The state of value-based contracting

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The state of value-based contracting

Reinventing the current drug payment model in Medicaid


Medicaid provides health coverage for millions of low-income Americans, representing approximately 26% of the United States population, including many with substantial health needs.1 Prescription drug coverage is a key component of Medicaid for many beneficiaries, including children, non-elderly adults and people with disabilities, who rely on Medicaid drug coverage for both acute problems and for managing ongoing chronic or disabling conditions. Without Medicaid, many prescription drugs would be prohibitively expensive for low-income beneficiaries. And, while the federal government provides significant funding for Medicaid, it is consistently one of the largest spending categories among state budgets annually. In 2022, total Medicaid expenditures were the largest category of state spending, accounting for 28% of state budgets on average.1

With the advent of rising drug prices, increased utilization of costly specialty and biologic drugs and the introduction of novel cell and gene therapies, prescription drug spending is projected to increase meaningfully in the near-term. Accordingly, health plans and states must pursue new reimbursement strategies now to manage this new and significant financial exposure to Medicaid budgets. However, unlike commercial health plans, the tools previously available to achieve this have been limited in the Medicaid space. Open formulary requirements, combined with budgetary constraints, hinder Medicaid programs’ ability to fund new, costly therapies without states raising taxes or reallocating government funds earmarked for use elsewhere.

One way to achieve better outcomes and lower costs for Medicaid programs is through value-based contracts (VBCs). VBCs are performance-based reimbursement agreements between health care payers and pharmaceutical manufacturers in which the price, amount, or nature of reimbursement is tied to value-based outcomes. Value-based contracting for commercial payers is not a new concept, but it is newer in the Medicaid space where all prescription drugs must be available to patients in exchange for offering the best price on the drug and providing a mandatory rebate set in statute. The intent of VBC arrangements is to tie outcomes to highcost drug therapies funded by state Medicaid program payers.

For decades, the Centers for Medicare and Medicaid Services (CMS) has promoted valuebased reimbursement for quality outcomes within the delivery system. Now, new CMS guidance advocates for states and drug manufacturers to contract on a metric other than price, by linking the cost of a drug to the value it provides. The pipeline of high-cost, potentially curative therapies is robust, and Medicaid departments are looking for ways to manage the cost of medications while providing the right therapies to the right patient at the right time.

Medicaid is typically the largest expenditure in state budgets1 Public Assistance 1% Corrections 3% Transportation 7% STATE EXPENDITURES (% OF TOTAL ) Higher Education 9% Medicaid 28% Other 34% Elementary & Secondary Education 19%


The idea of rebate contracting with manufacturers for preferred status or to remove utilization management criteria has been the norm in Medicaid for more than 20 years. In those negotiations, states (or their pharmacy benefit administrators) focus on the net cost of the drug inclusive of federal, and in some cases, supplemental rebates. In their evaluation, clinical evidence, therapeutic alternatives and price per unit are the determining factors for preferred status. However, with the dawn of multi-milliondollar, potentially curative cell and gene therapies, the traditional rebate-per-unit model is no longer a viable solution for Medicaid payers.

Because many novel and high-cost therapies lack therapeutic alternatives and Medicaid is required by law to cover these drugs, the mandatory Medicaid rebate alone is not sufficient to make these drugs affordable for states. This presents states with a difficult dilemma: how to provide needed access to high-cost therapies such as cell and gene therapies while simultaneously managing the state pharmacy budget.

State Medicaid programs are focused on every dollar coming into the state. The Affordable Care Act (ACA) changed the requirements around federal rebates flowing back to the states from managed care organizations (MCOs). However, even with these statutory changes, the introduction of novel multi-million-dollar therapies presents the risk of throwing the Medicaid state ecosystem out of balance. One study, published last year in JAMA Pediatrics, found that if a $1.85 million sickle cell gene therapy was administered to only 7% of eligible patients annually, the average one-year budget impact per state Medicaid program would be nearly $30 million. 2 This single example illustrates the potential magnitude of the problem: even small increases in Medicaid spending can significantly impact a state’s ability to balance its budget and fund appropriate health care for this sensitive population.

