Academy of Sciences Recommends Federal Strategies to Lower Rx Prices, But Some States Are Already Taking Action

The National Academy of Sciences recently released a report recommending several strategies to curb prescription drug costs that attempt to strike a balance between reining in prices while fostering continued drug development and innovation.

Several of the academy’s recommendations are already getting trial runs in states, which are experimenting with innovative cost-savings approaches in order to reduce drug costs.

Specific policy recommendations in the academy’s report, include the following:

  • Expand federal purchasing power: This allows the federal government to use its purchasing power to negotiate drug prices. This would also include negotiations on behalf of state agencies wishing to be represented.
  • Enhance formulary design flexibility: If government payers have more flexibility to control which drugs are in its formulary (to Medicare, employees etc.), it would strengthen its negotiating power with drug manufacturers, especially if it can prevent the sale of an over-priced drug through its health plan’s formulary.
  • Revise the rebate program: Amend the Medicaid Drug Rebate Program provisions to allow certain drugs to be excluded from coverage.
  • Define the value of a drug: Refine methods for determining the value of prescription drugs to inform formulary design, price negotiations, and alternative payment models.
  • Increase transparency: Increase drug price transparency by requiring disclosure of net price (including discounts and rebates) as well as the disclosure of net drug price increases that exceed annual increases in the consumer price index to Congress.
  • Establish a fixed-fee drug reimbursement system: Move to a fixed-fee provider reimbursement system for drugs, rather than reimbursing providers based on drug list prices.

“As the federal government considers the thoughtful recommendations in this excellent report, states can be the laboratories of policy innovation, testing new ideas to control drug prices that can inform federal policymakers,” said NASHP’s Executive Director Trish Riley. “States have already advanced some of the key recommendations from the report, from outlawing the use of coupons in California to promoting drug formulary redesign, value-based purchasing, and transparency.”

On a state level, here are key examples of what policymakers are doing to control drug costs in their home states:

  • Transparency: Several states, including Vermont, Nevada (for diabetes drugs), Maryland (for generic drugs), and most recently California, have passed drug price transparency laws. This type of legislation typically requires manufacturers to justify price increases above a certain threshold. Model legislation is available at NASHP’s Center for State Rx Drug Pricing, an initiative funded by the Laura and John Arnold Foundation. While transparency is a great place to start, some of the following efforts may have more teeth to achieve immediate drug cost relief. Some of these recently-approved transparency laws (e.g. Nevada and Maryland) are now facing legal challenges from the pharmaceutical industry.
  • Formularies: Massachusetts has requested a Section 1115 Waiver to enable the state to negotiate drug prices for its Medicaid program and to exclude drugs with “minimal” value. Currently, Medicaid programs, as a condition of the federal rebate program, must cover all FDA-approved drugs. Massachusetts is seeking to boost its negotiating power by achieving greater flexibility to decide which drugs are included in its formulary. NASHP is funding an effort in Delaware that enables its Medicaid program to work with partners, including state employee benefit programs, corrections, and hospitals, to design a common preferred drug list for certain classes of drugs to lower net costs.
  • Rebates: This approach uses formulary design as leverage to negotiate supplemental rebates: New York this year established a cap on its Medicaid drug spending. If the cap is exceeded, the state is authorized to negotiate with pharmaceutical manufacturers for additional rebates. If the state is unable to reach an agreement for supplemental rebates, certain drugs may be referred to the NY Drug Utilization Review Board, which conducts a “value assessment” of the product. The board can look at research, development, and marketing costs, in addition to the drug’s therapeutic benefits relative to its cost. If a supplemental rebate agreement is not reached at this point, the drug could be removed from the managed care program formulary.
  • Payment Reform: States are also working to implement value-based purchasing (VBP) arrangements with manufacturers to pay for drugs based on value rather than volume. NASHP awarded Oklahoma’s Medicaid program a grant to fund the data analysis necessary for the state to implement a VBP agreement with a drug manufacturer. This agreement would allow the state to capture additional rebates if the drug under-performs in terms of certain agreed upon outcomes. Oklahoma is part of a group of states participating in SMART-D (State Medicaid Alternative Reimbursement and Purchasing Test for High-Cost Drugs), an effort led by the Center for Evidence-based Policy and funded by the Laura and John Arnold Foundation to advance APMs in state Medicaid drug purchasing. NASHP also awarded a grant to Colorado’s Medicaid program to design a new payment model for physician-administered drugs, a costly group of drugs including chemotherapy and other specialty agents.

These state approaches reflect recommendations made by NASHP’s Pharmacy Costs Work Group, which is a group of state officials convened by NASHP in 2016 to identify the most promising options for states facing drastic and unpredictable increases in drug spending.

NASHP’s Pharmacy Costs Work Group issued a brief with policy recommendations that has guided NASHP’s efforts in this area. These resources include the development of a range of resources for states such as model legislation, white papers on key legal issues including strategies to preempt legal challenges, a state legislative tracker, and other resources available at the Center for State Rx Drug Pricing.