is focus on very targeted areas. We’re not looking at a broad exemption from any of this. We’re looking at, are there particular areas — you know, there are, for example, if a new drug comes out and it’s really a combination of two very old drugs; two very old drugs that are both cheap. Does this new drug really have a clinical benefit over those two old drugs?  And if not, shouldn’t we just be paying for those two old drugs that are a lot cheaper than paying for this new drug? Is that a place where we should be able to say, “no”? That’s a question. Some of the newer drugs that are coming out, the FDA is doing a wonderful job. They are doing their job of fast-tracking a lot of these drugs, doing exactly what their supposed to be doing, under the 21st Century Cures Act, and some of the other things that are out there, but then the question comes:  Should Medicaid be paying for these drugs when there’s limited evidence out there that these drugs work? And we see drugs after they’re post marketed, before even they started coming out with black box warnings, coming out with drugs having to get pulled off the market. There is real safety issues sometimes that pop up post market. So when we’re looking at safety, and when we’re looking at clinical efficacy, should we be paying for these drugs on day one? Maybe, or maybe not.  Or maybe we should be looking at something, like, we pay for it when it works, and it’s safe, but we don’t pay for it when it’s not. There’s a drug — they come out, and they don’t even necessarily — in one package insert, it says that there is no clinical benefit established for this drug. So again, should we be paying for that drug? Or should we be waiting to see what happens? That there is a clinical benefit, and then pay for that drug? Or be a part of that solution with CMS.  And we think that this can be — if we can work through this program to do a waiver, that this can be a great experiment. To try to tweak what is the grand bargain, what is a good program that is in place, that gives the states these rebates. Maintain those rebates, don’t lose those rebates, but can there be ways that we can tweak things here and there, where in the modern world, where we are today — fast forwarding from 1990, where there are these drugs, and these different situations that maybe we shouldn’t always be covering them in the same way always have, historically.


I’m going to run out of time, so I have to keep going. To switch gears a little bit, physician administered drugs. There is two things that we’re doing in this area with physician administered drugs, of course.  So you have the drugs that you pick up at the pharmacy, and then there are the drugs that get administered in a physician’s office, or in a clinic. So we’re talking about, how do we pay those physicians, and those clinics, when the drug is put into their clinic? And then there is also, how do they get paid in the hospital? So the out-patient hospital setting, and the in-patient hospital setting. There is this trend toward these bundled payment structures — the EAPG and DRG. And what happens is, you set a rate. You say, okay, this procedure, with everything that you need to do for this procedure, is going to cost $1,000, and that’s what we’re going to pay the hospital who are doing this procedure. Well, what has happened now is, with some of these — sometimes with this procedure, it really does cost $1,000, but sometimes that same procedure also needs a $100,000 drug. And do you just keep paying that $1,000 and the hospital has to eat the $100,000? Do you build that $100,000 into your rate, but then every time they don’t use that drug, they are getting paid $100,000 and it really only costs them $1,000? Of course I’m way simplifying this, but the rate process is a lot more complicated. Do you carve these drugs out? When do you carve them out? If you’re talking $1,000 and $100,000, that looks pretty easy. What if it’s $50,000 and $52,000 difference? Do you carve them out at that point? Or do you not? And that gets into the stop-loss concept too, of is there this kind of threshold beyond which that you start carving these out? In Colorado, we do have an EAPG system.  We do not have the right, right now, under our CMS state plan, to carve out these drugs. But this is a very real situation that we’re having to face right now, is some of these drugs that are coming out, and trying to figure out how — what is the best answer, and how do we address this?


