Fundamental Changes in Medicare Drug Access on the Horizon

By Jason C. McKenney
The Pitfalls and Unintended Consequences of Value-Based Payment Arrangements and Costs Savings Initiatives for Prescription Drugs.

The price of branded drugs has remained a constant feature in the political and regulatory arenas for several years, to the degree that presidential nominees from both parties have announced specific plans to lower drug costs for Medicare.These are not merely idle concerns. A recent study published in the Journal of the American Medical Association found that from 2007 to 2018 net brand drug prices increased 60%, or 4.5% per year—twice the inflation rate.2 AARP has reported similar retail-level pricing trends for Medicare patients, noting a greater increase of 9.7% per year for “specialty drugs,” typically more complex products used to treat rare and chronic disorders.3 The AARP has been at the forefront of this issue, highlighting that Medicare patients take “on average 4.5 brand name prescription drugs on a chronic basis,” amounting to an “annual cost of therapy [of] $38,000—almost 25% higher than [their] median annual income.”4   

To great fanfare, this summer, the Center for Medicare and Medicaid Services (“CMS”) announced new regulations “as part of President Trump’s longstanding commitment to lowering drug prices.” The proposals expressly endorse a potentially significant cost savings measure for purchases of prescription drugs known as “value-based purchasing arrangements” (“VBPA”).  As CMS Administrator Seema Verma explained, “value-based payment in healthcare involves basing payment on improvement in patient outcomes.”  In other words, theoretically attempting to identify the best drug for the best value, which would represent a potentially seismic shift away from the current payment system based on the volume of drug purchased, which many blame for the increase in drug prices.5 The proposed additions to the Medicare regulations, in particular how to calculate Best Price under a VBPA, should provide drug manufacturers “flexibility to enter innovative value-based purchasing arrangements, according to CMS.”6

Nonetheless, legitimate concerns exist over VBPA models in the prescription drug context, including (1) doubts over their potential for wide-spread utility, (2) unintended consequences on innovation and patient access, (3) the potential increase in payments on a bundled basis, and (4) increased Anti-Kickback Statute compliance costs. Such concerns raise the prospect of whether VBPAs represent an equitable policy solution to lower prescription drugs’ prices.  

The First Flaw:

Inherent Uncertainty in VBPAs and Prioritization of Cost Savings Can Dampen Innovation, with Fewer Therapies Brought to Market and Reduced Patient Choices

As Administrator Verma acknowledges, VBPA models for brand name drugs remain in a state of infancy.7 Notably, the proposed regulations contain virtually no information on the appropriate quality metrics to use generally or for use in a therapeutic class. The industry has not developed guidelines to define the quality or economic value metrics for VBPAs, such as whether or when quality metrics should be measured by process or clinical outcomes. There is nothing on whether the actual payment structures themselves will borrow from accepted methods, such as shared savings, bundled payments, shared risk, and global capitation, instead of accepting new designs.8  Drug pipeline candidates and molecules in early or mid-stage development need this crucial guidance to develop financially viable VBPAs. Yet little visibility exists concerning the precise metrics CMS and Medicare will ultimately embrace. 

To fill this chasm, prudent drug companies have already invested potentially significant funds in designing and implementing new studies and finding useful comparator data, at or near the start of a molecule’s life cycle, to shape later discussions with the agencies proactively. To effectively create robust value metrics that properly reflect quality, a drug manufacturer should partner with provider organizations with expertise in the relevant therapeutic area, develop comprehensive patient treatment planning and care coordination regimens, and greatly expand outreach and engagement with patient advocacy groups and an array of other stakeholders. A survey of industry stakeholders confirmed “limited disease-specific clinical quality measures, including those reflecting patient preferences, in value-based payment models” actually exist. And that same survey identified a compelling need “for adoption of a broader set of quality measures tied to long-term clinical outcomes.”9 To further that effort, new quality metrics should reflect the most important parameters for truly evaluating a drug’s efficacy, patient outcomes, and resulting value.  In addition, metrics should integrate and evaluate the product as part of an overall disease management program, one that minimizes the reward for short-term outcomes but rather prioritizes long-term health care solutions. For instance, the value of a hypothetical cancer drug, and payments to the manufacturer, should increase if the remission rate four years after therapy is lower than comparator drugs. 

