Proposed Per Capita Cap on Medicaid Payments – Manufacturer Implications

Special thanks to co-writer Neelabh Saxena, Associate Director Pricing, Contracting, and Market Access. 

On March 24, 2017, the Republican leadership pulled back the American Healthcare Act from a vote, leaving Obamacare in place for the near future; however, GOP discussions revealed limited resistance to fundamentally changing Medicaid financing from its current basis to blocked grants or per capita caps, so we can expect any future bill will contain similar provisions to what is discussed in the following article.

Prior to the March 24 action, Republican leadership released the draft American Healthcare Act on March 6, 2017. Although media focused on the impact to the individual insurance mandates, the plan also proposed to fundamentally alter rules governing Federal–State Medicaid cost sharing. Those initially proposed changes, if brought back to the table and implemented, could have significant implications for pharmaceutical manufacturers.

This article summarizes those initially proposed changes and related key manufacturer considerations.

Background: Under current law, the Federal government and State governments share in the financing and administration of Medicaid. In general, States pay healthcare providers for services to enrollees, and the Federal government reimburses States for a percentage of their expenditures. All Federal reimbursement for medical services is open-ended, meaning that if a State spends more because enrollment increases or costs per enrollee rise, additional Federal payments are automatically generated.

Under the initially proposed legislation, beginning in 2020, the Federal government would establish a limit on the amount of reimbursement it provides to States. That limit would be set by:

  • Calculating the average per-enrollee cost of medical services for most enrollees who received full Medicaid benefits in 2016 for each State;
  • The Secretary of Health and Human Services would then inflate the average per-enrollee costs for each State by the growth in the consumer price index for medical care services (CPI-M);
  • The final limit on Federal reimbursement for each State for 2020 and after would be the average cost per enrollee for five specified groups of enrollees (the elderly, disabled people, children, newly eligible adults, and all other adults), reflecting growth in the CPI-M from 2016 multiplied by the number of enrollees in each category in that year;
  • If a State spent more than the limit on Federal reimbursement, the Federal government would provide no additional funding to match that spending.

The key takeaway here would be that instead of matching funds based on annual costs, States would have had fixed funds available to finance Medicaid starting in 2020. The initial allotment would have depended on the average enrollee cost and mix in 2016. Subsequent growth in would have been directed by shift in mix and the established uniform inflation index.

With less Federal reimbursement for Medicaid, States would have needed to decide whether to commit more of their own resources to finance the program at current-law levels or whether to reduce spending by cutting payments to healthcare providers and health plans, eliminating optional services, restricting eligibility for enrollment, or by arriving at more efficient methods for delivering services. Given the political ramifications of dropping or reducing coverage to current Medicaid enrollees, it is very likely that in a short term scenario, States would have attempted to maintain current coverage and then look for additional sources of funding to manage any cost increases.

One candidate for such additional funding might be rebates paid on pharmaceutical drugs. According to a 2015 PhRMA report, on average, pharmaceutical expenditure accounts for ~ 8–9% of Medicaid budget pre-rebates. Current statute requires drug manufacturers to sign a Federal Medicaid Rebates Agreement and pay rebates to States for all covered outpatient drugs. This guarantees manufacturer access to a large patient population and enables States to reduce overall Medicaid prescription expenditures.

However, terms of the Federal rebate agreement also indicate that State Medicaid agencies cannot completely exclude coverage of any products from manufacturers participating in the rebate program. While Medicaid programs may use prior authorization, step therapy and other tools to manage use of these drugs, they must provide coverage of almost all drugs to a certain degree.

In contrast to commercial payers, States also have limited flexibility to use patient cost sharing (co-pays) as a means of reducing usage of higher cost prescription drugs. Medicaid allows only nominal cost sharing, and few States enforce collection of copayments.

To summarize, States cannot exclude certain drugs from coverage and have limited flexibility to either modify patient behavior or claw back portion of drug costs through higher co-pays. This means to maintain current coverage, States would have to get creative to generate additional funds; clawing back more money from manufacturers would be one way to do so.

Key considerations for manufacturers in the initially proposed scenario would have been to:

  • Understand overall and group-specific Medicaid exposure by State: It would be important to understand average Medicaid cost per enrollee, contribution of drug costs to overall cost, distribution of revenue by Medicaid and also sub-segment into the States and the five proposed sub-populations;
  • Consider price increases: If average enrollee cost in 2016 would have driven the baseline Federal funding, exploratory analysis could have been undertaken to ensure that the average enrollee cost accounts for the higher list price before inflation penalties came into play; however, given political rhetoric around price increases, that may not be prudent;
  • Expect increased pressure from States to justify prices for new drugs: If the growth in Federal funding would have been restricted to a uniform inflation index, any new high-priced specialty products, additional indications or price increases that disproportionately impact a certain sub-group and which may have had a significant budget impact may have necessarily mandated extra scrutiny. State formulary boards might have expected budget impact analysis prior to deciding formulary positioning and then use that as a basis to negotiate higher rebates;
  • Expect increased demand for free drugs and other patient assistance programs: If the States decided to restrict Medicaid eligibility, it would be logical to expect increased demand from current consumers that are locked out of coverage. With the recommendations around penalties related to break-in insurance, we would then also expect a Coverage Gap situation similar to Medicare Part D, in which it might be prudent to provide financial assistance to consumers so that there is minimal break in prescription drug coverage;
  • Expect increased State focus on tiered design and stringent formulary management: States would likely increase efforts to reduce pharmaceutical expenditures with tiered benefit plans and more innovative formulary rebates. Manufacturers would then expect an increase in the number and complexity of supplemental rebate agreements. Additional co-pay assistance may have been required for price sensitive Medicaid patients to reduce impact of tiered benefits. In addition, States would likely then apply more pressure to offer supplemental rebates for better formulary positioning versus competitors. Similar to commercial managed care plans, formulary management would become more important in Medicaid. Manufacturers would need to review their current supplemental agreements and account for increased rebates and operational resources in their long-term plans;
  • With fixed allocation of per capita costs, expect an increase in Managed Medicaid plans and Patient Cost Management: There would continue to be a shift towards Managed Medicaid plans in which States partner with commercial entities to reimburse them on a per capita basis for lives covered. Manufacturers would have to be more creative and partner with managed care plans, State governments, healthcare providers, communities and pharmacies to ensure a Medicaid covered patient is managed in a cost-effective way.

Although the initial American Healthcare Act proposal was tabled, and modifications can always be expected to any proposed legislation, manufacturers should consider scenario planning exercises to determine the impact of any future proposals that may contain elements or iterations of this initial proposal.