Despite division along party lines and industry pushback, the House of Representatives has passed legislation (H.R. 3), the “Lower Drug Costs Now Act”, which would require the Department of Health and Human Services (DHHS) to establish a “Fair Price Negotiation Program” responsible for negotiating Medicare payments for some of the most expensive drugs available to Medicare beneficiaries. The House Ways and Means Committee is the third committee to review the House-sponsored drug price negotiation bill, paving the way for a vote on the measure in the full house by the end of the October 2019.  While republican leadership in the Senate calls the bill “dead on arrival”, it is important to understand just how significant the proposed change would be.

Medicare and Medicaid regulate prices paid for prescription drugs through a collection of drug pricing regulations.  The regulations define different terms, such as “Best Price” (BP), “Average Sales Price” (ASP), and “Average Manufacturer Price” (AMP) – each representing a different benchmark for prescription drug prices paid under the federal healthcare system.  Each of these terms are usually based on some calculation involving the manufacturer’s Wholesale Acquisition Cost (WAC), or list price.  With all of the acronyms and various payment methodologies involved in drug pricing, there is no wonder that the public often fails to understand just how prescription drugs impact government spending on healthcare.

For most Part B (outpatient) covered drugs, Medicare pays 106% of the Average Sales Price (ASP) to the provider furnishing the drug.  This methodology was adopted to help tie reimbursement of Medicare covered drugs to the provider’s cost of acquiring the drug.  ASP is calculated and submitted to CMS by manufacturers on a quarterly basis using a regulatory formula that considers (1) the unit-volume of drugs sold during that quarter and (2) price concessions (like discounts, chargebacks, and rebates) paid by drug manufacturers. This methodology was adopted by CMS to help link reimbursement of Medicare covered drugs to the provider’s cost of acquiring the drug.   However, most providers can acquire Part B drugs at a lower cost than the reimbursement rate that Medicare pays.  This is due, in most part, to the discounts and chargebacks that manufacturers pay to distribution companies, which then pass that saving to the purchasers.  Because the cost of acquiring the drug is usually lower than the rate of reimbursement, providers often make a decent margin on furnishing Medicare-covered outpatient drugs.  However, this, in the eyes of the government, means that Medicare is still spending more on drugs than it needs to.

Negotiating with Manufacturers

In the commercial insurance industry, which includes voluntary Part D prescription drug plans, insurance companies can negotiate reimbursement rates directly with manufacturers (or through Pharmacy Benefit Manager (PBMs)).  The more people covered by an insurance plan (“covered lives”), the more leverage that plan has in the negotiation with manufacturers. They use this leverage to negotiate higher manufacturer rebates.  If a manufacturer wants a preferential placement on the plan’s drug formulary (meaning the drug is easier to access, gets increased utilization, and is subject to higher reimbursement rates for plan providers) they must make these rebates as profitable as possible for the plans, especially when negotiating rebates for drugs in competitive market baskets. The continued push to revamp the Part B reimbursement process stems mostly from the fact that Medicare continues to be the biggest payer for outpatient drugs but has very little negotiation power to command the lowest price possible for Medicare beneficiaries.

Correcting these pricing inefficiencies means large potential savings for the federal government. Medicare has the largest number of covered lives of any single plan in the nation, but it is currently unable to engage in pricing negotiations directly with drug manufacturers. The argument that the government is making is that Medicare should be able to negotiate in the same way as commercial insurance providers to drive down federal spending on outpatient drugs. 

Parity in Pricing

One of the central points of H.R. 3 is that it would tie drug prices in the U.S. to the costs of that same drug in overseas markets. Currently, drug companies often charge more for a drug sold in the U.S. than the same drug sold in other countries. In many countries, healthcare operates overseas  through single payer or other centralized systems in which the government sets maximum pricing on drugs. In contrast, there is no maximum pricing in the U.S. This allows allows drug companies to charge patients in the US significantly more, to recoup R&D expenditures and to offset “losses” in countries with strict pricing ceilings.

If the Congress can pass some drug pricing reform, the federal government would have the ability to control pricing in a way not currently permitted, with the impact of significantly lowering the cost of drugs for Medicare beneficiaries. The impact on drug pricing and on the pharmaceutical industry itself would be vast if enacted. Some in the industry have stated that this is necessary to lower overall healthcare costs, while others argue that such a reduction in spending would stifle drug development in the United States and cause drug shortages.

State Level Changes

The federal push to lower drug pricing is somewhat lagging behind state initiatives.  In recent years, almost every state in the U.S. has proposed to enacted legislation that governs access and affordability to prescription drugs.  Those laws include:

• Price Transparency and Reporting;

• Foreign Importation;

• Anti-Gauging;

• Anti-Gag Provisions for Pharmacies; and

• Manufacturer coupon limitations for drugs with approved generics.

The National Academy for State Health Policy is maintaining a legislative tracker, available here, that is keeping up with the various state-based legislative initiatives. While the federal government continues to grapple with a method of lower drug costs, it is important to remember that many drugs and manufacturers are already subject to price control measures at the state level.  Manufacturers must keep on top of this landscape to ensure that they comply with state level reporting measures and planning strategic price increases accordingly. 

While drug pricing and transparency debates continue at the state and federal level, manufacturers, payers and consumers must keep track of their drug pricing and reporting compliance obligations.  When the DHHS Office of the Inspector General proposed historic changes to the drug rebate safe harbor under the Anti-Kickback Statute in early 2019, we know that manufacturers spent months in committees pouring over payor and PBM contracts to determine how such a change would impact their bottom lines and product utilization. Because of the fragmented state-based pricing laws, we know it can be difficult to understand which laws apply and what an individual manufacturer’s reporting obligations are.  Failing to submit required reports can trigger stiff fines or exclusion from state Medicaid plans.  Therefore, it is vital for business continuity for manufactures organize their government pricing and legal teams to track and monitor compliance with these various obligations. Contact us and we can support your government pricing and payor contracting teams and provide more information about your company’s price reporting obligations under state and federal law.

Click here to find out how a healthcare attorney can help your life science business factor regulations into revenue projections