Medicaid Block Grants: Allowing More State Flexibility To Limit Rx Coverage?

Medicaid block grant funding mechanism, which could allow states to bypass coverage requirements in the Medicaid drug rebate program, surfaces in House American Health Care Act.

The latest version of the American Health Care Act would allow states the option of choosing to get their federal Medicaid contribution in the form of a block grant and might also permit them to reduce the number of prescription drugs their Medicaid programs cover.

The coverage flexibility could allow for an exemption from the Medicaid drug rebate program, which requires Medicaid to cover drugs that are subject to statutory rebates (see box).

The block grant provision, which was added to the bill by House Republican leaders on March 20, is framed as a way to give states more flexibility in designing their Medicaid programs. It offers an alternative to the bill's capped per capita federal contribution system. Both alternatives would replace the current open-ended federal contribution to Medicaid.

House Republican leaders and the Trump Administration are pushing to move the American Health Care Act quickly to the House floor for a vote. However, the bill continues to draw strong criticism from both conservative and moderate Republicans so its prospects are unclear.

Regardless of whether the AHCA proceeds through Congress as planned, the emergence of a block grant approach that may be tied to a rethinking of the Medicaid drug rebate program is notable.

It reflects a push for more formulary controls by state Medicaid directors and Medicaid health plans scarred by the budget strains produced by Gilead Sciences Inc.'s high-cost hepatitis C treatment Sovaldi (sofosbuvir) and wary of similar challenges with other pricey treatments. (Also see "Medicaid Reform And Rebates: State “Opt-Out” Proposed At Hearing" - Pink Sheet, 13 Feb, 2017.)

As written, the per capita cap approach does not appear to interfere with the requirements of the Medicaid drug rebate program. But the block grant approach could.

Medicaid Drug Rebate Program

• Authorized by Social Security Act Sec. 1927
• Involves CMS, state Medicaid agencies and participating drug manufacturers and helps to offset the federal and state costs of most outpatient prescription drugs dispensed to Medicaid patients.
• Requires a drug manufacturer to enter into a national rebate agreement with the HHS Secretary in exchange for state Medicaid coverage of most of the manufacturer’s drugs.
• Rebates, which are based on statutory formulas, are paid by drug manufacturers on a quarterly basis to states and are shared between the states and the federal government.
• For innovator drugs, the base rebate equals the greater of 23.1 % of the average manufacturer price (AMP) or the difference between the AMP and the best price available for the drug in any US market sector.
• For generics, rebates equal 13% of the AMP.
• Manufacturers are also liable for additional rebates when the average manufacturer price for their drugs increase by more than a specified inflation factor, which can significantly increase the overall rebates paid.

"Theoretically, as the bill is currently written, states could pursue any number of formulary designs under a block-grant program, although it is possible that CMS could establish some 'guardrails' in its implementing regulations," Foley Hoag health policy attorney Ross Margulies explained in an email.

That means Medicaid programs could use non-coverage as leverage in formulary negotiations and extract rebates from manufacturers in return for access, as is done in Medicare Part D. However, the bill does not go into detail about potential changes to the rebate program. The block grant funding would only be applicable to "traditional" Medicaid adult and children populations under the bill. Funding for the much higher-cost elderly and disabled would be calculated through the per capita allotment.

The bill says that states receiving block grants must cover certain types of care such as hospitalization and surgery, as well as "prescribed drugs [and] medicines." (In that sense, the block grant program actually creates a mandatory drug benefit that does not exist in Medicaid today – currently states are not required to offer drug coverage, though all do).

However, the bill also includes a "broad exemption" from the requirements of Title XIX of the law, which includes the Medicaid rebate program, and thus the mandate that Medicaid programs cover every FDA approved drug, Margulies pointed out.

The bill says states opting for block grants instead of per capita contributions would be allowed to determine "the types of items and services, the amount, duration, and scope of such services, the cost-sharing with respect to such services, and the method for delivery of block grant health care assistance under this subsection, which shall be instead of the such types, amount, duration, and scope, cost-sharing, and methods of delivery for medical assistance otherwise required under this title…."

Manufacturers Fear That Rebates Would Only Multiply

In theory, manufacturers might be better off if they are no longer subject to mandated Medicaid rebates, which can equal 50% to 70% of the price of an established drug when price inflation rebates are factored in, according to some companies.

However, manufacturers worry that states are unlikely to forgo the revenue produced by the mandated rebates and any changes to the system might involve adding more supplemental rebates to what is already required. (Also see "Medicaid Drug Formulary Ideas Floated, But US Manufacturers Are Skeptical" - Pink Sheet, 1 Mar, 2017.)

"Generally, manufacturers are concerned about the extent to which, under the [block grant] approach taken, states should receive increased ability to control utilization of drugs under the Medicaid program in order to husband the resources provided in a block grant as effectively as possible," Sidley Austin health care practice attorney Bill Sarraille said in an interview.

"That at least opens the potential that what emerges out of the legislative process could involve a fundamental rethinking of the basic assumptions under which the MDRP has traditionally" operated, he pointed out.