Allowing public payers to base coverage on a drugs value is an effective way to cut prices

In October President Trump reaffirmed his belief that “Prescription drug prices are out of control.” Food and Drug Administration (FDA) commissioner Scott Gottlieb is trying to speed the approval time for generic drugs, but otherwise the Trump administration has taken few steps to address the problem. It refused to comment on a recently released National Academy of Sciences report on policies to reduce drug spending. Now, Arizona and Massachusetts have presented the administration with an unprecedented opportunity to take action.

Arizona and Massachusetts have separately requested permission from the federal government to deny Medicaid coverage for high cost drugs. Private payers and the Veterans Administration use the threat of exclusion from their approved drug lists, or formularies, to improve their bargaining position vis a vis drug companies. Arizona and Massachusetts would like to do the same for their Medicaid programs.

{mosads}Under the Medicaid Drug Price Rebate program, pharmaceutical manufacturers agree to give Medicaid their “best price” for each drug, which is steeply discounted. In return, Medicaid programs must cover all drugs.

Medicaid programs can require physicians to seek prior approval for costly drugs, but they cannot exclude drugs completely. Medicaid programs use prior approval programs to negotiate additional discounts over and above the Rebate program discount. But Arizona and Massachusetts believe they can do better.

The Medicaid Drug Price Rebate program has its origins in failed legislative efforts by former Sen. David Pryor (D-Ark.) to establish Medicaid drug formularies. Pryor proposed that states be required to solicit bids for drugs and cover the least expensive drug in each class.

Pharmaceutical manufacturers and patient advocacy groups, who strongly opposed the use of formularies, lent their support to an alternative proposal that eventually became the Medicaid Drug Price Rebate program. Thus did a move to require formularies result in their prohibition.

Arizona and Massachusetts also requested the ability to exclude from coverage drugs that cost a lot but do not have a significant impact on outcomes. Many people naively think that the Food and Drug Administration will approve a drug only if it is effective.

However, many drugs are approved on the basis of studies that do not have a control group or examine the impact on so-called surrogate endpoints, which do not necessarily capture whether a treatment improves patients’ health. Among these are some of the costliest drugs for cancer, multiple sclerosis, and rare diseases.

The FDA will probably approve more drugs on the basis of less than solid evidence following passage of the 21st Century Cures Act, which expands the ability of the FDA to approve drugs that have not been tested in a randomized controlled trial.

By subjecting these drugs to extra scrutiny, Arizona and Massachusetts will send a signal to drug makers that evidence matters. If drug companies expect Medicaid programs to cover their costly drugs, the companies should fund research to show that the drugs offer meaningful benefits to patients. In the event that they do not, Arizona and Massachusetts will use the threat of non-coverage to bargain for bigger discounts. These policies will implicitly link the strength of evidence behind a drug to the amount that Medicaid will pay for it.

As with any policy that decreases drug prices and profits, the adoption of formularies by Medicaid could dampen incentives to develop new drugs, especially drugs targeting conditions common among Medicaid beneficiaries. But if the state uses its formulary to exclude or bargain down the prices of drugs with minimal or unproven benefits, there will be little harm to patients.

The effectiveness of drugs approved on the basis of single arm trials or surrogate endpoints has not been conclusively established. Evidenced-based coverage decisions will encourage manufacturers to steer their research and development efforts in more productive directions and put pressure on them to produce higher quality evidence for new drugs.

Pharmaceutical manufacturers should have the leeway to set their prices as they see fit. Insurers should also be free to wield their clout by refusing to cover high cost, low benefit drugs. Allowing public payers to base coverage on drugs value is one of the best approaches for finessing the tradeoff between having low prices today and preserving incentives to develop new drugs in the future. By approving Massachusetts’s waiver, the Trump administration would demonstrate its commitment to reducing drug prices and letting states take the lead in reducing Medicaid spending.

David Howard is a professor in the Department of Health Policy and Management at Emory University.