Could a Medicaid closed formulary work?
Massachusetts takes a gamble to control drug costs
Earlier this fall, Massachusetts filed a demonstration waiver based on a heath reform package from Republican governor Charlie Baker. Contained in the waiver is the proposal to allow MassHealth (the Massachusetts Medicaid program) to convert to a closed formulary. If the CMS approves the waiver, the Bay State would be the first in the nation to implement a closed formulary. It’s a test of the how far the Trump administration is willing to loosen the reins in the name of state flexibility, as well as whether the state can balance the needs of low-income residents with serious cost cutting measures — if the state’s legislature is willing to work with the governor.
Since 2010, MassHealth’s pharmaceutical spending has grown 13%. While pharmaceutical spending makes up a small portion of the overall budget, this rapid growth threatens to crowd out other program priorities. The 1115 waiver submitted in September seeks the authority to pick and choose what drugs are covered in the state formulary. Currently, states are required to cover any drug approved by the FDA and included in the supplemental rebate program. Being able to leave drugs off the formulary list gives the state the leverage to negotiate deeper discounts from drug manufacturers. Reformulations of drugs that get price hikes without clinical benefits could also be left off the formulary.
The economics behind the demonstration are sound. It’s a tool that many private insurers use to control cost. The Veteran’s Health Administration has also implemented closed formularies, which saw average price per pill tumble 25%, while outpatient pharmacy spending dropped as well. In three years, the VA recognized savings of $82.4 million across five closed drug classes.
These cost controls come with a tradeoff, and patients and physicians are very suspicious about the benefits of closed formularies. Advocates are justifiably concerned that this will limit patient access to necessary medicines. Research shows that closed formularies lead to reduced drug utilization and continuation, especially in chronic patients (a large Medicaid demographic). This foregone medication could also lead to an increase in inpatient care. MassHealth says they’ll have an exceptions process that will allow patients to get drugs that are otherwise off-formulary if they have adverse drug reactions or patient specific needs, but this extra administrative hurdle can have a meaningful impact on patient care.
The MassHealth proposal indicates that the state would exclude drugs that cannot meet a sufficient level of evidence of clinical effectiveness. The U.S. is historically poor at utilizing comparative effectiveness research, and this may quietly be the most innovative aspect of the waiver. Currently, drugs only need to demonstrate safety and that they have a clinical effect to receive FDA approval. To evaluate which drugs should be covered, the state would partner with the University of Massachusetts Medical School to create a new clinical effectiveness review. However, as there is currently no widely agreed-upon comparative effectiveness threshold, the state would have to determine a new basis for their review.
A final challenge is how the formulary would handle specialty drugs, which often have huge price tags. One of the motivations behind a closed formulary would be limiting the coverage of these blockbuster drugs to control costs. The recent release of Sovaldi, a Hepatitis C drug which costs $84,000, has ravaged Medicaid budgets. However, it’s widely agreed that even at such a high price, it’s a cost-effective cure for Hep C, which could potentially land it on a closed formulary list. Additionally, MassHealth has suggested that not all classes of drugs would be closed. If they follow the VA’s example, they may protect drugs for diseases such as Hepatitis C, HIV, or select cancers. Another example of the challenge to control specialty drug costs is Exondys 51, which controversially received FDA approval even though an agency panel agreed there was not enough evidence to support approval. It also comes with a tremendous price tag of $300,000. With such a huge cost and little to no evidence of clinical effectiveness, it’s precisely the kind of drug that a closed formulary would seek to exclude. However, as the first-ever treatment for Duchenne’s muscular dystrophy, it’s also an entirely new class of drug. The state’s proposal specifies that the formulary would contain at least one available drug per therapeutic class, meaning Exondys 51 could still find its way to MassHealth beneficiaries.
If CMS agrees to permit Massachusetts to establish a Medicaid closed formulary, the state could gain a strong tool in fighting drug costs. A success here would likely be the start of a wave of closed formularies across the country. However, the wrong balance between cost controls and access to medicines would lead to poorer patient outcomes in an already vulnerable population.
