PSG Position: President Trump’s Latest Executive Order

November 30, 2020

On November 20, 2020, the Trump administration finalized rules aimed at reducing the costs of drugs.

Michael Kolodij, PharmD, unpacks both:

  1. “Most Favored Nation” rule requiring Medicare Part B rates to target the lowest price paid by similar nations for the same drugs; and
  2. A new rebate rule that removes the rebate safe harbor shield under the federal anti-kickback statute for Medicare Part D plans. The safe harbor would be extended only for rebates that are passed through at the point of sale.

Fact Sheet: Trump Administration Finalizes Proposal to Lower Drug Costs by Targeting Backdoor Rebates and Encouraging Direct Discounts to Patients


Most-Favored-Nation Price for Medicare Part B Drugs

What it is: The interim final rule with comment period (CMS-5528-IFC) implements a new payment model program for Fee-for-Service (FFS) Medicare Part B  that aligns prices paid by the U.S. Government with the lowest price paid by other developed nations. The model will go into effect on January 1, 2021, and last seven years.

The rationale is that the largest buyers pay the lowest prices, yet this has not been true for prescription drugs. While the U.S. Federal Government is the largest payer for prescription drugs globally, it pays more than many smaller countries.  Other nations typically pay far less for medications, mainly because their governments often determine the cost. Today, Medicare reimburses based on a published Average Sales Price (ASP) plus a six percent add-on payment of the drug cost, giving the provider margin for their services. This model would phase in the determined “most-favored-nation price” (MFN), blending ASP rate with MFN over the first three years of the model and then fully convert to MFN price in years four through seven.  Providers will receive a per dose, fixed dollar reimbursement to replace the six percent of drug cost add-on payment to remove the incentive to administer higher cost products as a means of increasing revenue.

The CMS Office of the Actuary (OACT) estimates this program will save $85.5B in federal spending over the course of the seven years, and beneficiaries will save $28.5B with reduced premiums and lower coinsurances on Part B drugs.

The program only includes the top 50 medically administered drugs based on the gross cost in 2019 and may expand as utilization changes. Certain products will be excluded from the MFN model, such as vaccines and therapeutics, to treat COVID-19.  Important to note that although much has been discussed regarding biosimilars lowering medical drug costs, only one of the 50 drugs included in the program is a biosimilar product due to the overall low utilization here in the U.S.

The challenges: Legal challenges may arise, and many were already noted when this was first announced. The success of this model has some critical dependencies if implemented as discussed at length in the rule:

  1. How does pharma react to this new pricing methodology? Will other developed countries experience drug increases at a rate that outpaces expectations?
  2. How will Medicare obtain reliable international net pricing data necessary to identify the target most favored nations price?
  3. Will U.S. healthcare providers be able to source the drugs included in the model at or below the MFN price?
  4. Certain specialties like oncology and neurology are projected to lose revenue in this model. What will the economic impact be to healthcare providers, and how will they react?
  5. Will providers change care or treatment plans based on this new payment model?
  6. How will patients access medications if providers decline to take the financial risk of acquiring and administering medications at a financial loss?

Our take:  This final rule faces material headwinds in the form of substantive and procedural legal challenges as well as implementation complications.  Several variables will need to go in favor of this model for it to succeed.  There may be legal challenges from those opposed, or there could also be actions taken that limit the success of the model.  Assuming this goes as the administration intends, the MFN model has the potential to spur the paradigm shift for specialist providers away from fee-for-service to value-based models when treating conditions like multiple sclerosis or different cancers.  Although this model is being tested in FFS, it will have downstream impacts on Medicare Advantage (MA) plan revenue as FFS costs for Part B drugs go down.  If successful and sustainable, we would expect private payers to align reimbursement rates from the MFN model into their provider contracts for MA and Commercial patients.


Part D Rebates

What it is: This final rule was proposed back in 2019. It seeks to direct all Part D manufacturer rebates on prescription drugs directly to patients at the point of sale effective January 1, 2022. We shared our detailed thoughts on the original rule and its impact last year.

The challenges: It was previously hard to believe that the proposed rule could be finalized because financial analysis by the Centers for Medicare and Medicaid Services (CMS) included in the proposed rule showed that the proposed policy changes would raise both beneficiary premiums and federal spending. The final rule provided several scenarios modeled by OACT, Milliman, and Wakely that all projected increased Medicare beneficiaries’ premiums. Government spending was also projected to increase unless Part D plans could exert greater formulary control than what is allowed today.  There are no provisions in the rule or changes to regulations governing Part D plans and their ability to manage formularies. However, Alex Azar, Secretary for Health and Human Services, did change course by publicly confirming that federal spending and premiums would not increase.  His statement does not explicitly state why he believes the existing actuarial projections are incorrect.

Part D plan sponsors will be faced with the task of determining what this means for them and how they may need to bid this upcoming spring differently for the 2022 plan year. Health plans and pharmacy benefit managers (PBMs) are better equipped than in 2019, having been through the exercise two years ago, with alternative formulary strategies that mitigate the impact and additional experience administering rebates at the point of sale in other market segments.

Our take: This final rule faces material headwinds in the form of substantive and procedural legal challenges as well as implementation complications.  The final rule conjures up memories of the 2020 bid development in the spring of 2019 when the entire industry was attempting to handicap the probability of the Anti-Kickback Statute being amended and adapt to the potential of Part D rebates applied at the point of sale.  Those opposed have the same argument today that this is sacrificing cost for transparency, while only a small fraction of Medicare beneficiaries will realize the benefit.

Medicare has an opportunity to lead and disrupt the industry. However, it needs to ensure this new payment model is advantageous to Medicare beneficiaries and federal government/payers. While this reform will promote transparency, it needs to be coupled with other changes such as increased formulary controls to create meaningful pricing pressure and competition among manufacturers.