Absent the creation of novel and broader quality criteria unmoored from short-term quality metrics, drug companies will have difficulties proving value, especially for innovative products, and therefore will likely see reimbursement rates fall, have products excluded from Medicare Part D formularies entirely, or placed on a disadvantaged formulary tier. This concern exists because of the “the chance that the selected performance measures will ‘bend’ treatment patterns, with preference for certain types of programs.”10 In other words, once Medicare widely adopts specific quality metrics and preferred VPBA structures, access to formularies may be challenging. These are perfectly acceptable innovative drugs that, for whatever reason, do not perform like the VBPA’s metrics. Indeed, many of the limited number of VBPA models have adopted an unduly crabbed approach that emphasizes improvement in financial goals over a rather short medical time frame, based on prevailing standards of care, thereby making it difficult for manufacturers to demonstrate the value of new technologies. These misaligned incentives could promote VBPAs for older therapies with historic standards of care, squeezing out provider adoption and patient access to breakthrough therapies that challenge existing norms.  

For these reasons, the inchoate VBPN models for prescription drugs will likely result in diminished investments in research and development by manufacturers, with a natural reduction in innovative new products coming to market and patient access. If the stated goal of the proposed changes is to “foster” and “encourage innovation,” it would be reasonable to harbor concerns that the objective may not be feasible.11

The Second Flaw:

Unintended Consequences and Medicare’s Use of Sole-Source Formulary Listings

To save costs, in recent years, Medicare has allowed Part D plans to include in their formularies only a single product in some therapeutic class. This is also known as a “sole source” placement or listing. Such a sole-source placement is most prevalent where another branded drug serves as direct competition to the preferred product. To obtain additional discounts from drug manufacturers, part D plans and their pharmacy benefit managers (“PBMs”) create a competitive pricing war for the right to the sole-source listing based on which company offered the most rebates and discounts. This practice—combined with Medicare surpassing commercial insurance as the largest drug purchaser—has enabled Medicare to pay the lowest prices on the market today.  

 “Sole-source” listings will likely increase under VBPAs for at least two reasons.  As noted, the purpose of a VBPA is to identify the “best” drug for the “best” value. Upon selecting a winner, it is economically rational for Medicare to place that drug on the most preferred formulary tier with a sole-source listing, thereby maximizing cost savings. As a result, drug companies will likely recalibrate research and development expenditures away from less-sexy-but-still-viable, next-generation products in longstanding therapeutic categories. Their crowded nature makes demonstrating quality difficult and towards disease areas having unmet or under-met needs that carry the potential for higher prices. And by partnering with customer and provider groups (and working with regulatory agencies), a drug company can mitigate the overall risk that its innovative drug does not qualify for a VBPA and increase the chance of a sole-source formulary listing.  However, these products often fall within the group of more expensive “specialty products.” The potential absence of a price constraining competitor in the market, combined with the protection of a sole-source formulary listing, may result in a product having an increased chance of achieving monopoly power and the ability to raise prices, potentially undermining the primary cost saving objectives of the proposed regulations.   

