CMS Medicaid Initiative Allows States To Limit Drug Coverage, Keep Manufacturer Rebate Obligations

On Jan. 30, 2020, the Centers for Medicare & Medicaid Services (CMS) announced the new Healthy Adult Opportunity (HAO) initiative through a State Medicaid Director letter, accompanied by a press release and fact sheet. One significant result of the initiative is that it will allow states to limit drug coverage under Medicaid without reducing manufacturer rebate obligations.

The HAO initiative offers states a different Medicaid funding approach, sometimes referred to as “block grants.” A major aspect of that approach will be permitting states to create a closed formulary for certain populations not covered under the state Medicaid plan, thereby excluding drugs from Medicaid coverage. This will have potentially significant consequences for Medicaid patients and their treating providers, as states may exclude from coverage a broad universe of drugs that historically have been covered under Medicaid. Additionally, such a closed formulary will have significant implications for pharmaceutical manufacturers. Despite not receiving mandatory Medicaid coverage for all their covered outpatient drugs, CMS expects that pharmaceutical manufacturers enrolled in the Medicaid Drug Rebate Program (MDRP) will remain obligated to pay Medicaid rebates on drugs available under the limited formulary.

According to CMS, the HAO initiative offers “new opportunities” for states to alter their Medicaid program design. Under the HAO initiative, states may pursue demonstrations under Section 1115(a)(2) of the Social Security Act (the “Act”) that enable them “to provide cost effective coverage using flexible benefit designs under either an aggregate or per capita cap financing model for certain populations without being required to comply with a list of Medicaid provisions identified by CMS.”

Potential breach of a Medicaid Drug Rebate Program“grand bargain”?

The Section 1115(a)(2) demonstrations that states may submit to CMS for approval can include aclosed formulary for populations not covered under the state Medicaid plan. State Medicaid programs may thereby offer narrow formularies, akin to those offered in commercial health insurance markets, subject to comparable limitations. According to CMS, states that implement such a closed formulary will not be subject to the general MDRP requirement to cover all covered outpatient drugs of manufacturers enrolled in the MDRP. Nevertheless, CMS asserts that manufacturers that participate in the MDRP will remain subject to their...