Another pieces that we’re looking at is reimbursement on the physician administered drugs. Getting back to when they’re being used in a clinic, or a doctor’s office. The current reimbursement methodology is the average sales price. It’s a statistic that is calculated, and it’s similar to what we used to use in the pharmacy side, the outpatient pharmacy world, when we used average wholesale price. It was another statistic that we used, and it’s trying to get at what is the real price of these drugs. But what we started doing on the pharmacy outpatient side, is we started using something called “average acquisition cost”, and what this is, is it’s a new way to truly figure out, what is the cost of the drugs to the pharmacy, so that we are reimbursing them for their true cost. And not using this kind of statistic that, it can be close, but it can be too high, it can be too low, depending on how it gets calculated, but trying to really get at that cost. and we’ve been using this average acquisition cost system on the out-patient pharmacy side since 2013. And now, all states have moved to this or what’s called the [NATIC?].  But what we’re trying to get at on this is, could we do this with physician administered drugs? Could we do something similar where we start looking at a cost-based reimbursement methodology that’s similar to that AAC that we’re using on the pharmacy side? And through NASHP, we were given a grant to look at this. We’re in the process of doing that right now. We’re trying to do a survey, we are trying to get the pricing information from the physicians — the way it works on the pharmacy side, is you get this information from the pharmacies and then create an average cost reimbursement amount. Again, oversimplifying it, since I’m out of time. But again, so on this side, looking at it:  Can we really use this?  And what does it look like, compared to ASP? Use that information to determine, is this a better way and could we really implement this and make this happen? As far as we know, this isn’t happening anywhere in the country, so we are excited to be working with this, and we appreciate NASHP’s help with this, to look at this, and see if this could be a new way to reimburse that would work better for everyone. Thank you.


MARY ELLA PAYNE:   Thanks, Cathy. Okay, now we are going to turn to the discussion portion of today’s briefing. There are several ways that you can ask questions:  You can raise your hand and then we have, I think, some mics that will be available to ask your question. You also have a green card that was included in your packets, and you can ask a question on the green card, and then hand it to staff, and they will bring it up here. And then  you can also do it through Twitter. Again, it’s #allhealthlive. So if you’d like to ask a question through our live Twitter feed, you can do that as well.
Before we get started, I’m going to take the opportunity to ask one question first, to kick this off.  My question actually is for John Coster, who I didn’t mention in his bio, but John was one of the early authors — one of the authors of the Medicaid Rebate Program back 27 years ago. I know that because I was there, and it’s hard to believe it’s been 27 years. The question I have is:  What’s different? That was a major program that got enacted in early 1990s because prescription drug prices were going through the roof at the time.  What is different about today’s conversation? Or is it different from the conversation we were having in the 1990s that drove Congress to actually enact significant laws around this area?


JOHN COSTER:   Well, I think people were in Washington long enough — the more things changed, the more they stay the same.  I think back in 1990, the states were struggling with trying to manage the cost of prescription drugs.  Individual states were trying to negotiate with manufacturers.  For example, you had California, who was a large purchaser and a payer at the time, was pretty effective. But you had states like Kansas who really weren’t getting great discounts or rebates, because they didn’t have much leverage. So the discussion revolved around, well, why is — for example, the Veteran’s Administration, paying this price?  They had gotten good discounts. And why is this federal payer getting a good price, but Medicaid was basically paying — as my boss, who gets the credit of course, for the Rebate Program, not me, but as a staffer.  The discussion was, why is Medicaid paying the highest prices?  So the Medicaid rebate program was really the first — I think one of the first attempts by Congress to try to help states and federal payers manage their prescription drug costs.  What strikes me most about then and now, back then in 1990, we were all freaking out about a $300 a year drug.  You know, a $400 a year drug.  And back then, we were talking about the price of pills, and tablets, and lotions and creams, and now we’re talking about million dollar gene therapies. So I think in many ways, the issues are the same.  The states are still — and other payers are struggling.  How do we pay for these new therapies, which are great advances, no doubt, and helps improve lives, and helps people live longer.  And that’s some of the reason why you get the discussion — is the Rebate Program still relevant?  Because it was designed a time where, you know, we were dealing with these, you know, like I said, little — but now we’re dealing with different therapies that some people don’t even think they’re drugs, necessarily.  Gene therapy — is it a drug?  Is it — what is it?  So I think, as I said, there is still kind of the same issues, but I think we’re looking at it from an order of magnitude, much different perspective now, in terms of numbers.


MARY ELLA PAYNE:  Did you want to add something?


TRISH RILEY:  I would agree, but also the magnitude of the Medicaid Program itself has become far more sophisticated, and far larger, with a far more diverse population.  So I think it’s just the growth that may be the Rebate Program needs reconsideration both on the cost side, and the enrollment side.




