Block grants offer a fixed sum of money that may be indexed to a predetermined growth rate. They provide the granting entity with a predictable cash outflow. They don’t offer flexibility to accommodate changes in subgroup patient mixture or new technologies that are more effective and more costly than current best choice treatments.

Cystic Fibrosis is a cluster of genetic mutations that makes breathing very difficult. Individuals with CF can’t clear the mucus that coats their lungs as effectively as people without CF. There have been drug regimes, breathing treatments, and other interventions that help this process. That course of treatment is only modestly effective in prolonging life and improving quality of life. For a certain subset of genetic mutations, a drug, Kalydeco, directly attacks the faulty mechanism and dramatically improves the quality of life and probably the length of life of patients.

Kalydeco and another CF drug by the same company are effective but extremely expensive.

However, there looks to be a major technological development. The same firm that makes Kalydeco has some very promising clinical trial results as reported by Stat:

data from three clinical trials testing three different triple combinations of cystic fibrosis drugs. Patients genetically resistant to all treatments now on the market showed unprecedented gains in lung function on all three experimental therapies.

The Vertex data point everyone will be gawking at: a 10 percentage point improvement, adjusted for placebo, in FEV1, an important measure of lung capacity…

Kalydeco lists at more than $300,000 per year. Orkambi, another Vertex cystic fibrosis drug, costs $270,000 per year. If the triple combinations are approved and priced similarly, concerns about the high cost of care will multiply, said Dr. David Cornfield,

If there was a block grant that included treating CF patients using 2016 or 2017 treatment regimes as the baseline, the CF component is a composition of a portion of the patients receiving expensive but effective drugs and half the patients receiving less expensive and less effective treatment regimes.

Yes. This could mean that Kalydeco efficacy, available to 5% of patients, will be available to 90%.

— Matthew Herper (@matthewherper) July 19, 2017

If there was a block grant with a baseline of 2016 costs and an inflation adjustment, and the triple drug therapy is approved in 2018 or 2019, the block granted Medicaid entity has a tough choice. Its CF costs will increase in both the short term and long term. Almost all of the patients with CF would move to the much more effective and much more expensive pharmaceutical treatment regime.

The Medicaid agency would not receive any additional federal funding to deal with the increase expense. It would either need to cut expenses elsewhere or go back to the state government with far more constrained fiscal capacity and ask for more money. Utilization management won’t change the costs much, care management won’t change costs much, it has no ability to negotiate as there are no near substitutes and the Medicaid agency is obligated by law to pay for medically appropriate care.

A block grant without extremely generous growth factors effectively locks in the treatment options to the baseline year (assuming prices grow no faster than the block grant grows on a per capita, risk adjusted basis). A block grant system locks the standard of care for CF into the standard of care available at baseline with substitution occurring as drugs go generic.