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Report: CMS’ Proposed Rule to Encourage Value-Based Payment Arrangements with Drug Manufacturers

Est. Reading Time: 3 Minutes

Key Insights:

  • The Centers for Medicare and Medicaid Services (CMS) has proposed a new rule to help private insurers, state Medicaid programs, and prescription drug manufacturers to procure value-based payment arrangements.
  • If the rule is approved, drug manufacturers will have to overhaul their guidelines regarding drug pricing.


According to a study by West Health and Gallup, “nearly nine in 10 U.S. adults are ‘very’ (55 percent) or ‘somewhat’ (33 percent) concerned that the pharmaceutical industry will leverage the COVID-19 pandemic to raise drug prices.” As a solution, 88 percent of respondents stated they supported “direct negotiations by the federal government with the drug manufacturer on the price of a treatment for the disease itself.”

CMS has responded to this changing healthcare environment by proposing a new rule to provide greater flexibility for states to enter innovative value-based purchasing arrangements (VBPs) with drug manufacturers, and to provide manufacturers with regulatory flexibility that will encourage VBP arrangements with payers, including Medicaid, similar to Medicare Part D prescription drug plans. In a press release, CMS stated that it has seen success with these drug plans: “over the past three years, average Part D basic premiums have decreased by 13.5 percent.” The drug plans encourage “increased competition and strengthened negotiations in Part D” and save “taxpayers nearly $6 billion in the form of lower Medicare premium subsidies.”

The Rundown of the Proposed Rule

CMS’ proposed rule is an extension of its drug plan “to manage drug costs and promote beneficiary access to needed medications” beyond Medicare. In the case of drug therapies, CMS’ rule would empower “states, private payers, and manufacturers to pay for prescription drugs based on clinical outcomes” rather than negotiate prices based on “the quantity of drugs sold.”

CMS Administrator Seema Verma also hopes the rule would inspire further innovation and create accountability across the different structures, saying: “By modernizing our rules, we are creating opportunities for drug manufacturers to have skin in the game through payment arrangements that challenge them to put their money where their mouth is.”

New Drug Pricing Rules

CMS’ proposed rule extends drug-pricing regulations outlined in the Continuing Appropriations Act, 2020, and the Health Extenders Act, 2019. The proposed rule states that drug manufacturers can no longer “include the sales of the authorized generic in the calculation of the brand name average market price (AMP) regardless of the type of relationship between the brand name manufacturer and the authorized generic manufacturer.”

By forcing drug manufacturers to price drugs based on their effectiveness, CMS hopes to support the “healthcare system’s move to paying on the basis of value instead of volume and increasing accountability for outcomes” and conserve costs by creating a “collection of more evidence on clinical outcomes for a given therapy” to help physicians “use new medications and treatments in a more targeted fashion.” This way, physicians and providers can help keep their patients out of the emergency room and divert them from costly or unnecessary treatments.

While the newly proposed rule has not been finalized, it emphasizes CMS’ commitment to value-based payment arrangements and reducing drug costs across the network. If the rule is adopted, Medicare physicians and providers may be better able to improve patient outcomes while reducing healthcare expenditures. Accountable care organizations (ACOs) may be able to improve their performance, save more money, and secure healthier futures for their patient populations.

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