SHAWN BISHOP:  Sure.  I have a question from the audience, and this is very interesting.  I have another question, but I will wait to see if there is other folks too.  Do speakers have any insight on how the lawsuits from pharmaceutical manufacturers will play out?  Will these state laws that Tricia mentioned around transparency, and other laws, will they stand?  Or are they on shaky ground?


TRISH RILEY:  I think in Maryland, the price gouging bill that allowed the Attorney General to go after unconscionable prices, was overturned in the courts.  There’s an appeal, but whether that continues or not, I don’t know.  In California there was a court action on the transparency bill, but the state has begun implementation regardless, so I think it may tweak what states do at some level, but the one thing we know about states, is they are not deterred.  Even though Maryland’s case was being litigated, 12 states proposed the same price gouging bill.  They are just going to keep pushing, and try to change — as we learned from the lawsuits, how much of it is harassment, how much of it is a legitimate concern?  But states will tweak, learn from experience, and ask Congress for some help, particularly around the dormant [inaudible] clause, where we are now talking about a global market, it is really tough to talk about pharmaceutical costs that are in your state only. And so there need to be — it’s a good thing Cathy is a lawyer.  The dormant [inaudible] clause issues are really significant, and I think Congress could take action to help states.


MARY ELLA PAYNE:  So we have a question over in the corner. Can you stand up and identify yourself?


AUDIENCE MEMBER:   Hi, I’m [name], with the Healthcare Leadership Council.  I was just wondering if some of the speakers could talk about the issue of drug importation, and how states are working on that.


TRISH RILEY:  There are eight states that have proposed drug importation.  It passed in the House in Utah, failed in the Senate, but leadership asked the Department of Health to develop a proposal back for the next legislature.  It passed both Houses strongly in Vermont, and the governor has about five days from today to make a decision about whether or not to allow it.  The industry has opposed it pretty vehemently, and confused the public with a lot of rhetoric about personal importation, citing studies and former FDA commissioners, and their worries about importation, which we concur with, but that’s personal importation. What these proposals are, is wholesale importation, where a wholesaler in the United States works with a wholesaler in Canada, brings drugs in, most of these state laws will identify the 20 most expensive drugs across purchasers in the state, bring those drugs in from Canada, and make them available through the current supply chain.  Through local pharmacies.  It is a procedure that the Federal government has the authority to approve, as long as the state can prove safety and savings. So Vermont is the closest; Louisiana is still under consideration.  It’s of great interest in the state, and interestingly, in some of the more conservative states.


MARY ELLA PAYNE:  How about a follow-up?  How would that work with dual eligible?  Medicare is prohibited from re-importing, so how would that affect that population?


TRISH RILEY:   I think the states have been looking primarily at commercial — public employees commercial programs, and then whether Medicaid can be involved.  There are all kinds of issues about how to make Medicaid participate, whether Medicaid’s rebates are in fact better than what we can do in Canada.  How the 340 B program would work.  So I think it could be, in some states, an incremental approach, where you start with public purchasers in some of the commercial products.


MARY ELLA PAYNE:   Okay.  Let me see if there is any questions.  Okay, Marcia?


AUDIENCE MEMBER:  (no mic)…lack of recognition of how effective the Medicaid Rebate Program has been, and so I wanted to ask John:  How deep are the discounts as a result of the Medicaid Rebate Program, how much of them are accounted for by the inflation penalty, and how much by best price?  And what has the impact been of recently adding an inflation penalty to generics?


