Baker backs rate-setting for high-cost drugs

THE BAKER ADMINISTRATION is seeking legislative authority for MassHealth to negotiate prices directly with the manufacturers of high-cost drugs that have little or no competition and, if that effort fails to produce savings, to put the companies through a rate-setting process followed by regulatory and legal penalties if the firm fails to charge the target price.

The Massachusetts proposal, included in the governor’s fiscal 2020 budget unveiled Wednesday, is part of a broader trend at the state and federal level to rein in the prices of new drugs that can cost as much as $1 million per course of treatment. State officials say 20 drugs recently launched or pending federal regulatory approval are expected to cost $100 million annually after expected rebates are deducted.

The issue has gained some urgency as drugs are the one area seemingly immune to cost control efforts. State officials say MassHealth’s pharmacy budget has grown about twice as fast as other program services over the last four years — 9 percent annual growth versus 4 percent overall.

Gov. Charlie Baker’s proposal is his second attempt to tackle drug pricing. Previously, he sought and failed to win federal approval for a proposal to exclude some high-cost drugs from the MassHealth prescription formulary. That bid was rejected by the federal government, so Baker is now seeking legislative approval for a new approach.

The first step under Baker’s proposal would be negotiating a more favorable price directly with the drug manufacturer. If that effort fails, MassHealth could establish a “target value” for a specific drug using a public rate-setting process. If the drug manufacturer again refuses to budge on price, the administration could refer the company to the Health Policy Commission, which could require the firm to justify its pricing at a public hearing. The Health Policy Commission could also refer the manufacturer to Attorney General Maura Healey, who could prosecute the company for violations of state consumer protection laws.

The latter two steps would only be used for drugs that cost at least $25,000 per person a year or $10 million in the aggregate annually.

It was unclear from briefing materials what the state’s rate-setting process would look like. In other states and at the federal level, regulators are using calculations by third parties or the prices charged for drugs in other countries as reference points in determining a drug’s value.

Drug manufacturers say the cost of developing ground-breaking new drugs is enormous and setting prices to recoup those costs should be left to the marketplace.

“Governor Baker’s proposal to force certain drug manufacturers to pay additional, supplemental rebates on incredibly effective drugs that MassHealth deems too expensive sends a message across the industry that government is going to punish success and that only it can be the final arbiter of drug pricing,” said a statement from Robert Coughlin, president and CEO of MassBio.

Coughlin said MassHealth is already paying significantly less for the same drugs than private insurers. “It’s unclear to me why the governor is focusing his MassHealth cost-cutting efforts here when there are simpler reforms available like eliminating spread pricing by pharmacy benefit managers in MassHealth – a practice that other state Medicaid programs have successfully eliminated after discovering it cost them hundreds of millions of dollars a year,” Coughlin said.

The governor’s proposal does what Coughlin is calling for – requiring pharmacy benefit managers to be transparent about their pricing spreads and rebates and limit their margins. Pharmacy benefit managers are third-party middlemen who administer prescription drug plans for insurers, including MassHealth managed care organizations.

Baker said he believes in and supports the Massachusetts life sciences industry, which produces many of the costly, break-through drugs. But the governor defended the need to take action to rein in pharmaceutical spending.

“It affects a very small number of drugs,” Baker said. “They happen to be a very small number of drugs that have very, very, very big prices on them, and there really isn’t – under current law – a process for determining what an appropriate price is for a lot of those new drugs, which is what those 20 drugs fall into, yet there is a process for determining the price of almost everything else that Medicaid pays for.”

Baker administration handouts said the initiative would yield $80 million in gross savings in fiscal 2020, while a MassHealth fact sheet said the proposal would save $80 million net. An administration official said Wednesday night that both characterizations are accurate. The cost of MassHealth is split between the state and federal government. [This paragraph was updated to reflect the administration claim that net and gross savings are the same.]

David Seltz, executive director of the Health Policy Commission, issued a statement calling the governor’s proposal “a thoughtful approach” to addressing pharmacy prices. “The new review process proposed for HPC is consistent with our mission and current statutory role to provide public oversight and accountability over the main drivers of health care spending growth,” he said.