Medicaid best-price risk in value-based drug contracts: what manufacturer teams must model before signing

A manufacturer that signs a value-based purchasing (VBP) arrangement with a commercial payer agrees to refund or rebate part of the purchase price when a drug does not meet agreed clinical outcomes. If that refund applies even to a single patient, the reduced price can become the new Medicaid "best price" for every unit of that dosage form and strength sold to any Medicaid program in the same quarter. The downstream cost to the manufacturer can dwarf the original commercial refund by orders of magnitude.

This article is for government pricing analysts, commercial operations leads, legal counsel negotiating VBP terms, and market access directors who need to understand where Medicaid best-price risk still lives in value-based contracts, even after CMS's regulatory reforms.

The statutory mechanism: how one refund can reset national best price

Section 1927 of the Social Security Act

Under Section 1927 of the Social Security Act and implementing regulations at 42 CFR Part 447 Subpart I, any manufacturer that wants its outpatient drugs covered by state Medicaid programs must sign a National Drug Rebate Agreement (NDRA) with HHS and report two pricing metrics each quarter:

• Average Manufacturer Price (AMP): the weighted average price paid to the manufacturer by wholesalers and retail community pharmacies.
• Best Price: the lowest price available from the manufacturer to any wholesaler, retailer, provider, HMO, nonprofit entity, or governmental entity in the United States during the rebate period, net of virtually all discounts, rebates, chargebacks, and other price concessions.

The Medicaid rebate for a single-source brand drug is the greater of:

1. AMP minus best price (the "best-price differential"), or
2. 23.1% of AMP (the "basic rebate floor").

An additional inflation-based penalty (CPI-U penalty) often pushes the total rebate well above 23.1%. KFF reported in September 2025 that 48 states and DC had supplemental rebate agreements layered on top of the federal formula, so the effective Medicaid discount on many branded drugs can exceed 50% of AMP.

Why VBP refunds threaten best price

In a value-based arrangement, if a patient fails to meet a clinical endpoint, the manufacturer may issue a partial or full refund to the payer. Under the pre-2022 regulatory framework, that refund was a price concession that reduced the effective price for that unit. If the post-refund price was lower than the current Medicaid best price, it became the new best price for that dosage form and strength for the entire quarter.

The math is punishing. Consider a drug with AMP of $10,000 per unit and current best price of $9,500 (a 5% commercial discount). If a VBP refund on a single patient reduces the effective price to $5,000, then:

• The new best price is $5,000.
• The best-price differential rebate jumps from $500/unit ($10,000 − $9,500) to $5,000/unit ($10,000 − $5,000).
• This applies to every Medicaid unit nationwide for the quarter, not just the one patient who triggered the refund.

The 2020 CMS final rule and the multiple best-price fix

What CMS changed

In December 2020, CMS published a final rule (85 FR 87000) titled "Medicaid Program; Establishing Minimum Standards in Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based Purchasing (VBP) for Drugs Covered in Medicaid." The rule created two pathways to mitigate best-price risk from VBP arrangements:

1. Bundled-sale treatment: VBP arrangements can be reported as bundled sales under 42 CFR 447.502, where discounts are allocated proportionally across all units in the arrangement rather than applied to individual units.

2. Multiple best-price reporting: Manufacturers can elect to report multiple best prices for a single dosage form and strength when the different prices result from a qualifying VBP arrangement offered to all states.

The multiple best-price option took effect on July 1, 2022, after CMS issued technical guidance and updated the Medicaid Drug Pricing (MDP) system to accept multiple price points. CMS released a notice through GovDelivery in June 2022 confirming the implementation timeline and providing technical instructions for both manufacturers and states.

The offer-to-all-states requirement

The regulatory text at 42 CFR 447.505(a) states that the multiple best-price option is available only if the VBP arrangement "is offered to all states." This is not a formality. It means the manufacturer must extend the same arrangement — same outcome metrics, same refund triggers, same terms — to every state Medicaid program, not just the commercial payer with which the original deal was negotiated.