JOHN COSTER:  That’s a lot of stuff.  I can’t give you exact numbers, but the inflation penalty was added at the law’s inception in 1990, because CBO said they wouldn’t score savings on the law, because they thought that manufacturers just raised prices to compensate for the rebates that Medicaid was going to be getting in the states.  I think that the inflation penalty contribution to an individual manufactured drug, depends upon how long the drug has been on the market.  And how aggressive the manufacturer has been with raising prices.  The more aggressive, the more the rebate being paid by the manufacturer for the drug is coming mostly from inflation penalty.  So I think if you — there have been some reports and studies saying inflation penalty, and some drugs contribute as much as half of the total rebate that a manufacturer pays.  The best prices is — the information, the AMPs and best prices are confidential. So I can’t — plus I don’t know on average.  Like, the brand rebate is 23.1%.  Part of the rebate a manufacturer would pay for a drug, frankly depends upon the competition and the class.  So if you have a single source drug, no competitors, the manufacturer is probably pay 23.1%.  If you have a lot of competition — like, now you have a lot of competition in Hepatitis C class.  My guess is the manufacturers of those products are paying significant best price rebates, and significant supplemental rebates, because they all want to be preferred on the state’s preferred drug list.  So I think the answer to your question, Marcia, is sometimes it’s more a function of the manufacturer, the pricing strategy, the competition in the class — multiple things.  But I think last year we brought in 42 billion dollars in rebates.  The original CVO score — five year score in 1990, which admittedly is ancient history — the original score over five years was 3.4 billion over five.  And now we’re bringing in — of course, we’ve added NCO drugs, those came on in 2010. So it’s hard to compare exactly, but I think in the states — and they have their own perspectives on this, I think they would say the Rebate Program has been incredibly helpful. Inflation rebate has been incredibly helpful. The generic penalty was added a couple years ago, as I said, because there was some — I think, isolated incidences of certain generic products who had gone up substantially in price. I think most generics exist in a deflationary environment, but there are some that had increase.  We are starting to track some of that now. Anyway, that’s a long-winded answer to your question.


AUDIENCE MEMBER:  [inaudible — not mic’ed)


JOHN COSTER:   Yeah, I mean, I think, 42 billion.  I think it’s a little more than half of all spending.  It’s also difficult to peg that, because we collect data on — not to get too bureaucratic, but we collect data on fee-for-service, but we don’t always have all our data on MCL, because those part of capitated payments. But it’s substantial.


TRISH RILEY:  And I think obviously it’s a lot of money the state — and it comes in after the fact, so how states use it for budget purposes, and it is a lot of money. I think the question is:  Now that we’ve focused more on this issue as states, and have learned more about these launch prices that are just — who knows how they are determined.  It really raises issues about, do we know enough about what this best price really is?  Do we know enough about — it isn’t not known, and so that always raises suspicions and the state and federal relationship is a partnership, but it’s also a state and federal relationship. And when you don’t know exactly what these best prices — how they are determined, what the rebates really are, it raises questions about whether we can try something different.  But I don’t think we’ve heard any state that wants the wholesale eliminate the Rebate Program, but rather begin, as Cathy points out, some retooling of it for the 21st Century, so that it can really say “no”, when it needs to.


MARY ELLA PAYNE:  Cathy or Terry, do you want to make a comment on that question?


TERRY COTHRAN:   I would agree with what Trish said.  We don’t want to get rid of completely, it’s very helpful, but there are scenarios, such as what Cathy had mentioned, where it just may not make sense for it to apply.


CATHY TRAUGOTT:   I don’t think I really have anything to add, I agree with all of that.  And I think we could be here all day talking about specifics. I think there is a lot of different areas. I think that the fact that the rebate program works the way it does, creates different incentives, it creates different marketing programs. There’s a lot that goes into it that I think if we wanted to get into it, like I said, we could spend all day talking through all of those details, but at a big level, yeah, I think everything’s been covered.


MARY ELLA PAYNE:  I think Shawn wanted to jump in and ask a question?


SHAWN BISHOP:  Just real quick, and I know there are other folks who have questions that are waiting:  I think it was mentioned that Medicaid Direct Rebate Program has not been utilized, or it hasn’t been considered for the waiver program very extensively.  Is there a reason for that? Has 1115 waivers, they haven’t applied, they haven’t been sought after to apply to the Medicaid Drug Rebate Program.  Is there a reason for that, or is this just a artifact of the fact that it was working so well for a while? Any insights on that?


CATHY TRAUGOTT: I don’t know if John has any thoughts on that from the CMS perspective, but I — yeah, I think a lot of it — I think it’s a combination of, it does work — the Rebate Program works, and I think it is a good program, and it helps — it has helped the state programs that didn’t have the leverage back before 1990, and to create a program that did work. I think it’s — just in recent years, with the new drugs that are coming out, the new costs — and John’s right, you know, some things change, they don’t as well, but in this new world of gene therapy, and all of these things that just did not exist that many years ago, it feels like there is — it’s kind of the right time to start looking at this more. I can’t answer the question as to why specifically it hasn’t come up as much in the past, but it is interesting, I think, that a lot of states have started, you know, independently had already started kind of toying around with this idea on their own, and then it’s just becoming — it’s getting momentum.  What that looks like, and where we go, is going to be interesting.


