Introduction

Cell and gene therapies (CGTs) are a novel class of medications that have the potential to address the underlying cause of a disease and stop or slow the disease progression. However, these therapies come with significant costs and other uncertainties that make it challenging for state Medicaid agencies to forecast utilization and control costs. By participating in the Medicaid Drug Rebate Program (MDRP), states agree to cover nearly all of a participating manufacturer’s covered outpatient drugs in exchange for a statutorily defined rebate amount. As such, state Medicaid agencies are generally required to cover these very high-cost therapies and states will want to ensure they are able to collect the significant statutory rebate associated with these products. This white paper explores the challenges that states have in financing these products, including the challenges with rebate collection, and discusses strategies that state Medicaid programs have used to control costs and ensure equitable distribution of risk among their managed care organizations (MCOs).

CGTs and the Medicaid Drug Rebate Program

Due to the very high cost of CGTs, Medicaid rebates associated with these drugs are significant. MDRP rebates are collected on drug products from manufacturers that have entered into an agreement (National Drug Rebate Agreement) with the Secretary of the U.S. Department of Health and Human Services (HHS) for drug products that meet the definition of a covered outpatient drug.^1,2 The Unit Rebate Amount (URA) is calculated as the total of the basic rebate and inflationary rebate, as outlined in Figure 1 and in 42 CFR 447.505.^3,4 For multimillion-dollar CGTs, the URA could equate to hundreds of thousands of dollars in rebates for a single prescription.

Historically, a drug administered in an inpatient or outpatient hospital setting as part of a service and not directly reimbursed (i.e., reimbursed in a bundled payment) was not considered a covered outpatient drug. This meant that CGTs reimbursed in bundled payments were at risk of not meeting the definition of “covered outpatient drug,” and therefore not eligible for statutory Medicaid rebates. In May 2023, the Centers for Medicare and Medicaid Services (CMS) proposed modifying the definition of a covered outpatient drug to clarify when a payment is considered direct reimbursement for the drug.⁵ This Final Rule, published in September 2024,⁶ clarifies that identifying a drug separately on a claim for payment may qualify as direct reimbursement for a drug, rendering the drug eligible for statutory rebates. The administered quantity or units dispensed is required to be included on the claim and the drug is paid at an amount directly attributable to the drug itself, according to the approved state plan reimbursement methodology. States may also reimburse for the CGT outside of the bundled payment so that the drug can be considered a covered outpatient drug.

Excluding CGTs from bundled payments

Many of these CGTs require inpatient hospital administration and some also have lengthy stays before and/or after drug administration. For this reason, some CGTs may be billed in a bundled payment. However, existing bundled payment systems may not adequately reimburse hospitals for the cost of CGT, even when accounting for outlier payments. As Inpatient Prospective Payment System (IPPS) fee schedules and payments for bundled services were developed prior to many of these therapy approvals, the costs would not be directly considered as part of the bundled payment, leading to insufficient payment for treatment. As such, the costs for CGTs frequently far exceed the bundled payment, and providers may not be adequately reimbursed for their services. For example, when Kymriah and Yescarta launched in 2017, the associated diagnosis-related group (DRG) payment was far less than the cost of these therapies, which may have discouraged hospitals from administering them.^7,8 Thus, a different pathway for managing access and cost is necessary for these new ultra-high-cost CGTs.

State Medicaid agencies may consider excluding these drug therapies from bundled payments to ensure they are adequately reimbursing hospital providers for the cost of the drug that is administered, as well as to collect statutory rebates on drugs that meet the definition of a covered outpatient drug, which will, in turn, lower the drugs’ net cost to the Medicaid program.

Current state approaches for excluding CGTs from bundled payments

Some states have clearly defined what drugs are excluded from bundled payments in order to collect the MDRP rebates. Some states have published an exclusion list of drugs requiring direct reimbursement or reimbursement outside of the bundled payment methodology. We provide examples of states that have excluded CGTs from bundled payments in order to receive statutory rebates below.

