Former U.S. Supreme Court Justice Louis Brandeis popularized the phrase “laboratories of democracy” to describe how a “state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.” Within the federalist framework, state and local governments have some degree of autonomy to act as social “laboratories,” where policies can be created and tested at the state or local level. These experiments in policymaking can be confined to one state or locale, or spread to others, depending on their popularity.
And so it goes with Medicaid. In January of this year, Tennessee became the first state in the nation to obtain permission from the Centers for Medicare and Medicaid Services (CMS) to adopt a closed formulary for outpatient prescription drugs.
A closed formulary offers Tennessee’s Medicaid agency more leverage to negotiate supplemental rebates directly with drug manufacturers. In the meantime, the state will continue to receive statutorily mandated Medicaid drug rebates. Other states will monitor what’s happening in Tennessee closely, and may follow suit.
The Medicaid program is run jointly by the federal and state governments, with each state administering its own Medicaid program, subject to federal oversight. The federal government also contributes more than 50% of the program’s costs.
Adopting a closed formulary enables Tennessee to exclude medications from coverage provided they include at least one drug per therapeutic class on the formulary. As a result, this does diminish patients’ access to the full panoply of prescription drugs, and could have a negative impact on health outcomes. There will be exceptions to the rule. Tennessee Medicaid must cover “all or substantially all” of the drugs required to be covered under the Medicare Part D protected classes policy. The six classes are antidepressants, anticonvulsants, antipsychotics, immunosuppressants, antineoplastics, and antiretroviral drugs. And, the state is obligated to institute an appeals and exceptions process, so that patients may apply for access to non-covered drugs.
For years, state Medicaid agencies and Medicaid managed care companies have wanted to be able to utilize the prescription drug management tools common in both the commercial sector and Medicare Part D. This includes closed formularies.
But, until now state Medicaid agencies have been thwarted in their attempts to establish closed formularies. In June 2019, for example, CMS rejected an application submitted by the Massachusetts state Medicaid agency to obtain a waiver to adopt a closed formulary. At the time, this would have been a first for Medicaid.
Besides closed formularies, other methods of cost containment have proven less difficult to pursue. This includes the use of bulk purchasing power. As soon as he assumed office in January 2019, California’s governor, Gavin Newsom, promised to execute a series of changes to the state’s healthcare system, including granting the Medi-Cal – California’s Medicaid agency – direct negotiating power with drug makers with respect to the prices of certain drugs prescribed to Medicaid beneficiaries. Enacted in January 2021, Newsom’s executive order directs Medi-Cal to establish bulk-purchasing arrangements for “high-priority drugs.” Simultaneously, the state will take control of the pharmacy benefit for all 13 million Medi-Cal beneficiaries — the vast majority of whom previously had their prescription drug benefit administered by Medicaid managed care plans and pharmacy benefit managers.
However, California’s capacity to drive down prescription drug prices will depend on the degree to which the Medicaid preferred list can be a de facto closed formulary. Without the ability to exclude drugs, California’s negotiating leverage is limited.
Other states have been active in creative ways to contain drug costs. For example, in July of 2019, Louisiana’s Medicaid state agency embraced a subscription model, colloquially called the “Netflix model,” for provision and purchase of hepatitis C treatments. In principle, this model implies that the state pays a subscription fee to procure a supply of hepatitis C medications. Here, the supply is however many pills are necessary to treat patients diagnosed with hepatitis C. Louisiana, however, adopted a modified version of the subscription model, in which the state pays a fixed price per treatment up to a certain maximum rather than a lump sum payment to the drug maker. After reaching that cap, Louisiana will receive additional treatments at no cost through the end of 2024.
Several states are pursuing prescription drug payment reform. In 2018, Oklahoma became the first state Medicaid program to implement a value-based pricing initiative, linking payments to a drug’s impact on health outcomes. Oklahoma signed value-based contracts for four drugs: Two long-acting atypical antipsychotics, aripiprazole lauroxil (Aristada) and paliperidone (Invega Trinza); an antibiotic for skin infections, oritavancin (Orbativ); and the epilepsy drug, perampanel (Fycompa). Other states, including Colorado, Massachusetts, and Michigan have laid the groundwork for similar outcomes-based pricing arrangements.
At the state level, novel payment models and methods for Medicaid prescription drug cost containment are gaining traction. In Tennessee’s Medicaid program, the closed formulary is becoming a reality. Other states may decide to follow Tennessee’s lead. Success of the initiative will be measured in terms of the state’s ability to keep a lid on costs, and by whether harm is done to patients by reducing the extent of their access to prescription drugs.