AUDIENCE MEMBER:   Bob Gris, with the Institute of Social Medicine and Community Health.  My question is whether state Medicaid programs really have the leverage to accomplish the goals that all of you have identified as the reason for a rebate program.  It was mentioned that the U.S. spending is much higher per person, and per drug than other countries, and I don’t understand why Medicaid programs should have different prices for the same drug.  I don’t understand why other countries should have different prices for the same drug. It seems to me that the mechanics that you’re talking about are not effective tools for addressing the real drivers of drugs.  This is a policy issue at a federal or global level, and to talk about the value of a Medicaid Rebate Program as working, given these disparities, I think is a joke.  I don’t understand why nobody is saying that.


MARY ELLA PAYNE:  I think everyone shares the frustration.  Maybe we’ll hear something today at 2:00 pm, I don’t know.  Do any of the panelists want to comment? I think people are trying to do the best, given their programs and their constraints, but I agree, we have a big, big issue on our hands.  I don’t know what else — Shawn?


SHAWN BISHOP:  I guess I would just add that, to your point that United States has a more fragmented healthcare system then other countries in terms of who pays for healthcare in the United States. So that fragmentation has developed over time.  It’s a system that is developed over the last 40, 50, 100 years.  It creates issues in the system, there is no doubt about that, related to costs, and related to, I guess what you’re calling leverage.  So until we grapple with — do we want to continue a fragmented system?  The employers, you know, are one system, you know, the Federal government is another, as you said, the states are another. I believe that — and we might hear something more from the President today. Given that that’s our healthcare system, I think what the states are trying to do, is they are trying to, bravely, I think, I mean, I don’t mean to overdramatize this, but bravely get some more leverage to your point. They are trying to do that. And maybe you best can speak to that issue, but they’re trying to get more leverage where they can, give that this is a difficult negotiation.  That we would prefer, I think, some folks would prefer to have more leverage in the United States, but the states are doing what they can right now.  This is what this is about, is getting more leverage.


CATHY TRAUGOTT:   I was just going to add, to your point, I think we all agree, those are the bigger issues that really need to be addressed. The issue is, until those get addressed, we as a Medicaid program have to figure out what we can do under today’s world, and the rules that exist today.  We would love to have those bigger aspirational discussions of how to really fix the bigger picture issue. But until then, we have to do something that works under the current constructs.  And so what we’re talking about today, is trying to do something as best we can under what exists today.


MARY ELLA PAYNE:   I’m going to move on, this is a question for Terry.  “What types of drugs do manufacturer seem most interested in executing a value-based contract for?”


TERRY COTHRAN:  It’s been all over the board, it depends on the manufacturer and kind of what their hot drug is at the time.  I know our approach originally, from when we started doing this, was to target some of the new drugs that were a half a million dollars, but we found very quickly some of those single entity manufacturers did not have much of an interest since they didn’t have much competition in that area.  So we’ve had to have some very honest discussions with manufacturers to see what’s on their mind as we approach this, but the types of drugs have just been all over the board as far as what we’ve looked at or talked about.  We haven’t really eliminated anything in particular to say, that’s not an area we’re interested in.  So it depends on the manufacturer, I guess, mostly.


MARY ELLA PAYNE:  The audience?


AUDIENCE MEMBER:  Thanks, Mike Miller, I’m a Health Policy physician going back almost as far as Mary Ella and John, but not quite. My question is — I want to put this in a little bigger context, because one thing that I haven’t heard you guys really talk about is, I guess I can put it neutrally, “leaks in the supply chain” that are driving up costs and spending.  My understanding is that doesn’t really seem to be an issue in Medicaid because of how the rebates are structured, and the population, there is not high deductibles, there is not high co-pays, co-insurance, so that the costs aren’t being inflated by people taking — adding on costs as it goes from manufacturer to the patient.  Is that correct, or am I missing something?  There was a lot of discussion about that in the commercial world, and Medicare Part D. Thank you.