• MassHealth, Massachusetts’s Medicaid program, lists CGT (such as Casgevy, Zynteglo, Roctavian, and Elevidys, among others) on an adjudicated payment amount per discharge (APAD) carve-out list of drugs that are excluded from bundled payment methodologies. The list indicates it applies to participating in-state MassHealth acute care hospital providers and applicable out-of-state acute care hospital providers. The drugs and biologics are listed separately, depending on whether they are administered in an acute inpatient or outpatient hospital setting, and have prior authorization and billing guidance. The billing guidance states that the drugs must be excluded from any facility or institutional claim, and the hospital must claim separate payment for the drugs on a professional claim, along with the National Drug Code (NDC) and number of units administered.⁹ This ensures that the Medicaid program can receive statutory rebates for these high-cost drugs.
• Health First Colorado, Colorado’s Medicaid program, also has a list of drugs that are excluded from bundled payment methodologies.¹⁰ The list applies specifically to medications billed on the UB-04/837I through the Health First Colorado medical benefit, such as Elevidys, Zolgensma, Yescarta, and Kymriah, among others.

Other states may be in the process of publishing a list of drugs excluded from bundled payment methodologies and providing billing policies and procedures to key stakeholders, such as providers, hospitals, manufacturers, and patient advocacy groups. Each CGT has unique and specialized training associated with administration, and only certain providers and hospital systems are permitted to administer them. The centers are not the same for every CGT. Qualified treatment providers and centers, along with those that want to become qualified, may be looking for details on how Medicaid programs will cover these CGTs, in addition to the policies and procedures for billing and reimbursement.

Supplemental rebate agreements and outcomes-based agreements

Another strategy for states to address CGTs are drug-specific rebate agreements. States voluntarily solicit rebate agreements from manufacturers for mutually agreed-upon coverage policies for drugs included on the preferred drugs list covered by the pharmacy benefit. These supplemental agreements can also be for drugs covered under the medical benefit, as long as they are for covered outpatient drugs. Supplemental rebate agreements are the most common type of voluntary rebate agreement utilized by Medicaid programs. They are paid by manufacturers to states in addition to the required statutory rebates described previously under the MDRP. Manufacturers offer rebates on a per unit sold basis in exchange for preferential status on the preferred drug list. These supplemental agreements have flexibility on the contract terms but are always paid out upon a quantitative basis (per unit dispensed), independent of clinical outcomes.

Value or outcomes-based agreements are set up to pay rebates based upon measurable performance of the drug. These types of agreements, in contrast to supplemental agreements, create additional administrative actions:

• Determination of the eligible cohort of utilizers based on claims or other measure
• Collection of data on said cohort and adjudication of whether the predetermined outcome(s) were met during the specified period
• Determination and reconciliation of the amount of rebated owed, if any

These agreements serve as another flexible tool for states to provide medications at the lowest cost and gain insights on the drug’s real-world value in their patient populations. For long-lasting therapies, such as CGTs, these contracts are better suited to allow states to collect rebate based on durability and patient health improvement or maintenance over a long period.

CMS CGT Access Model

The CMS CGT Access Model¹¹ is the most recent tool made available to states with the aim to lower costs and improve patient outcomes. Announced on January 30, 2024, the program will begin in January 2025 and operate for approximately 11 years, contingent upon the terms for each state.¹² The first two treatments that CMS intends to include in the program are one-time gene therapies for sickle cell disease (SCD), priced at $2.2 million and $3.1 million, with potential for a lifetime benefit. CMS will conduct negotiations on behalf of states to receive the SCD CGTs at discounted prices tied to specific predefined outcomes. The model allows manufacturers to apply and negotiate contracts directly with CMS. In turn, CMS will offer the contracts to interested states and act as a hub for states to ensure a standardized approach, reduce administrative burden at the state level, enhance patient access, and ultimately decrease healthcare costs.

CMS has indicated that under the program there will be negotiated standardized prior authorization criteria, as well as confirmation that the CGT claims will be covered outpatient drugs, making them eligible for statutory rebates in addition to the program—s discounted prices (via negotiated rebates). CMS has published a model fact sheet,¹³ and a request for application for states, which provides more guidance for requirements and participation in the model.¹⁴

CGT risk mitigation strategies

As more CGTs come to market, state Medicaid programs may want to consider implementing a risk mitigation strategy that is intended to better align revenue with costs for individual MCOs, as costs are projected in total and individual MCOs to have different disease prevalence and CGT treatment costs. Below is a list of some commonly used approaches to address high-cost CGTs, but it is not meant to be an exhaustive list.