“Rare diseases and conditions affect an estimated 25 to 30 million people in the U.S. While drug development to manage these conditions has progressed, approved treatments are available for around 7% of the approximately 7,000 rare diseases that have been identified. While the data shows a significant impact, it is likely just the tip of the iceberg. The largest current impact of this category is in the Medicaid sector, where cost per claim is much higher with a larger prevalence of rare disease medical drug utilization, given the younger age demographic of Medicaid beneficiaries. The forecasts predict PMPM spend to almost double by 2025 for Medicaid.”3


People affected by rare diseases and conditions ~2X

7% Approved treatments

7,000 Rare diseases

Forecasts predict per member per month (PMPM) spend to almost double by 2025 for Medicaid



Currently, the world’s most expensive drug is a one-time gene therapy priced at $3.5 million. Hemgenix, used to treat hemophilia B, is one of many new cell and gene therapies that have recently been approved for the treatment of rare diseases. Another example is Zynteglo, a gene therapy used to treat adult and pediatric patients with beta-thalassemia, a blood disorder that requires regular red blood cell transfusions and is priced at $2.9 million per single treatment course. These novel therapies offer new hope for many individuals. Yet, as potential cures for previously incurable diseases, they also carry extraordinarily high price tags.

Unlike most traditional treatments, which are often taken on an ongoing basis, gene and cell therapies are viewed as one-time, ultra-high-cost treatments intended to cure or significantly alter the trajectory of a disease. Instead of paying for disease treatment over time, state Medicaid programs absorb the entire cost all at once. Cell therapies are typically priced close to $500,000 per treatment course, and gene therapies may exceed $1 million per treatment course. These costly therapies have the potential to disrupt state Medicaid budget models, creating financial exposure for states. Accordingly, existing pharmaceutical purchasing models must be reinvented to address the costs of these breakthrough therapies while preserving access to care.

2A 4
Per treatment Cell therapies are typically priced close to
Per treatment Gene therapies may exceed
$500K $1M


The swell of new blockbuster drugs coming to market are positioned clinically to be curative, but also often come with a multi-million-dollar cost per dose. Fortunately, in the Medicaid fee-for-service (FFS) market, value-based contracting is now driven by CMS’s rule changes enacted last year. States now can consider the value or outcome of a drug relative to its price and the overall impact to a Medicaid program’s total cost of care. To determine program savings and, ultimately, the durability of novel cell and gene therapies, states will need to look at both pharmacy and medical claims data and measure any reduction in hospitalization rates, doctors’ office visits, relapses and other metrics.

Historically, states have encountered a range of barriers to adopting VBCs. The most frequently cited challenge has been the administrative resources needed to develop and negotiate VBCs, followed by the data collection and measurement requirements needed, the time required for implementation and the time required to measure value. 4 These challenges have previously limited the feasibility of VBCs, especially for smaller states with less volume and utilization.

To address these challenges, Prime Therapeutics (Prime) and Magellan Rx Management (Magellan Rx) have launched MRx Value Plus (Value Plus), the first multi-state VBC solution, designed to assist state Medicaid programs in securing access to cell and gene therapies for patients while helping to ensure the cost of these therapies is linked to the value they provide.

The Value Plus solution is focused on health outcomes for patients treated with a manufacturer’s product. If health outcomes are not realized, the manufacturer will refund a portion of the cost of the drug back to the state, which helps minimize their financial exposure. This new multi-state approach not only allows us to assist these states with negotiating and executing VBCs, but it also creates scalability and efficiency in addressing the durability of high-cost drugs.