MARY ELLA PAYNE:   Who would like to take that?  Do you want to start, Trish?  Or Terry?  Or Cathy?


TRISH RILEY:  I think states do you PBMs, and I think it’s part of the transparency initiative to try to figure out where that money flow goes, but I think the state’s focus of Medicaid has largely been on launch price and the rapidity and unpredictability of huge price increases, and that’s been where their attention has been riveted.


CATHY TRAUGOTT:  When you’ve got a 100% fee-for-service state, and then an almost 100% fee-for-service state sitting here, so I think some of the other states that have — are much more ingrained into the MCO world, would probably be able to answer that question better.  I think for us though, it doesn’t touch us anywhere near the same way it does what you’re talking about, for those reasons that you’re talking about.


MARY ELLA PAYNE:  I’m going to go to the cards.  “Trish called on consumer groups to advocate with the true consumer voice.  Thank you for this comment. In your opinion, what is the most effective way for national consumer groups to get involved in this complex space, and what area solution should we target?”


TRISH RILEY:   I really asked for that one.  I don’t think nationally so much, I think about states, and I think at a state level, states know their consumer groups, and they know where their financing comes from, and there needs to be more conversation, it seems to me, with honest conversations about given the limits of our resources, given the needs of your population, where do we go?  And to have that one-on-one with Medicaid directors, and Medicaid pharmacy directors.  And I think at a national level, with big national organizations, who there will be skepticism about where the funding comes from, it’s less impactful for states to really have the conversation, and I think we saw in Massachusetts, there is enormous discussion with consumer groups that significantly change what their wavier application looks like, and built in considerable consumer input and checks and balances and appeals.


MARY ELLA PAYNE:  Thanks, and this is a good add-on, I think.  “With more restrictions imposed on Medicaid beneficiaries as a result of closed formularies, what patient friendly policies can be implemented around appeals processes and the lack of choice Medicaid beneficiaries might face?”  Cathy or Terry?


CATHY TRAUGOTT:  Honestly, I try to shy away from using the term “closed formulary” because when I think of closed formulary, I really think the commercial kind of plan, and I don’t think — especially in a fee-for-service world, we’re never going to look like that. It just can’t happen. It’s a different population, there is a different set of rules, there’s just — it’s never going to look like that.  There’s going to be — it’s going to look different. And so what we’re really looking at, we have a very open process as far as how we do — how we put what drugs we cover as our preferred and non-preferred, it’s a very transparent process. We have a lot of places for public input. None of that would change, and we would want that, we would welcome that, because as I said, our mission is still access and improved outcomes, and to keep those two pieces going, even as we are trying to save money, that has to happen. We have to have those safeguards in place.  And what we’re looking at trying to do is truly target, do we need to cover these particular products?  Because there really are other products out there, and everyone is going to get what they need.  So we don’t have to cover this particular product. And doing that exercise, I think it — and we can’t do — we can’t raise co-pays, we can’t do all of those other things that happen as well.  So again, we just look very different, and we’re going to have those safeguards as a part of the whole process. And I can’t imagine CMS would allow us to do something that doesn’t have all of that in place as well. And that’s what I was getting at. I think this is a great opportunity to explore that. What can we do that helps CMS, that helps the states, and helps the patients out there, to make sure we’re still meeting everyone’s goals, but trying to add something in here that we can help maybe get to a better place, cost-wise.


MARY ELLA PAYNE:  The New York example is probably informative, so in New York, as they were negotiating, when they hit the budget, and they negotiated with manufacturers to give additional supplemental rebates, one company said, “no”, Vertex, for a drug called Orkambi, which is a very expensive drug for a small group of population who have cystic fibrosis. It’s an extraordinary drug, it’s a new drug, it’s very expensive. The state went to its drug utilization review committee, contracted with the Institute for Clinical Effectiveness Research, ICER, who did and evaluation of the value of the drug. What does this drugs outcome look like? What is it’s value? And concluded, like the State of New York, that it was overpriced. So we watch New York to see how that one plays out, but it’s an example of wanting to give access to this important drug for people with that debilitating disease, but not being able to afford it.  So how will they be able to get further rebates? It will be interesting to see.


