On November 19, the US House of Representatives advanced a series of drug pricing proposals as part of the BBBA, which now moved to the Senate for further negotiations. One provision gives the Secretary of Health and Human Services the authority to negotiate prices of certain drugs directly with manufacturers and to establish a maximum fair price (MFP) for products reimbursed under Medicare Parts B and D that have been on the market for an extended period without generic or biosimilar competition. The MFP would be determined as a percentage of the drug’s non-federal average manufacturer price, adjusted based on the number of years since its Food & Drug Administration approval.

For Medicare Part B drugs, the legislation proposes to apply the MFP directly to provider reimbursement. Instead of basing payment on the drug’s average sales price (ASP) + 6% as under current law, the Centers for Medicare and Medicaid Services (CMS) would be required to tie the provider reimbursement to MFP + 6%. In turn, the beneficiary’s 20% coinsurance for Medicare-negotiated Part B drugs would be based on the MFP rather than the product’s ASP. Additionally, the BBBA requires price concessions associated with the MFP to be applied to subsequent ASP and Medicaid best price (BP) calculations.

This current policy design for Medicare negotiations outlined in the House version of the legislation may create 4 key considerations.

Increased Financial Risk for Providers Administering Part B Drugs Selected for Negotiation.

A recent Avalere analysis found that shifting payment from ASP + 6% to MFP + 6% in Medicare fee-for-service (FFS) would lead to an average 39.8% reduction to add-on payments for top Part B with the highest likelihood to be targeted for negotiation. This could cause significant financial pressures for providers who routinely administer negotiated products, because the add-on payments are supposed to cover a range of fixed overhead costs associated with drug storing, handling, and administering complex biologics.

Spillover and Potential Distortions to Commercial Market Dynamics

Because the price concessions associated with the MFP are explicitly included in Medicaid best price calculations and are not explicitly excluded from ASP, then BP and ASP for negotiated drugs are likely to steadily decline over time, depending on how the provision is implemented by the CMS. A substantial share of commercial and Medicare Advantage contracts between payers and providers are structured based on ASP, so MFP-based negotiations could produce a spillover effect on physician payment that extends beyond FFS Medicare and places further financial pressures on providers. These pressures are likely to be more pronounced for independent physician practices than hospitals, since a larger proportion of reimbursement arrangements in the physician setting are tied to ASP. Meanwhile, hospitals are often reimbursed under a “percent of charges” formula that is better insulated from shifts in ASPs, particularly given that the hospitals’ stronger negotiating position enables them to command higher commercial reimbursement in general. Moreover, states tend to base reimbursement in FFS Medicaid to ASP, so ASP volatility could reduce the number of providers willing and able to care for low-income patients.

Additional Administrative and Overhead Burden for Providers to Avoid Risk of Diversion

Medicare negotiation as outlined in the BBBA does not change the way drug prices are set by manufacturers, but rather it lowers provider reimbursement with the expectation that drug makers would in turn offer greater price concessions for negotiated products administered to eligible Medicare beneficiaries. As a result, physicians would be able to acquire negotiated drugs for Medicare patients at lower prices than for all other patients. The establishment of differential pricing for specific patients would create significant challenges for a drug distribution system organized around aggregate negotiations and sales, without regard to the patient who may ultimately receive a specific unit or the payer who may reimburse for it. The challenge is that wholesalers, distributors, and group purchasing organizations currently have no access to claims data, so they have no visibility into who receives the drugs purchased by providers. Without a proper tracking mechanism, it is unclear if the CMS would be able to ensure that providers would only access MFP pricing for their Medicare patients and not for non-Medicare patients, creating a significant diversion risk.

To avoid unintended diversion, fraud, and abuse, providers would likely be expected to assume new responsibilities to protect the integrity and spirit of the MFP program. However, while they may be expected to deploy new physical and technological infrastructure to maintain and track separate inventories, providers would also have reduced compensation for overhead costs for negotiated drugs as outlined above.

An analogous situation exists with providers who administer vaccines and face significant additional burden to track doses and patients separately. Physicians must maintain separate inventories of vaccines, one inventory of privately purchased vaccines for privately insured children and one inventory of publicly funded vaccine supplied to the provider for administration to VFC and state vaccine-eligible children. Borrowing from the public inventory is allowed under unforeseen circumstances, but the provider must always document the type of vaccine borrowed, from which stock, the patient’s name and date of birth, the date the dose was administered, an approved reason for borrowing, and the date the corresponding replacement dose was returned to the appropriate stock. In 2012, the Office of the Inspector General (OIG) found that despite best efforts, many providers generally did not maintain proper documentation. As a result, the OIG recommended that the Center for Disease Control and Prevention ramp up efforts to ensure accountability and to prevent fraud and abuse, while also updating training materials, written procedures, and document templates it has developed for providers. Similarly, under the BBBA, providers and the CMS will likely face new administrative responsibilities to track and document doses administered to eligible Medicare patients.

Dampened Incentives for Future Market Entry of Biosimilars

Under the current MFP negotiation program, drugs targeted for negotiation would remain negotiation-eligible until either a generic or biosimilar becomes available. Once these generic and biosimilar products enter the market, the brand or reference products would be excluded from further negotiations and shifted back to ASP-based reimbursement. However, the ASP erosion described above may put biosimilars at a disadvantage. Biosimilar competitors to negotiated drugs would enter the market competing against a price that has been lowered by government reimbursement cuts. This would impact the estimates of future revenue by biosimilar manufacturers and their ability to recoup developmental costs upon commercialization. The upshot could be that manufacturers abandon plans to bring biosimilar products of negotiated drugs to the market in the first place.

What’s Next?

As this legislation moves through the Congressional process, stakeholders should evaluate the potential impact on Medicare Part B provider payments and practice viability, as well as downstream implications for access to care and incentives for consolidation. Alternative ways to operationalize BBBA negotiation could be considered that could still lower costs for the Medicare program and for patients.

For example, the proposal to implement a penalty for drug price growth beyond inflation also included in the BBBA relies on retrospective rebates rather than upfront cuts in reimbursement. Under that proposal, the CMS would base cost sharing for beneficiaries on the inflation capped price, while reimbursing providers at ASP+6% and billing manufacturers for any inflation penalty on a quarterly basis. Manufacturers would be required to pay the government directly, while reimbursement to providers would remain unchanged and the inflation penalty would not be reported in BP and ASP calculation. A similar mechanism for capturing savings from BBBA negotiations could be operationalized in parallel with the inflation penalty and potentially avoid the challenges associated with upfront cuts.

Similarly, states also receive mandatory Medicaid rebates directly from drug manufacturers on prescription drugs provided through Medicaid. The rebates are paid quarterly to states, and the savings are shared with the federal government. Cost sharing for beneficiaries is capped, but providers are reimbursed by FFS Medicaid for physician-administered drugs in most cases at ASP + 6%.

As the Senate works on an updated BBBA draft, stakeholders might consider these and other potential downstream implications associated with the current negotiation proposal as written.

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