New CMS Payment Model Aims to Reduce Medicaid Drug Spending
Overview of the Initiative
The Centers for Medicare & Medicaid Services (CMS) Innovation Center announced the launch of a new payment model designed to decrease drug expenditures in Medicaid, as stated on Thursday. This voluntary model is set to commence in January and will last for five years. It involves the CMS negotiating lower drug prices with participating pharmaceutical companies, using prices from select other countries as a benchmark. The agency is currently inviting applications from manufacturers interested in joining the initiative and is also seeking letters of intent from states that wish to participate in the negotiated pricing and terms. States can enroll on a rolling basis until August 31.
Details of the Generous Model
The new model, known as Generating Cost Reductions for U.S. Medicaid (GENEROUS), will allow drug manufacturers that are accepted into the program to negotiate outpatient drug prices with the CMS. Pricing will be informed by international data, according to the agency. Following these negotiations, manufacturers will receive invoices from participating states for supplemental rebates to align with the established international prices. The CMS will also benefit from a share of these rebates through a decrease in federal Medicaid spending.
Objectives and Statements from CMS Officials
This initiative aims to significantly reduce Medicaid spending on prescription drugs, which the CMS reported exceeded $100 billion in 2024. Abe Sutton, director of the Center for Medicare and Medicaid Innovation, emphasized the need for lower drug prices in the U.S., stating, “Drug prices in the U.S. remain far too high. GENEROUS aims to ensure that Medicaid pricing will be on par with those in other developed nations. My hope is that all eligible Medicaid programs choose to participate in the pilot to help ensure that their Medicaid dollars can go further to support those in need.”
Context and Industry Reactions
The launch of this model follows previous efforts by the Trump administration to reduce drug prices, including a controversial “most favored nation” policy that aligns U.S. prices with those in other countries. Critics argue that such policies could hinder biotech investment and innovation, while some experts warn that manufacturers might exploit the system or abandon less profitable markets, leading to continued high medication costs.
Recently, the White House revealed that Novo Nordisk and Eli Lilly would provide their expensive GLP-1 obesity medications to select Medicare beneficiaries at a monthly cost of $245, with starter doses of pill versions priced at $149 once regulatory approval is secured. Additionally, Pfizer entered an agreement with the administration to offer most favored nation pricing to Medicaid programs and discounts to consumers online. Similarly, AstraZeneca finalized a deal to provide discounted drugs to the safety-net insurance program and through a new government website.
Impact on the Healthcare Landscape
Cost savings have become a primary focus for the CMS Innovation Center, which was established by the Affordable Care Act to explore methods for reducing costs and enhancing quality in programs like Medicare and Medicaid. However, research has indicated that the Innovation Center has not consistently produced savings for the federal government, leading to criticism from lawmakers, particularly Republicans. Earlier this year, the agency announced the cancellation of four payment models and the suspension of two demonstrations, which included models related to drug development and spending.
As the healthcare sector anticipates significant changes to Medicaid following President Trump’s recent tax and policy law, which includes substantial cuts to the safety-net insurance program, millions may face loss of coverage.