MARY ELLA PAYNE:   We have a question over there.


AUDIENCE MEMBER:  Hi, Lisa Faye from the Cystic Fibrosis Foundation. I also feel compelled to say that we do — we are the pure patient voice for people with CF, and we come to conversations with Medicaid, and state officials with data and evidence, whenever we can. So going back to the drug cap scenario, as it is still in play, you had mentioned that the state has some tools in the toolbox to have some leverage. Can you just talk about that?  Also, what your feelings are in the appropriateness of a state using ICER’s economic modeling.


TRISH RILEY:  Well, I think there is a lot of interest in ICER’s economic modeling, because the value proposition is an intriguing one.  The tools that New York has, and will use in Orkambi, because it’s a different — it’s a first in class, one in class, there is no competitor.  For that drug, they won’t use some of their bigger tools, but they will push the transparency piece, and ask the company, Vertex, to tell them more.  How did you price this? How much did you spend on R&D, and really drill down and ask for data, so they better understand the pricing strategy of the company. For other drugs where there is competition, they have other tools about prior approvals and potentially removing drugs from formularies on MCOs and still requiring access because of the rebate requirements.  But it’s  new initiative, and interesting to follow. It’s also administratively complex, not uncumbersome, and not uncostly, but I think that’s where the link with ICER provides states some [inaudible].


AUDIENCE MEMBER:  I’m Christa Drovac.  A question about best price. So let’s say New York is successful, and they renegotiate the cystic fibrosis medication, then everybody else in the market now knows that there’s a lower price, so then is there a disincentive for pharmaceutical companies to negotiate, because of this best price issue? And then I guess the second part is, if you have these carveouts for like, pilots, or other interesting outcome based scenarios, what if it goes lower? Do you have to tell everybody else about it?


JOHN COSTER:   Best price, again, the rebates are for branded drugs, are the lower of 23.1% of the average manufacturers price, or the product’s best price. Whichever is lower. States have supplemental rebate agreements in effect with multiple manufacturers. A CMS approved supplemental rebate agreement, the prices negotiated between the states and the manufacturer, on the CMS approved Supplemental Rebate Agreements. Those prices are exempt from best price. So assuming what New York State is doing is using their approved Supplemental Rebate. We approve the templates, we don’t approve every agreement on the templates. So what they are doing is part of their Supplemental Rebate Agreement that is approved, and they negotiate, whether it’s with Vertex or any other company, those prices would be exempt from best price. The demonstration, I think you would want to exempt those prices from best price. If the demonstration program goes forward, you want to exempt those prices from best price, or with the manufacturer will probably do is negotiate just up until whatever that best price is in the market, and probably stop there. Otherwise, as you say, that will become best price for everyone. But there is a list of exemptions in our rules, which are 42 CFR 44750 — I think it’s 508. The list of what’s exempted from best price is in our rules. There are also certain statutory exemptions. And you’ll see CMS approved supplemental rebate agreement prices are exempt from best price.


TERRY COTHRAN:  And just to touch on that, that’s how Oklahoma is doing the alternative payment model, is we are structuring them in a Supplemental Rebate manner, to where they are exempt from best price as well.


SHAWN BISHOP:   Can I add to that?  The issue with best price, and I think maybe you were getting to this, is that if in the commercial sector, an organization, a manufacturer and a payer would like to negotiate these value-based discounts, and that price goes very low, it could go below best price in Medicaid and can trigger best price in Medicaid. So the issue is actually in the commercial sector. That that’s where they are concerned about best price, not in Medicaid. Medicaid is exempt, these arrangements are exempt from that.  Trisha, do you want to add to that?  That’s where the concern is, in the commercial side, when they are utilizing value-based purchasing, could trigger best price in Medicaid.


TRISH RILEY:  It’s part of the worry, and the politics of some of the rate setting initiatives.  If a state wanted to set rates for drugs in the commercial sector, as Mary Ella had described, and those rates somehow were below best price, it would trigger best price, and therefore, that worry creates a real incentive for Pharma to fight.


MARY ELLA LYNCH:   We have just a couple minutes left.  Go ahead.