Second, the proposed regulations include provisions that may supercharge the pricing wars for a sole-source designation. According to CMS, the proposal will “remov[e] there requirement that certain Part D plans have to ‘meaningfully differ’ from each other.”12  In other words, under the current rules some Medicare plans could have multiple branded drugs in a formulary’s therapeutic class, while other plans could opt for the sole-source approach. However, under the proposed changes, all plans can elect the sole-source pathway, enabling broader cost savings. However, in light of increasing sole-source formulary listings, the ever-expanding purchasing power of Medicare, and the commercial insurance market adopting similar VBPA models, it is not inconceivable that Medicare’s policy sole-source preferencing could effectively hobble the losing product and raise barriers to entry that deter alternative therapies being developed in the future. Should this scenario occur, patients could experience diminished access to viable therapies and, over the long run, reduced consumer choice in the form of fewer new product launches. At worst, these market dynamics might enable the winning product to achieve or facilitate the use of a monopoly position. Indeed, branded drug companies already confront this precise antitrust risk, and the proposed changes and potential cost-saving diktats seem likely to exacerbate it.13  

These examples illustrate how well-intentioned changes in regulations and policy goals create incentives where market participants may engage in conduct that may potentially undermine the objectives of those very changes. This lose-lose dynamic should be avoided. Drug companies cannot, and should not, be subject to potentially greater levels of antitrust scrutiny (and ultimately liability) as a result of a regulatory system structured and implemented to reflect CMS’s and Medicare’s apparent objective—in short, an almost single-minded focus on reducing costs.14 Yet CMS and Medicare likewise deserve reasonable cost relief, albeit relief not swept away mistakenly due to their regulatory preferences. If VBPAs continue, they must be built on robust and long-term quality metrics that facilitate equal risk sharing, while sufficiently protecting drug companies that are increasingly intertangled with regulators to protect sufficient investments in innovations and patient access. 

The Third Flaw:

The Bundled Payment Method 

CMS has previously experimented on a limited basis with VBPA models in hospitals and other in-patient settings in the Bundled Payments for Care for Improvements program (“BPCI”).  From 2014 to 2018, the agency conducted an initial pilot program that showed preliminary success.15 Thereafter, the Trump Administration has substantially expanded the program.16  

The VBPA models in the BPCI program were structured to pay providers on a bundled basis for treating pre-determined “episodes” of care. The provider is responsible for the total cost of care, including costs of labor, medical devices, complications, post-acute care, and readmission. All expected costs associated with treating a distinct medical episode are aggregated into a single target price. If the total expenditures for a participant’s episode fall below the target price, the provider would receive additional CMS compensation, and vice versa. BPCI was intended, much like the recently proposed regulations, to align provider incentives better, reduce costs, and improve outcomes.

Given the success in some aspects of the BPCI program and its growth, it is reasonable to assume bundled payments will play some part in VBPA structures for drug products. These payments present two separate and distinct potential problems. First, bundled payments for medical devices have incorporated a minimal number of quality measures. As a result, providers in the hospital setting may not fully appreciate an innovation’s value, especially if the VBPA’s quality metrics emphasize short-term horizons. Tellingly, the authors of a 2018 paper published by the University of Pennsylvania determined not only that “less is known about the effect of bundled payments for chronic health conditions,” but more troubling, “early evidence suggests that cost and quality improvements may be small or non-existent."17 Therefore, under the current BPCI method, providers may not get compensated for using technology that delivers quality improvements, which will result in device companies reducing research and development and support of devices in the field. The BPCI initiative now utilizes “almost exclusively lower utility implants without respect to patient need.”18 Based on these experience, there is reason for concern whether viable VBPAs using bundled payments can be developed for a suite of drugs used to treat chronic conditions, which often fall within the category of more expensive “specialty drugs.”

Second, asking drug companies to increase the number of bundled offerings, potentially including integrated services, runs the risk of fostering enhanced and unfair antitrust risk.  While multi-product bundling antitrust claims remain difficult to prove, the practice itself is rather prevalent given the discounts provided by manufacturers. The restrictive harm of bundling turns on the fact that a single supplier (or group of suppliers working together) possess a monopoly over an available product and leverages that power to coerce purchasers to obtain additional products (some of which they may not want). While, in contrast, a competitor on the market or seeking to enter the market cannot recreate the suite of products on a rational economic basis.19 Currently, multiple drug manufacturers concentrate research and development in specific disease areas and, as a result, develop complementary products. If bundled payments become a common payment structure for a VBPA model, branded manufacturers would have increased incentivizes to develop a bundle of products and integrated services for use in treating a specific medical condition, just like the use of bundled payments in the BPCI program. A potential consequence of possibly enhanced competition concerns would be for a manufacturer to pull back on bundled offerings, potentially depriving patients of procompetitive lifesaving medicines, while simultaneously diminishing the likelihood Medicaid achieves its cost-savings goals. Another lose-lose proposition.    