In practice, most manufacturers fulfill this obligation by amending their NDRAs or state supplemental rebate agreements to include the VBP terms. States that decline to participate do not prevent the manufacturer from using the multiple best-price option, but the manufacturer must document the offer.

ASP interaction

CMS clarified in a separate guidance document that rebates paid to states under the multiple best-price program are considered rebates under Section 1927 and therefore excluded from the ASP calculation under Section 1847A(c)(3) of the Social Security Act. This is important for manufacturers with drugs reimbursed under Medicare Part B, because it means VBP-driven Medicaid rebates do not simultaneously depress ASP.

Remaining risk scenarios the rule does not fully address

1. Supplemental rebate stacking with VBP refunds

Even when the federal best-price risk is managed through multiple best-price reporting, states can still negotiate supplemental rebates on top of the federal rebate. If a VBP arrangement produces a very low best-price point, some states may use that price point as the baseline for negotiating even deeper supplemental rebates, arguing that the manufacturer has already acknowledged the drug is worth less than list price in certain scenarios.

As of 2025, multi-state purchasing pools and individual state Medicaid programs routinely use best-price disclosures as leverage in supplemental rebate negotiations. A manufacturer that has not modeled the supplemental rebate cascade before signing a VBP deal can find its net Medicaid price significantly lower than expected.

2. Non-qualifying VBP arrangements

Not every value-based arrangement meets the regulatory definition of a VBP arrangement at 42 CFR 447.502. The definition requires that the arrangement be "intended to align pricing and/or payments to an observed or expected therapeutic or clinical value in a select population." Arrangements that are purely financial — volume discounts, market-share rebates, warranty programs not tied to clinical outcomes — may not qualify.

If a manufacturer's arrangement does not meet the 42 CFR 447.502 definition, the multiple best-price reporting option is unavailable, and any refund reverts to the traditional single-best-price calculation. The distinction between a qualifying VBP arrangement and a non-qualifying commercial discount is a legal determination that should be documented before execution.

3. The AMP reporting lag and quarterly reconciliation

AMP is reported quarterly, and best-price concessions from VBP arrangements may not surface until claims reconciliation is complete — which can be months after the original sale. A manufacturer may report one best price in Q2 based on available data, then discover in Q4 that a VBP refund processed in Q2 actually produced a lower price. The restatement obligation can be significant, both in financial terms and in audit exposure.

4. State Medicaid managed care and MCO carve-outs

Approximately 70% of Medicaid beneficiaries are enrolled in managed care organizations (MCOs). MCOs may negotiate their own VBP arrangements with manufacturers, and the treatment of MCO-level rebates in the best-price calculation depends on whether the MCO arrangement qualifies under the federal VBP definition. If an MCO-level arrangement does not meet the standard, and the manufacturer does not catch it, the best-price exposure remains.

5. PBM accumulator programs and patient copay assistance

CMS's 2020 final rule also addressed the exclusion of certain manufacturer-sponsored patient assistance programs from best-price calculations. However, the rule's treatment of copay accumulator and maximizer programs remains a live issue. If a manufacturer provides copay assistance that effectively reduces the patient's out-of-pocket cost, and the payer runs that assistance through an accumulator program that does not apply it toward the deductible, the manufacturer may still need to evaluate whether the assistance transaction creates best-price exposure.

Pre-execution checklist for manufacturer teams

Before signing a VBP arrangement

After execution

• Monitor claims reconciliation quarterly. VBP refunds that appear after the reporting deadline must be restated.
• Track state acceptance or rejection of the VBP offer. Document which states opted in and which declined.
• Reconcile MCO-level arrangements against the federal VBP qualification criteria.
• Audit copay assistance programs for accumulator/maximizer interactions that could create new best-price points.

What changed in 2025–2026

CMS Cell and Gene Therapy Access Model

In 2025, CMS launched the Cell and Gene Therapy (CGT) Access Model, with 33 states participating in outcomes-based agreements for sickle cell gene therapies. This represents the first federally coordinated outcomes-based program for gene therapies and has forced manufacturers to operationalize the multiple best-price reporting mechanism at scale. The model requires manufacturers to offer the same outcomes-based terms to all participating states, which satisfies the 42 CFR 447.505(a) requirement.