AUDIENCE MEMBER:  Hi, I’m Misty Williams with Congressional Quarterly. I have kind of a two-part question. I wanted to talk a little bit about the President’s budget proposal and the pilot project in that, John, can you tell us any details about that in terms of if there is state interest? And also, would it require legislative approval to move forward with something like that? Obviously we are seeing the 1115’s, which is seems like states might think that they need special approval outside of the regular statutes, and also, Cathy, if you could talk a little bit about where you guys are in the 1115 process, and any more specifics about what you guys would hope to include in that?


JOHN COSTER:  Sure.  The five state demo was in the President’s budget, and it was a legislative proposal.  So the assumption is that means administration thinks either it needs or wants to have legislative authority in order to go forward with these demonstrations. I can’t give any more detail, because I just don’t have any. In terms of interest, everyone knows Massachusetts has expressed interest.  I think Arizona, they’ve expressed interest. And I have the fortune, on most times, in talking with state pharmacy directors, and they will say, we would like more flexibility. But I think some of that goes back to the discussion we were having before, in that the Rebate Program brings in a lot of money. And demonstrations in general have to be budget neutral.  So if you’re bringing in half your spend from rebates, and you get more flexibility, in order for demonstration to be successful, you are going to have to find a way to basically compensate for the rebates that you would be losing. So I think this administration has signaled it wants to be flexible. It put forward the proposal; maybe we will hear more about it this afternoon, I just don’t know.  I really just don’t know. But it probably means the administration wants legislative authority to do it — either because it feels like — you know, waivers — I don’t mean to be simplistic, but it’s not like we have a magic — we don’t wave a want with CMS.  Waivers, as I’ve learned — and I’m not an expert at waivers by any means, they are complex.  They are very complex. 1115 waivers, 1915 waivers, 402 waivers — and I’m not saying the states just feel like, just wave this stuff for us, and as you might guess, there is a lot of complexity. Because of this particular issue, I think the administration feels like it wants to have specific statutory waiver to do this for the states.




CATHY TRAUGOTT:   So we are — I’m here talking about it, so we’re interested in pursuing this.  It is complex, and we recognize that from the state side as well. And we have to pair it up with other initiatives that are happening within the state. We have a hospital transformation project that we’ve publicly been talking about that we have to file a waiver to do that. And there’s the — it gets into the complications of, do you have multiple waivers, do you just have a single waiver? What goes into that waiver?  How do you time your waivers? All of that is still up for discussion. So our timing is unclear.


MARY ELLA PAYNE:  We are going to need to wrap up. Before you head out, please do your evaluation forms.  But Shawn also wants to highlight — we still have one second — wants to highlight a really valuable new information booklet.


SHAWN BISHOP:  Sure, and I don’t want to keep you from wrapping up and getting your stuff together.  I will just say this as you’re doing that. We provided this booklet here, when you walked into this meeting. I wanted to give it a little shameless plug, because this is a booklet of resources that the Commonwealth Fund supported. It was written by experts, it was peer reviewed by experts, and also peer reviewed by the health fairs. It has 12 explainers of pharmacy and price related topics. One of the topics is Best Price, and it actually gave the answer that was here on the panel today, about how best price relates to the current pricing issues. Every single explainer in here has a section that talks about how the issue relates to the current pricing issues that we’re facing today, and then it has three articles in the back that are options for reducing drug expenditures or prices. One related to lowering outpatient costs, one related to value-based pricing, which is what we talked about here, and another related composition. So I wanted to give this a shameless plug, and thank you for letting me do that, because I think it’s a great resource.


MARY ELLA PAYNE:  It is an incredible resource, just looking at the Table of Contents. So thanks again for everyone, please fill out your blue evaluation forms. I also would like to give a plug to our next conversation on healthcare costs at our half-day summit on May 24th.  The summit is part of the Alliance for Health Policy’s 2018 Signature Series, Opportunities for Progress, Healthcare Cost in America. So you can look at the


So before we close, I want to thank again the Commonwealth Fund for today’s briefing, making it possible, and for the panelists, I think it was an incredible panel, and really interesting conversation today. So that will be it, hope to see you again at another future Alliance event.