The Fourth Flaw:

Increased Compliance Costs

As explained in CMS’s proposed regulations, VBPA models are structured so that one or more sub-optimal patient outcomes occur, then the manufacturer makes additional payments to Medicaid due to the drug’s failure to meet quality metrics in the VBPA.20 However, the nature, form, and timing of such payments to CMS, Medicare, or a plan’s PBM can have significant consequences. Effective January 1, 2020, The Office of Inspector General of the Department of Health and Human Services (“OIG”) removed from the safe harbor in the Anti-Kickback Statute discounts and rebates paid by drug manufacturer to Medicare Part D plans, Medicaid MCOs, or PBMs acting on their behalf.21 Payments from manufacturers in the form of up-front discounts and later-reconciled rebates to the above entities as part of a VPBA model could very well fall outside the Anti-Kickback Statute safe harbor and result in civil and/or criminal penalties.  

However, the statutory discount provision has the potential to protect such payments, including for “a discount or other reduction in price obtained by a provider of services or other entity under a Federal health care program if the reduction in price is properly disclosed and appropriately reflected in the costs claimed or charges made by the provider or entity under a Federal health care program.”22 Therefore, a manufacturer in a VBPA should ensure that the underlying agreement with Medicaid (1) characterizes risk-sharing payment in form and substance as “a discount or other reduction in price,” and are not in substance a rebate; (2) disclose upfront in the agreement the conditions that would trigger the making of such payments; (3) impose of Medicare the obligation that the reduction in price is appropriately reflected in its claimed costs; and (4) mandate that the payment is to be only received directly by Medicare, and not a PBM acting on its behalf, because payments to PBMs do not appear to fall within the scope of a statutory discount provision, as PBMs are not a “provider” or an “entity under a Federal health care program themselves.23  


Here For Now, But What to Do?

The federal health care agencies and members of both political parties have legitimate concerns over brand name prescription drugs’ prices and the right to remedy their perceived ill effects. However, for the reasons discussed above, it is also legitimate to question whether VBPAs are the solution for appropriately balancing the competing policy objectives of reducing prescription drug costs and providing brand name companies a fair opportunity to prove their drugs’ value. Compounding these issues, the structure and utilization of VBPAs for prescription drugs may create strong incentives for branded manufacturers to reduce investments in innovation and, ultimately, diminish patient access to new or existing therapies. Finally, the proposed regulations have the potential to create regulatory dynamics in which the potential for drug company pricing power might increase and threaten to wipe out any savings. This non-optimal outcome should be avoided.         

Indeed, President Trump has just recently signed an executive order commanding the Health and Human Services Secretary to develop regulations that would peg the Medicare price of certain “high cost” drugs where “insufficient competition” exists to the lowest priced charged for the same drug in a member country of the Organization for Economic Co-operation and Development. This is an interesting proposal worthy of further consideration. It directly addresses one of the key flaws in the global system for prescription drugs, namely that OECD counties effectively free-ride on the research and development costs borne by U.S. manufacturers in the form of lower prices through their nationalized public healthcare systems.24 While cutting drug prices in the U.S. under this regime could still reduce innovation, one potential outcome is that manufacturers in other countries are incentivized to increase their R&D expenditures to fill the gap.   

Not withstanding the potential inconsistencies between the Executive Order and VBPAs approaches for reducing drug costs, it should be assumed that VBPAs are here to stay for the foreseeable future. Drug companies must hold Medicare to their promise of truy value-based metrics. Industry stakeholders diligently observe whether VBPAs are in fact fulfilling their intended purpose and if new or alternative payment models exist that could better align participants’ incentives.   


