Medicaid Closed Drug Formularies: A Closed Door or a Path Forward?

Written By: Leavitt Partners

As we noted in July, CMS declined Massachusetts’ Medicaid 1115 demonstration request to establish a closed formulary.  The proposed program would have given Massachusetts the ability to exclude certain FDA-approved drugs from coverage and thereby given the state additional leverage in negotiating rebates.  The state and drug manufacturers would have otherwise continued to be subject to the rest of Section 1927 requirements, including the federally mandated minimum drug rebates.

On its surface, the rejection of the Massachusetts application may appear to limit states’ use of 1115 demonstrations to rework their Medicaid outpatient drug programs.  Yet, in the denial letter, Secretary Azar indicated a potential path forward.  The Department of Health and Human Services (HHS) would consider approval of the concept if all of Section 1927 were waived – in which case the state would drop the optional outpatient drug program and construct a new program under an 1115 demonstration.  This would result in “the state having to negotiate directly with manufacturers and forgo all manufacturer rebates available under the federal Medicaid Drug Rebate Program.”

Is this a path forward, or a dead end?  The answer lies in the level of risk states may be willing to accept.  Key considerations include:

  • States may not have the capacity to negotiate directly with manufacturers or the leverage to achieve rebates equivalent to or lower than the net reimbursement paid to the State under the existing program.
  • While there is the potential for intense competition in some drug classes, there may be little or no competition in others. In those classes the state would have less leverage and may be at risk of paying more than it would under the federal rebate program.
  • Manufacturers may have little incentive to negotiate high discounts if significant savings in one state may incentivize other states to pursue similar initiatives.
  • 1115 demonstrations must be budget neutral for federal spending, which presents a significant risk to a state given the uncertainty of negotiating adequate rebates outside of the federal statutory mandate.
  • While CMS indicated in their letter that the state could “be provided flexibility to exclude specific drugs from coverage based on cost effectiveness or other approved criteria,” there are other constraints that could ultimately restrict the state’s ability to do this. For example, Massachusetts had already agreed in its waiver application to “maintain an exceptions process to cover drugs that are not on the formulary when medically necessary” as part of the waiver, which could result in the approval of an unknown number of excluded drugs.[1]
  • The state would need to take on new administrative burdens, including developing and maintaining the drug formulary, negotiating new drug rebate agreements, new dispute resolution processes, and presumably recreating some processes currently being performed by CMS, like the unit Rebate Amount (URA) Calculation which would no longer be based on statutory formulas.

If the concerns outlined above make limited Section 1927 waivers like that proposed by Massachusetts unlikely, states will have to look for other viable options to better control their escalating pharmacy costs. One option to watch is Oklahoma’s value-based purchasing approach which was recently approved by CMS under a State Plan Amendment. Please refer to our C-Brief for additional information on this plan. Another may be an innovative proposal now under development in Louisiana in which the state would pay a fixed price for unlimited access to a high cost drug over an extended period of five to seven years.

Leavitt Partners tracks state Medicaid and health policy activity and interprets those trends to help clients identify policy related opportunities and risks. To learn more about Leavitt Partners’ state intelligence and strategic advisory services please contact Julie Sommer at Julie.sommer@leavittpartners.com or 720-244-2138.


[1] The MassHealth definition of medically necessary services already requires services to meet the requirement that, “ there is no other medical service or site of service, comparable in effect, available, and suitable for the member requesting the service, that is more conservative or less costly to the MassHealth agency.”  (Code of Massachusetts Regulations, Title 130, 450.204)