Taming MassHealth drug costs

State should explore 'value-based' purchasing

IT’S ELECTION SEASON, and the focus of politicians has again moved to “skyrocketing” drug prices. When officials with the Massachusetts Medicaid program, MassHealth, and other senior state officials recently threatened to limit spending on pharmaceuticals,, reporters breathlessly reported that something must be done about “out of control” drug prices.

One might ask, how much did drug costs really rise in 2017? The answer nationally is a mere 0.6 percent, far less than the inflation rate. And per capita spending on medicine declined 2.2 percent during 2017, while total out-of-pocket costs that consumers pay at the pharmacy counter over a 30-day period have dropped by an average of $1.54 since 2013. This flat or declining trend line is driven by the fact that many brand names drugs used by millions of patients, e.g. Lipitor and Nexium, have lost patent protection and dropped precipitously in price as generic drugs.

Then why the hysteria among MassHealth officials?

Last year, when MassHealth officials sought a federal waiver to restrict patient access to certain costly drugs, they pointed out that drug costs in the MassHealth program had been rising at an annual rate of 13 percent since 2010. This is a very misleading statistic as enrollment in the MassHealth program grew from 1.2 million in 2010 to almost 1.8 million in 2018. When you put a half million more people into a government program, costs tend to grow.

However, one genuine reason for greater than average drug cost growth in MassHealth is that the program has a larger portion of patients with challenging conditions and disabilities who tend to be taking more expensive medications. A good percentage of MassHealth patients are prescribed specialty drugs, which tend to be defined as drugs that cost more than $6,000 per year. During 2017, spending on specialty drugs rose to 42.3 percent of total Medicaid drug spending, the highest percentage on record.

This trend is being driven by the fact that biotechnology laboratories, like the ones prevalent in Cambridge, have discovered a larger number of promising drugs for difficult diseases. Last year, half of the new drug approvals were for “orphan diseases,” i.e. drugs for rare diseases found in smaller populations. Drug prices tend to be higher for diseases with a smaller number of patients for obvious reasons: companies must still spend a great deal on research and development, but they will have fewer customers. In addition, these drugs tend to be large molecules that are more expensive to manufacture.

Some might look at this situation as a glass being half full. Massachusetts is home to the very companies that are discovering amazing new drugs to treat difficult diseases and those drugs are being made available to vulnerable populations in the MassHealth program. This is a problem?

Nonetheless, Massachusetts taxpayers want to be reassured that the expensive drugs that they are buying for MassHealth are actually working. It is not uncommon for patients to be put on very costly drugs that turn out to be ineffective because of genetic or other reasons specific to individual patients. Many patients are then moved to other drugs in hopes of finding one that is effective. Why should the Commonwealth pay full fare for the drugs of patients who received little or no benefit?

State Medicaid programs have a tool called supplemental rebates which they can use to demand deeper discounts for all sorts of reasons. Oklahoma just received permission from the federal government to use the supplemental rebate mechanism to lower of the price of drugs that turn out to be ineffective. Using supplemental rebates, states could require drug manufacturers to “rebate back,” i.e. write a refund check to the state, when drugs prove ineffective for certain patients. Here in Massachusetts, Harvard Pilgrim has been a leader in writing these value-based contracts in the commercial health insurance market.

As Gov. Baker rightly pointed out at last week’s Health Policy Commission hearings on cost trends, “Thirty drugs account for $600 million, or 30 percent of our total pharmacy spend at this point.”

Meet the Author

William Smith

Visiting Fellow, Pioneer Institute
Fair enough, but has the MassHealth program looked at the idea of requiring supplemental rebate payments for those 30 drugs when they are not effective for particular patients? Shouldn’t this option be tried before price controls or wholesale restrictions are placed on innovative new drugs?

Tying drug prices to effectiveness is called “value-based” purchasing. The Trump administration recently hinted that they are going to make regulatory changes that would allow value-based purchasing to expand. Given the huge presence of the biopharmaceutical industry in Massachusetts, and the example already set by Harvard Pilgrim for commercial payers, shouldn’t MassHealth also look to be an innovative leader among Medicaid programs?

William Smith, PhD, is visiting fellow in life sciences at the Pioneer Institute.