Being the first to market in this space, the Value Plus VBC program delivers:

Assistance to state Medicaid programs in securing access to cell and gene therapies for patients while helping to ensure cost is linked to value

Harmonization between the state’s allotted pharmacy budget to promote universal access to medications that improve patient quality of life

Ability for biopharmaceutical manufacturers to recoup their investment in therapies that promote better holistic outcomes for all



Product X is a curative, single dose cell and gene therapy drug with a one-time cost of $1 million. The state estimates they will treat 10 patients with Product X over the next 12 months for a total spend of $10 million.

Product X


State estimate

Total spend (12 months) X =



Product X successfully treats 70% of patients but fails to achieve clinical endpoints in 30% of patients. Manufacturer Z offers a full, 100% refund on all treatment failures (3 out of 10 patients, or $3 million).

Product X unsuccessful treatment


Manufacturer refund on failures X =


Manufacturer Z


The net cost to the state for Product X is $7 million total or $700,000 per patient

Net cost

Per patient =

$7 MILLION $700,000


There is a growing number of rare diseases that can now be effectively addressed with one-time cell and gene therapies. Medicaid departments serve vulnerable populations that need access to these treatments. Our goal is to mitigate the financial risk for Medicaid programs while providing a solution that ensures manufacturers deliver on the promised outcomes for the therapies. The Value Plus solution holds manufacturers accountable to the outcome they assign to the therapy. When Medicaid is paying for a curative therapy, there now are financial assurances that patients will see a cure; otherwise, Medicaid will receive a higher rebate on their cost of the treatment.

The robust pipeline of innovative new gene therapies offers the potential to transform medicine, alleviate disease burden, and ensure patients have the treatments they need.

According to former Food and Drug Administration Commissioner Scott Gottlieb, “By 2025, we predict that the FDA will be approving 10 to 20 cell and gene therapy products a year based on an assessment of the current pipeline and the clinical success rates of these products.”5 The scaling of these technologies allows treatment of thousands of rare diseases across more of the population. Evolving our current drug payment model into an outcomes-based approach offers the best path to accomplish this, as it ties reimbursement to the success of therapy, offsetting costs in the event of therapy failure and promoting clinical outcomes.

Prime and Magellan Rx are currently partnering with several states and drug manufacturers who are leveraging the Value Plus solution. Learn more by contacting us at

1,000 s



aims to mitigate financial risk for Medicaid programs while providing a solution that ensures manufacturers deliver on promised outcomes

7 10 to 20 cell and gene therapy products will be approved by the FDA each year 5
2025, it's predicted that
rare diseases to be effectively addressed across more of the population
Scaling of these technologies allows for


FDA-approved and anticipated gene therapies for 2023 6 These represent therapies requiring one-time administration with wholesale acquisition cost (WAC) of ≥ $750,000.7




Luxturna® (voretigene neparvovec-rzyl)

Zolgensma® (onasemnogene abeparvovec-xioi)

Spark Inherited retinal disease

$850,000 December 2017

Adeno-associated virus vector gene therapy to treat children and adult patients with a rare form of inherited vision loss that could result in blindness

Zynteglo® (betibeglogene autotemcel)

Novartis Spinal muscular atrophy

$2.125 m May 2019

Adeno-associated virus vector gene therapy for select pediatric patients younger than 2 years of age with spinal muscular atrophy (SMA), a rare genetic disease leading to debilitating and often fatal muscle weakness and a leading genetic cause of infant mortality

bluebird bio Transfusion-dependent beta-thalassemia

$2.8 m August 2022

Autologous hematopoietic stem cell-based lentiviral vector gene therapy for adult and pediatric patients with an inherited blood disorder, beta-thalassemia, who require regular red blood cell transfusions – the most severe form of the disease

Skysona® (elivaldogene autotemcel)

Hemgenix® (etranacogene dezaparvovec-drlb)

Vyjuvek™ (beremagene geperpavec-svdt)

bluebird bio Cerebral adrenoleukodystrophy

$3 m September 2022

Autologous hematopoietic stem cell-based lentiviral vector gene therapy for select pediatric patients with a rare, fatal neurodegenerative disease

CSL Behring Hemophilia B $3.5 m November 2022

Adeno-associated virus vector-based gene therapy for select adult patients with hemophilia B, a rare genetic bleeding disorder with prolonged or heavy bleeding

Krystal Dystrophic epidermolysis bullosa

~ $631K* June 2023

*Vyjuvek: weekly administration rather than one-time at an approximate cost of $631K annually at the time of this writing. All brand names are property of their respective owners. This list is not all-inclusive.