CY 2026 Physician Fee Schedule final rule

The CY 2026 PFS final rule (published October 31, 2025) modified ASP calculation requirements, including new documentation and submission requirements related to bona fide service fees (BFSFs) and new policies governing bundled sale arrangements. CMS finalized a January 1, 2026 compliance deadline for the new submission requirements, which means manufacturers executing VBP arrangements in 2026 must ensure their reporting systems capture the additional documentation CMS now requires.

IRA negotiated prices and VBP interaction

The Inflation Reduction Act's Medicare drug price negotiation program set negotiated maximum fair prices for 10 drugs beginning in 2026, with 15 more in 2027. Manufacturers with both IRA-negotiated prices and VBP arrangements must evaluate whether the negotiated Medicare price creates a separate best-price point or interacts with the VBP best-price calculation. CMS has not issued final guidance on this interaction as of May 2026.

What to monitor next

• CMS guidance on IRA negotiated price and best-price interaction: The gap between IRA maximum fair prices and VBP best-price points could create a new class of pricing risk.
• State supplemental rebate escalation: As more states adopt VBP arrangements, watch for states that use VBP-derived best-price points as leverage for deeper supplemental rebates.
• MCO-level VBP audit enforcement: CMS and state Medicaid agencies may increase scrutiny of MCO-level arrangements that do not qualify under 42 CFR 447.502.
• Bayesian and RWE-based outcome measurement: As FDA accepts more real-world evidence in regulatory decision-making, VBP arrangements may increasingly rely on RWE-based endpoints, which could complicate the clinical-value alignment requirement in the VBP definition.

Sources

• Section 1927 of the Social Security Act, 42 USC 1396r-8: Medicaid Drug Rebate Program statutory authority.
• 42 CFR Part 447 Subpart I: Payment for Drugs — implementing regulations for AMP and best price. Available at https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-C/part-447/subpart-I.
• 42 CFR 447.502: Definitions, including value-based purchasing (VBP) arrangement. Available at https://www.law.cornell.edu/cfr/text/42/447.502.
• 42 CFR 447.505: Determination of best price, including multiple best-price reporting for VBP arrangements. Available at https://www.ecfr.gov/current/title-42/chapter-IV/subchapter-C/part-447/subpart-I/section-447.505.
• CMS Final Rule, 85 FR 87000 (December 31, 2020): "Medicaid Program; Establishing Minimum Standards in Medicaid State Drug Utilization Review (DUR) and Supporting Value-Based Purchasing (VBP) for Drugs Covered in Medicaid." Available at https://www.federalregister.gov/documents/2020/12/31/2020-28567/medicaid-program-establishing-minimum-standards-in-medicaid-state-drug-utilization-review-dur-and.
• CMS Medicaid Drug Rebate Program Notice on VBP Arrangements using Multiple Best Prices (June 2022): Technical guidance for manufacturers and states. Available at https://content.govdelivery.com/accounts/USCMSMEDICAID/bulletins/310181e.
• CMS Clarification on Medicaid Drug Rebate Program "Multiple Best Prices" and ASP Reporting: Guidance on exclusion of VBP rebates from ASP calculation. Available at https://www.cms.gov/files/document/part-b-average-sales-price-asp-data-reporting-guidance-clarification-medicaid-drug-rebate-program.pdf.
• KFF, "5 Key Facts About Medicaid Prescription Drugs" (September 2025): State supplemental rebate adoption data. Available at https://www.kff.org/medicaid/5-key-facts-about-medicaid-prescription-drugs.
• CY 2026 Physician Fee Schedule Final Rule (October 31, 2025): ASP calculation changes, BFSF documentation requirements. Available at https://www.federalregister.gov/documents/2025/10/31/2025-23687/medicare-program-cy-2026-revisions-to-payment-policies-under-the-physician-fee-schedule-and-other.
• CMS Cell and Gene Therapy Access Model (2025): Federal outcomes-based agreements for sickle cell gene therapies. Available at https://www.cms.gov/newsroom/fact-sheets/cms-cell-and-gene-therapy-access-model.