Medicare Compliance & Reimbursement

Michigan may go forward with its effort to obtain deep discounts from prescription-drug manufacturers for Medicaid and other state programs, a Washington, D.C. federal trial court judge ruled March 28. The Pharmaceutical Research and Manufacturers of America, the drug industry trade association which challenged the Centers for Medicare & Medicaid Services' approval of Michigan's "Best Practices Initiative," plans to appeal.

Under the initiative, a committee of experts designates at least two "best-in-class" drugs in each of about 40 therapeutic classes. Physicians may prescribe those drugs freely to Medicaid enrollees.

But physicians must receive prior state authorization before prescribing non-best-in-class drugs, unless the manufacturers sign two agreements with Michigan. First, manufacturers must agree, on a drug-by-drug basis, to offer Michigan Medicaid a "supplemental rebate" - in addition to the general rebate negotiated by the Health and Human Services Secretary - so that the price for each drug is equivalent to the lowest price at which the cheapest best-in-class drug - the "reference" drug - is available anywhere in the United States.

Second, manufacturers must agree to offer that same reference-drug price to two non-Medicaid state programs: the Elder Prescription Insurance Company Program, which provides drug benefits to low-income seniors not eligible for full Medicaid benefits, and the Maternity Outpatient Medical Services program, which provides prenatal services to non-Medicaid-eligible low-income minors and certain other expectant mothers.

PhRMA, along with two parties that intervened as plaintiffs, challenged CMS' approval of the initiative on four grounds. First, the association said Michigan had in effect established a "formulary" without following requirements laid out in the Medicaid statute. However, District Court Judge John Bates said the state had established a prior authorization program, not a formulary. Federal law permits state Medicaid programs to institute prior authorization requirements, he wrote, as long as a state responds to authorization requests within 24 hours, and permits physicians to prescribe 72-hour supplies of drugs while awaiting decisions in emergency situations.

"It may seem somewhat incongruous that a state can subject a drug to prior authorization either by merely establishing a prior authorization program, or by following the additional, burdensome process ... to exclude a drug from a formu-lary," Judge Bates acknowledged. But he explained that, for better or worse, that's what the Medicaid statute says.

The National Urban Indian Council, one of the interveners, also argued that basing Medicaid pharmaceutical access requirements on the prices provided by drugmakers to other state programs was not "in the best interests of the [Medicaid] recipients, as required by federal law. But Judge Bates said CMS, in approving Michigan's Medicaid amendments, had reasonably focused not just on the "best interests of discrete individuals who are current Medicare beneficiaries" - as PhRMA advocated - but on the best interests of Michigan Medicaid as a whole. Under this standard, wrote Bates, CMS reasonably accepted Michigan's argument that using its Medicaid leverage to make drugs affordable for its EPIC and MOMS populations was the only way to avoid program cuts that would push more people into the already strained Medicaid program.

In any case, Judge Bates noted, Michigan's Best Practices Initiative mandates authorization for any drug that a physician declares is "medically necessary," mitigating any harm even to discrete Medicaid beneficiaries.

In the third argument made by plaintiffs, PhRMA maintained that a state may benefit from the general Medicaid rebate negotiated by the HHS Secretary, or it may negotiate its own rebate agreement, but it cannot do both. Judge Bates rejected this argument as elevating "form over substance," since any particular rebate arrangement, whether contained in one agreement or two, would obviously use the Secretary's rebate agreement as a floor.

The court rejected PhRMA's contention that, by setting out-of-state "benchmarks" for regulating prices, the initiative trespassed on Congress' power under the Constitution's Interstate Commerce Clause. Judge Bates said this "dormant Commerce Clause" analysis did not apply because Michigan was acting not as a regulator but as a market participant, using the leverage of its Medicaid population to get discounts just as a private HMO might leverage its enrollment numbers. In any case, the judge added, the benefits of the program far outweighed any small effects on interstate commerce.