Recent CMS Actions on State Requests to Control Medicaid Drug Expenditures

Outpatient prescription drugs are an optional Medicaid benefit, yet all fifty states, the District of Columbia, and U.S. territories provide the benefit as a key component of comprehensive medical coverage. ^1,2 Federal law requires state Medicaid programs to cover all FDA-approved outpatient drugs from manufacturers that participate in the Medicaid Drug Rebate Program (“MDRP”).³

A state may maintain a preferred drug list through their statutory authority to operate a prior authorization program but must permit beneficiary access to medically necessary non-preferred covered outpatient drugs.⁴ While drug-manufacturer rebates provide considerable financial offsets to both states and the federal government, policymakers continue to evaluate strategies to curb drug expenditures and align payment with outcomes.⁵ This brief highlights recent CMS actions on state requests under section 1115 demonstration authority that reveal statutory constraints on allowing flexibility in coverage and access policies.

History of State Medicaid Agency Closed Formulary Requests

Recent state requests have focused on two areas: a tighter preferred drug list (PDL) that is more like commercial insurance closed formularies; and delay in covering drugs approved under the accelerated approval pathway. Accelerated-approval drugs are FDA-approved based on surrogate endpoints that predict, but do not definitively measure, clinical benefit and are subject to manufacturer-rebates for Medicaid coverage.⁶ Although the asserted states’ argument for exclusion involves the high cost of these medications and non-traditional FDA-approval process; the magnitude of state expenditures for these drugs has been the subject of recent study.⁷ However, the Medicaid Drug Rebate Program Notice, State Release No. 185, requires states to cover accelerated-approval drugs upon approval.⁸

Massachusetts

What Massachusetts requested: In September 2017, Massachusetts submitted an 1115 waiver-amendment request to adopt a closed formulary with at least one covered drug per therapeutic class and exclusion of accelerated-approval drugs. An excluded drug, if medically necessary for a beneficiary, could be available through an exceptions process.⁹ As their rationale for the request, the Commonwealth cited the financial benefits of volume-based supplemental rebates and alignment of Medicaid drug coverage policy with Medicare and commercial markets Massachusetts sought authority to waive Section 1902(a)(54) of the Social Security Act, which incorporates the covered outpatient drug coverage requirements at Section 1927.¹⁰

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How CMS replied: In June 2018, CMS rejected the closed formulary request as submitted, indicating that the Commonwealth’s authority would need to be authorized under section 1115(a)(2) expenditure authority rather than as a waiver of the optional covered outpatient drug benefit at Section 1902(a)(54). Moving drug coverage to an 1115(a)(2) expenditure authority would eliminate adherence to Section 1927 of the Social Security Act, including the requirements associated with MDRP.¹¹ If Massachusetts were to elect this expenditure authority, then they would need to negotiate rebates directly with drug manufacturers, rather than have the rebates under MDRP, and satisfy budget neutrality requirements; i.e., federal expenditures under the 1115 demonstration could not exceed projected federal expenditures without the demonstration.12 Massachusetts declined to revise the closed formulary request in the manner proposed by CMS.¹³

Tennessee

What Tennessee requested: In November 2019, Tennessee’s waiver renewal included formulary flexibility, which was essentially the same as that of Massachusetts, as Tennessee requested a waiver of Section 1902(a)(54) authority to operate a “commercial style” closed formulary with at least one drug per therapeutic class and an exceptions process pathway.¹⁴

How CMS replied: This time, CMS approved Tennessee’s request in January 2021 to operate a “commercial-style” closed formulary and continue participation in the MDRP. CMS stated that the adult pharmacy benefit would operate under the 1115(a)(2) expenditure authority rather than as a waiver of Section 1902 of the Social Security Act and did not require Tennessee to resubmit the application with the revised authority.¹⁵ However, unlike their response to Massachusetts, CMS writes: “Because under section 1115(a)(2), expenditures under this section on outpatient drugs are ‘regarded as’ expenditures under the State plan [emphasis added], section 1927(b) requirements pertaining to the obligation for a drug manufacturer with a drug rebate agreement to pay rebates will still apply pursuant to section 1115(a)(2) expenditure authority.”¹⁶

In the approval, CMS required that Tennessee’s formulary align with the Essential Health Benefit (“EHB”) requirements applicable to qualified health plans offered on the Marketplace and the standards that apply under Alternate Benefit Plans (“ABP”s) under section 1937 of the Social Security Act.¹⁷ Additionally, the formulary must adhere to Medicare Part D rules for coverage of drugs in the six protected classes, follow Medicaid requirements for coverage of Medication Assisted Treatment and provide an exceptions process for non-formulary drugs.¹⁸ Tennessee was required to have a maintenance of effort for coverage of prescription drugs for the populations covered prior to the waiver approval.¹⁹

In April 2021, two legal advocacy groups sued CMS to block the 1115 demonstration approval and agreed to suspend the litigation if CMS conducted another federal public-comment period; CMS concurred, and the public-comment period ended in early fall 2021.²⁰ Based on public comments received, CMS sent a letter to Tennessee on June 30, 2022, indicating that the closed formulary, in addition to the budget neutrality model, did not serve the objectives of the Medicaid program and requested that the state submit an amendment to remove the closed formulary.²¹ Note that CMS did not object to the prior statutory-approval rationale but objected instead on policy grounds. While asserting the high cost of Medicaid drug coverage and authorities at CMS’ disposal to test approaches to align Medicaid with other payers, Tennessee submitted, on August 30, 2022, the requested amendment (currently pending CMS’ review).²²

Oregon

What Oregon requested: Oregon issued a draft 1115 renewal application for public comment in December 2021 that proposed, for adults, a closed formulary, including at least a single drug per therapeutic class and the exclusion of accelerated approval drugs that have not had clinical benefits confirmed, with conversion to full FDA-approval within the specified timeframe.²³ Based on public comments received, Oregon removed the closed formulary request from the application and retained the accelerated-approval drug request for CMS’ consideration.²⁴

How CMS replied: CMS’ September 2022 approval letter indicated several proposals that the “state removed from the application, or the state and CMS have mutually determined can be addressed [through other authorities],” and pharmacy flexibilities were included in that list.²⁵

Bottom Line:

The CMS approval of the Tennessee request for a “commercial-style” formulary signals a statutory route for approval. However, the CMS directive that Tennessee remove such request from their waiver request signals a policy-based reluctance to support closed formularies. Both the current and past administrations have focused on the adoption of value-based purchasing arrangements to address pharmacy spend through the 2020 covered outpatient drug value-based purchasing final rule as well as the recent Executive Order directing the Center for Medicare and Medicaid Innovation (“CMMI”) to select Medicare and Medicaid drug payment models for testing.^26,27