Notice & Comment

Limiting State Flexibility in Drug Pricing

That’s the title of a new perspective piece from Rachel Sachs and me in the New England Journal of Medicine.

The Trump administration has refused to allow Massachusetts to experiment with a closed formulary, which would give the state some leverage in price negotiations over low-value drugs. But, as we explain, CMS has offered no written explanation whatsoever for its refusal.

From a legal perspective, that’s a problem. Administrative law requires agencies to provide reasons for their actions. Judges will usually defer to those reasons, but an unexplained action won’t stand up in court. If Massachusetts sues, the agency’s decision is at least as vulnerable as other actions that judges have recently invalidated, including CMS’s approval of Kentucky’s Medicaid work requirement. Indeed, CMS’s willingness to push the legal envelope on work requirements stands in stark contrast to its timidity when it comes to Massachusetts’ request to experiment with a closed formulary.

In subsequent statements to the press, HHS Secretary Alex Azar and CMS Administrator Seema Verma have suggested that granting the waiver would be illegal and would give states too much power in price negotiations.

These after-the-fact justifications track an argument that the pharmaceutical industry pressed in its campaign against the Massachusetts waiver. In its view, the establishment of a closed formulary would violate a “grand bargain” it struck with Congress as part of the 1990 legislation. The industry’s view of that bargain is that it agreed to sell drugs to Medicaid programs at a discount, and, in exchange, states would have to cover every FDA-approved drug.

Azar and Verma appear to believe that departing from the law’s purportedly neutral baseline would be unlawful, unfair, or both. But no part of the 1990 law limits CMS’s waiver authority over the portion of the Medicaid statute that governs prescription drugs. That’s an important omission. Congress knows how to restrict the scope of waivers when it wants to; indeed, it has done so in other parts of the Medicaid statute (for example, under the section covering cost-sharing requirements). For its part, CMS recently granted Oklahoma’s request to waive a different part of the same statutory provision that Massachusetts now seeks to waive, suggesting that the agency’s legal objections are a pretext.

What’s more, the grand bargain has already been violated—but not by Massachusetts. Since 1990, changes in pricing strategies, the proliferation of orphan drugs and complex biologics, and the decreasing rigor of the FDA approval process have placed an enormous strain on state Medicaid budgets. Massachusetts’ request reflects a thoughtful effort to restore the balance established by that bargain in light of an evolving pharmaceutical market. In rejecting the request, the Trump administration appears to have sided with the drug industry over the states.

You can read the whole thing here.


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