United States: Massachusetts Medicaid Proposes Changes To Hospital Acquisition Of Costly Prescription Drugs

Earlier this year, we wrote about a lawsuit involving the 340B drug pricing program. We sometimes write about the 340B program because it is integrally linked to the Medicaid prescription drug rebate program. So today, we wanted to call attention to a proposed regulation issued by the Massachusetts Medicaid program (which is called "MassHealth") that shows that link clearly.

Section 1927 of the Social Security Act requires pharmaceutical manufacturers to provide a rebate to state Medicaid plans if they want to have their drugs covered by Medicaid. The rebate is generally equal to 23.1% of the average manufacturer's price (AMP) of the drug. But it can sometimes be higher – for example, if the manufacturer increases the price of the drug faster than the rate of inflation, or if the manufacturer offers a better price discount to a commercial payer.

At issue in the proposed regulation is the "anti-double dipping" rule in the 340B program. The 340B program allows some entities that treat a large low-income patient population – such as high disproportionate share hospitals (DSH) or federally qualified health centers (FQHCs) – to purchase drugs at a discount from manufacturers. But what happens when a DSH hospital dispenses a drug that it acquires under the 340B program to a Medicaid patient? Does Medicaid get the rebate? Or does the hospital get the discount?

The 340B program doesn't choose sides. But what it does do is say that a manufacturer doesn't have to pay twice. Either Medicaid gets the rebate or the DSH hospital gets the discount, and hospitals have to choose whether they are either going to "carve in" 340B drugs (meaning they get the discount) or "carve out" 340B drugs (meaning Medicaid gets the rebate and hospitals pay full price for the drug).

A new proposed Massachusetts regulation tilts the playing field squarely in favor of the state, and would proclaim that the state gets the rebate for as-yet undefined "high cost drugs." Massachusetts has proposed to amend its hospital payment and pharmacy regulations to implement its policy. As far as we at the Medicaid and the Law Blog can tell, it's the first time that a state has moved so aggressively to claim the rebate for itself and shut DSH hospitals out of the decision-making process.

Under the current MassHealth regulations, hospitals are free to elect to be "carve-in" hospitals for purposes of the 340B program. The only requirement that the state imposes is that a "carve-in" hospital notify MassHealth that it has so elected, as a way of ensuring that the state doesn't then claim a rebate on a drug dispensed to a 340B hospital patient. Under the new proposed policy, this choice is overturned for "any high cost drugs that are designated" by MassHealth. For these (as yet unnamed) drugs, Massachusetts 340B hospitals may not provide drugs to MassHealth members through the 340B program.¹ To us, the clear implication of the MassHealth policy is that the state wants to claim rebates for these drugs.

It's easy to understand why MassHealth wants to adopt this policy. Suppose the cost of a rare drug is $1 million; it's obvious why the state would want to claim a $231,000 rebate on a $1 million drug. But the effect of the proposed policy is that hospitals will no longer be able to acquire the drugs at a significant discount and then bill MassHealth at a mark-up. Moreover, hospitals will likely be required to keep separate inventories for "high cost drugs" and "low cost drugs" – a significant record-keeping burden.

We also find it notable that MassHealth has not named – or even established parameters for naming – "high cost drugs." All that the MassHealth agency has said is that designation of these drugs will "occur by provider bulletin or other written issuance ... with reasonable notice to providers consistent with state law."² Such a designation may have deleterious impacts on manufacturers under other provisions of Massachusetts law, so we think that manufacturers will want to monitor the progress of these regulations closely, even though they are not directly or immediately affected.

MassHealth will be holding public hearings on the proposed regulations. Meanwhile, other states will likely be watching to see if Massachusetts moves forward with its policy given the likely favorable impact on state Medicaid programs.

Footnote

1 Prop. Reg. 130 C.M.R. § 410.468(A).

2 Id.

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