Herpes-simplex virus type 1 (HSV-1) vector-based gene therapy for patients 6 months of age and older with a rare and serious genetic skin disorder that involves skin blistering and could be fatal; Vyjuvek is applied topically until wound closure


Elevidys (delandistrogene moxeparvovec-rokl)

Sarepta Duchenne muscular dystrophy


$3.2 m June 2023

Adeno-associated virus vector-based gene therapy for select ambulatory pediatric patients 4 through 5 years of age with a rare, serious, progressive genetic disease that could eventually lead to life-threatening heart and respiratory failure

Roctavian™ (valoctocogene roxaparvovec-rvox)

BioMarin Hemophilia A $2.9 m June 2023

Adeno-associated virus vector-based gene therapy for select adult patients with severe hemophilia A, a rare genetic bleeding disorder with prolonged, uncontrolled or heavy bleeding

Exa-Cel (exagamglogene autotemcel)

Vertex Sickle cell disease, Transfusion-dependent beta-thalassemia

$2–$3 m Sickle cell disease –

Anticipated FDA decision, December 2023

Transfusion-dependent beta-thalassemia –

Anticipated FDA decision, March 2024

Autologous, ex vivo clustered regularly interspaced short palindromic repeats (CRISPR)-Cas9 gene-edited therapy. If approved, it could be the first gene therapy to treat sickle cell disease, a group of inherited red blood cell disorders. It also has the potential to be the second approved gene therapy for transfusion-dependent beta-thalassemia – the most severe form of the disease – in patients who require red blood cell transfusions

Lovo-Cel (lovotibeglogene autotemcel)

bluebird bio Sickle cell disease

$2–$3 m

Anticipated FDA decision, December 2023

A gene therapy that uses a modified lentivirus vector to insert functioning copies of a modified beta-globulin gene into patient’s own hematopoietic stem cells to treat sickle cell disease, a group of inherited red blood cell disorders. If approved, it could be the first gene therapy to treat sickle cell disease


1 How do states pay for Medicaid? (n.d.). Peter G. Peterson Foundation.

2 DeMartino, P., Haag, M. B., Hersh, A. R., Caughey, A. B., & Roth, J. A. (2021). A budget impact analysis of gene therapy for sickle cell disease: The Medicaid perspective. Obstetrical & Gynecological Survey, 76 (12), 727-729. DOI: 10.1097/01.ogx.0000802672.82817.88.

3 Magellan Rx Management medical pharmacy trend report 2022. (2022, November 18).

4 Gifford, Winter, Wiant/Health Management Associates and Dolan, Tian, Rachel/KFF. (n.d.). How state medicaid programs are managing prescription drug costs: Results from a state Medicaid pharmacy survey for state fiscal years 2019 and 2020. (April 2020). The Henry J. Kaiser Family Foundation.

5 Statement from FDA commissioner Scott Gottlieb, M.D. and Peter Marks, M.D., Ph.D., director of the center for biologics evaluation and research on new policies to advance development of safe and effective cell and gene therapies. (2019, January 15). U.S. Food and Drug Administration.

6 MRx pipeline: A view into upcoming specialty and traditional drugs. (2023, July 28).

7 Gene therapy: A promising future at a high price. (2023, March 31). Prime Therapeutics LLC.

7346-O 08/23 © 2023 Prime Therapeutics LLC | Magellan Rx Management, LLC, a Prime Therapeutics LLC company

Prime and Magellan Rx are currently partnering with several states and drug manufacturers who are leveraging the Value Plus solution. Learn more by contacting us at
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