1 Alex Keown, Biospace, July 16, 2019; CMS Press Release, “CMS Issues Proposed Rules to Empower Commercial Plans and States to Negotiate Payment for Innovative New Therapies Based on Patient Outcomes, dated Jun 17, 2020 (announcing proposed regulation “as part of President Trump’s longstanding commitment to lowering drug prices”).  

2 Inmaculada Hernandez, et al., Changes in List Prices, Net Prices, and Discounts for Branded Drugs in the US, 2007-2018, JAMA. 2020;323(9):854-862. 

3 Stephen W. Schondelmeyer, et al., Trends in Retail Prices of Prescription Drugs Widely Used by Older Americans: 2017 Year-End Update, Sept. 2019 (AARP Public Policy Institute).

4 Dena Bunis, Prescription Drug Prices Increase by Double the Rate of Inflation, Sept. 19, 2019 (AARP Public Policy Institute); Leigh Purvis, et al., Rx PriceWatch Reports, June 2019 (AARP Public Policy Institute).

5 Seema Verma, CMS’s Proposed Rule on Value-Based Purchasing for Prescription Drugs: New Tools for Negotiating Prices For The Next Generation of Therapies, June 17, 2019.  

6 CMS Fact Sheet, July 17, 2020; 85 Fed. Reg. 37286, June 6, 2019.  

7 Verma, CMS’s Proposed Rule on Value-Based Purchasing for Prescription Drugs, June 17, 2019.  

8 Deloitte Center for Health Solutions, Delivering medical innovation in a value-based world(2016).

9 Id.

10 Monica E. Oss, Why Value-Based Purchasing for Medications Matters, July 14, 2020.  

11 Press Release, CMS Issues Proposed Rule to Empower Commercial Plans and States to Negotiate Payment for Innovative New Therapies Based on Patient Outcomes, June 17, 2020. 

12 Id.

13 In re: EpiPen (Epinephrine Injection, USP) Market., Sales Pract. and Antitrust Litig., 336 F. Supp. 3d 1256, 1288 (D. Kan. 2018) (alleging that brand manufacturer substantially foreclosed competition in violation of antitrust laws through rebate program that excluded competitors from drug formularies).  

14 Verizon Comm’ns, Inc. v. Law Offices of Curtis v. Trinko, 540 U.S. 398, 406 (2004) (noting that regulated markets can be a “good candidate for implication of antitrust immunity, to avoid the real possibility of judgments conflicting with the agency’s regulatory scheme”); Shire US, Inc. v. Allergan, Inc., 375 F. Supp. 3d 538, 552-557 (D.N.J. Mar. 29, 2019) (rejecting antitrust challenge to rebate program because of Medicare’s annual bidding process, one-year contacts, and low foreclosure rates, among other things).

15 The Guideway Care Blog, What is BPCI?, Oct. 30, 2019 (“There is clear evidence that BPCI participants that included surgical procedures in their bundle have achieved both cost and quality improvements.”).

16, Bundled Payments for Care Improvement (BPCI) Initiative: General Information

17 University of Pennsylvania Leonard Davis Institute of Health Economics, The Current State of Evidence on Bundled Payments, Oct. 2, 2018, Vol. 22, No. 3. 

18 Deloitte Center for Health Solutions, Delivering medical innovation in a value-based world(2016).

19 LePage's Inc. v. 3M, 324 F.3d 141, 156 (3d Cir. 2003) (the gravamen of the defendant’s complaint was that the defendant “linked a product on which it faced competition with products on which it faced no competition”); accord SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1059-62 (3d Cir 1978).

20 85 Fed. Reg. 37286, 37292.

21 84 Fed. Reg. 2340.  

22 42 U.S.C. § 1320a-7b(b)(3).

23 Id.       

24 Executive Order on Lowering Drug Prices by Putting America First,