• Carve-out: In this approach, states reimburse selected high-cost drugs on a fee-for-service (FFS) basis and the costs are not included in the MCO capitation rates. This removes capitated plan risk tied to uncertainty surrounding the number of total utilizers of new high-cost drugs by removing these costs from the managed care program entirely. Under this approach, there are no concerns about timing or lags associated with capitation payment rates. Trend related to high-cost drugs used in capitation rate setting is reduced to reflect this carve-out. There is an increased administrative burden associated with maintenance of the drug list itself, including review and updates for clinical management criteria and state development of payment and reimbursement methodologies. This strategy poses the largest budget risk to states.
• High-cost drug risk corridor: In this strategy, the state reduces the MCOs’ risk for high-cost drugs by partially offsetting high losses and/or sharing in MCO gains. Risk corridors are based on how actual costs compare with expected costs. Typically, the MCOs are at risk for claim costs within the risk corridor and then the plan shares in gains or losses for costs outside of that risk corridor. If the MCO paid more than expected, it receives a partial reimbursement for those losses. If an MCO paid less than expected, it will be charged an amount to partially offset its gains. This method provides more stability for MCOs by limiting each MCO’s gains or losses. This strategy would result in an increased administrative burden to validate and reconcile eligible claims and poses a budget risk to states. New Jersey is an example of a state that has a high-cost drug risk corridor, with a threshold of $300,000 in annual incurred costs for non-dual members. Depending on the actual versus expected MCO expenses, there are different state and MCO shares.¹⁵
• High-cost drug risk pool: A budget-neutral funding pool could be established to distribute dollars based on actual experience. Costs are projected for the applicable time period and the pool is typically funded by a component of the rate (e.g., capitation withhold amount). As plans have costs that meet the criteria for the high-cost drug risk pool, they are reimbursed for their expenses. This method directs more funding to capitated plans with higher total costs of drugs, whether those costs are based on the number of utilizers or the average acuity level per utilizer. This strategy does not have a budget risk to states; however, there is a possibility that the risk pool is not fully funded. There are a few considerations for states implementing a high-cost drug risk pool:
  • The state would need to define the cost threshold at which point a recipient becomes eligible for the high-cost pharmacy risk pool, the eligible rate cells, the treatment of members with partial year eligibility, and the relative financial responsibility for the state and capitated plans above that threshold. The risk pools can be created on a rate cell or MCO level.
  • Capitation amounts would need to be developed and the withheld amounts would need to be established.
  • The state would need to calculate and pay out appropriate funds to each MCO based on its portion of the pool. This would result in additional feedback processes with the MCOs.

Conclusion

CGTs are very high-cost, which creates significant financial pressure on state Medicaid agencies. These challenges underscore the need for state Medicaid agencies to develop robust strategies to manage the financial and operational impacts of CGTs. In order to understand the financial impact of CGTs and control costs, state Medicaid agencies may consider:

• Ensuring the state is able to capture the statutory rebate, especially for CGTs that are billed in a bundled payment.
• Exploring supplemental or outcomes-based agreements. This may include potentially participating in CMS’s CGT Access Model.
• Projecting CGT utilization and estimating impacts to capitation rates and/or state budget.
• Considering implementation of a risk mitigation strategy that is intended to better align revenue with costs for individual MCOs, as MCOs will have different disease prevalence and CGT treatment costs.

Milliman has experience working with state agencies successfully to:

• Implement risk mitigation in capitation rate development: Implementing a high-cost drug risk pool or high-cost drug risk corridor for state agencies to better align health plan revenues with actual claims experience for high-cost drugs when traditional risk adjustment processes do not adequately account for variances in health plan costs for these high-cost drugs. This has resulted in ensuring each MCO is adequately reimbursed for its variance in claim costs.
• Project CGT utilization: Projecting capitation rate and/or budget impacts of CGTs for state Medicaid agencies. We leverage current membership claims and query data to identify a cohort of members and the presence of clinical inclusions and exclusions. Further downstream factors can be applied to narrow to potential utilizers. Drug therapy and medical costs can be calculated to help states with cost-offset projections.

Caveats and Limitations

This white paper outlines the challenges state Medicaid agencies face managing CGT costs and outlines risk mitigation strategies; it is not intended to be an exhaustive study of financing CGTs. This information may not be appropriate, and should not be used, for other purposes. The material in this paper represents the opinion of the authors and is not representative of the view of Milliman. As such, Milliman is not advocating for, or endorsing, any specific views contained in this paper related to CGTs. Any third-party recipient of this paper that desires professional guidance should not rely upon Milliman’s work product, but should engage qualified professionals for advice appropriate to its specific needs.

¹ Social Security Laws. Payment for Covered Outpatient Drugs. Retrieved November 5, 2024, from https://www.ssa.gov/OP_Home/ssact/title19/1927.htm.

² Medicaid.gov. Medicaid Drug Rebate Program (MDRP). Retrieved November 5, 2024, from https://www.medicaid.gov/medicaid/prescription-drugs/medicaid-drug-rebate-program/index.html.

³ The full text of Title 42 is available at https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-C/part-447/subpart-I/section-447.505.

⁴ HHS (April 2015). Medicaid Rebates for Brand-Name Drugs Exceeded Part D Rebates by a Substantial Margin. Retrieved November 5, 2024, from https://oig.hhs.gov/oei/reports/oei-03-13-00650.pdf.

⁵ Sections 1927(k)(2) and (3) of the Social Security Act. See https://www.federalregister.gov/documents/2023/05/26/2023-10934/medicaid-program-misclassification-of-drugs-program-administration-and-program-integrity-updates.

⁶ The full text of the Final Rule is available at https://public-inspection.federalregister.gov/2024-21254.pdf.

⁷ Allen, J. et al. (June 8, 2023). Medicaid Coverage Practices for Approved Gene and Cell Therapies: Existing Barriers and Proposed Policy Solutions. Molecular Therapy. Retrieved November 5, 2024, from https://www.cell.com/molecular-therapy-family/methods/fulltext/S2329-0501(23)00077-3.

⁸ Klarer, J. (October 3, 2023). Charting the Landscape of Cell and Gene Therapy Reimbursement in the U.S. Cell & Gene. Retrieved November 5, 2024, from https://www.cellandgene.com/doc/charting-the-landscape-of-cell-gene-therapy-reimbursement-in-the-u-s-0001.

⁹ Mass.gov (September 18, 2018). Acute Hospitals — Billing Instructions for Carve-Out Drugs. Retrieved November 5, 2024, from https://www.mass.gov/doc/acute-hospitals-billing-instructions-for-carve-out-drugs-0/download.

¹⁰ Colorado Medicaid Program (May 8, 2024). Appendix Z: Inpatient and Outpatient Hospital Specialty Drug Prior Authorization Procedures, Coverage Policies and Drug Utilization Criteria for the Health First Colorado Medical Benefit. Retrieved November 5, 2024, from https://hcpf.colorado.gov/sites/hcpf/files/Appendix%20Z%20Hospital%20Specialty%20Drugs%20Prior%20Authorization%20Drugs%2005-09-2024.pdf.

¹¹ Cell and Gene Therapy (CGT) Access Model. Retrieved November 5, 2024, from https://www.cms.gov/priorities/innovation/innovation-models/cgt.

¹² CMS. Cell and Gene Therapy Access Model: Request for Applications for States. Retrieved November 5, 2024, from https://www.cms.gov/files/document/cgt-model-rfa.pdf.

¹³ CMS. Cell and Gene Therapy (CGT) Access Model: Overview Factsheet. Retrieved November 5, 2024, from https://www.cms.gov/files/document/cgt-model-ovw-fact-sheet.pdf.

¹⁴ CMS, Cell and Gene Therapy Access Model: Request for Applications for States, op cit.

¹⁵ As an example, see the New Jersey contract template, available at https://www.nj.gov/humanservices/dmahs/info/resources/care/hmo-contract.pdf.