What “Negotiating” With Medicare Means For Drug Makers: A Mixture Of Price Controls And Actual Negotiations

Healthcare What “Negotiating” With Medicare Means For Drug Makers: A Mixture Of Price Controls And Actual Negotiations Joshua Cohen Contributor Opinions expressed by Forbes Contributors are their own. I write about prescription drug value, market access, healthcare systems, and ethics of distribution of healthcare resources New! Follow this author to stay notified about their latest stories. Got it! Sep 1, 2022, 09:44am EDT | New! Click on the conversation bubble to join the conversation Got it! Share to Facebook Share to Twitter Share to Linkedin US President Joe Biden shakes hands with Senator Joe Manchin, a Democrat from West Virginia, left, .

. . [+] after signing H.

R. 5376, the Inflation Reduction Act of 2022, in the State Dining Room of the White House in Washington, D. C.

, US, on Tuesday, Aug. 16, 2022. House Democrats last week delivered the final votes needed to send Biden a slimmed-down version of his tax, climate and drug price agenda, overcoming a year of infighting.

Photographer: Sarah Silbiger/Bloomberg © 2022 Bloomberg Finance LP In the debate on the drug pricing provisions contained in the Inflation Reduction Act, critics call the government-mandated process “price controls. ” Specifically, they’re referring to the relatively small number of drugs that will be selected for price negotiation with the Centers for Medicare and Medicaid Services (CMS). Starting in 2026, 10 Medicare Part D (outpatient) drugs will have a Medicare-negotiated price.

This number will rise to 15 Part D drugs in 2027, 15 Part B (physician-administered) and D drugs in 2028, and 20 Part B and D drugs in 2029 and beyond. To be selected for negotiation, small molecule drugs must be 9 years post launch and not face generic competition, and large molecule biologics must be 13 years post launch and not have biosimilar competition. Furthermore, the pharmaceuticals chosen will be from the top 50 list of drugs with the highest total Medicare Part D expenditures, and later, beginning in 2028, from the top 50 list of drugs with the highest total Medicare Part B spending.

* CMS will announce which drugs it has selected for negotiation two years prior to the actual implementation of negotiated prices. A two-year long negotiation process will ensue. Imposed by CMS functioning as a monopsonist, or single purchaser, pharmaceutical manufacturers whose branded, single-source drugs are selected for negotiation face stiff penalties in the form of a 65% excise tax for sales during the first 90 days of “non-compliance,” escalating to 95% by the end of the first year.

Here, non-compliance implies not entering negotiations with CMS. In the end, firms have no realistic recourse. They can exit the Medicare market, but that’s highly unlikely, given how important this segment is to most pharmaceutical firms.

On the other hand, proponents of the legislation call it a process by which “fair prices” are established through “negotiations. ” They say changes are long overdue in a system in which, until now, drug makers were unilaterally calling the shots. Both sides of this debate tend to gloss over the fact that in the current system pharmacy benefit managers (PBMs), which operate Medicare Part D plans, already negotiate drug prices with pharmaceutical manufacturers.

While they don’t do this collectively as a monopsonist – rather, as separate entities – they can and do exert substantial downward pressure on net prices, particularly with respect to the types of drugs targeted by Medicare for negotiation in the Inflation Reduction Act. It is highly probable that by the time these drugs’ exclusivity periods are about to expire they’re in direct competition with others in the same therapeutic class. Correspondingly, the more competitive a therapeutic class the steeper the rebates and the lower the net prices.

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Before the FDA Clinical or Safety Reviews Have Been Made Public But, to reiterate what was mentioned above, the key change introduced by the legislation is that drug manufacturers will be confronted with a government monopsonist whose stick is draconian; a series of excise tax penalties. In theory, a monopsonist can therefore extract maximum discounts. It will after all be a `take it or leave it’ negotiation.

And so, the pharmaceutical industry and the investor community worry that the tail end of a drug’s life cycle will be drastically reduced in terms of revenues. In Europe and elsewhere, government purchasers intervene – both in terms of pricing and reimbursement – at every stage in the lifecycle of a drug. Evidence is mixed as to how much of a discount government purchasers are able to achieve.

For newly approved drugs, a 20% discount off of the list price is typical at launch. However, there have been several high-profile instances, in which price cuts of up to 60% have been imposed by government payers; for example, when bluebird bio wanted to launch its newly approved drug Zynteglo (betibeglogene autotemcel) – indicated for beta thalassemia – the German reimbursement authority demanded a 60% price reduction. Regarding drugs that fit the profile of the ones whose prices CMS will be negotiating, there is evidence from tender offers in Europe that discounts can be quite sizable; at least 40%.

So, for example, public hospital systems and other large purchasers in the U. K. often procure drugs through competitive bidding when there is more than one drug in a therapeutic class.

Where this occurs, competing manufacturers must lower their prices considerably to attain market share. While in the U. S.

there won’t be nationwide tender offers for drugs in the late stage of their lifecycle, for one segment of the market – Medicare – the government will be a monopsonist for a small number of drugs. Here, the legislation establishes an upper limit for the negotiated price (the “maximum fair price”), equal to a percentage of the non-federal average manufacturer price (AMP): 75% for small-molecule drugs which are more than 9 years but less than 12 years removed from their first date of marketing; 65% for drugs between 12 and 16 years after launch; and 40% for drugs more than 16 years after coming to market. Though there is a maximum “fair price” there is no floor, which in theory means the government could leverage its monospony power to the fullest extent.

But, conspicuously, the Inflation Reduction Act lays out explicit criteria with which drug makers may justify their counteroffers to the price CMS determines is a benchmark “maximum fair price. ” During the two year period of negotiations following a drug’s selection by Medicare an exchange of information between CMS and drug manufacturers will occur in which drug makers can provide supporting documentation regarding their counteroffers. The bill includes criteria that can be used in these price negotiations.

For the purposes of negotiating the maximum “ fair price ” of a selected drug, the Secretary shall consider, among others, the following factors: Research and development (R&D) costs of the drug, and the extent to which the manufacturer has recouped R&D costs; The degree to which a drug meets unmet medical needs for a condition for which treatment or diagnosis is not addressed adequately by available therapeutics; The extent to which a drug represents a therapeutic advance as compared to existing therapeutic alternatives; Comparative effectiveness of the drug in question, taking into consideration the effects on specific populations, including the disabled, the elderly, and the terminally ill. It’s an open question whether CMS will contract with outside drug appraisers like the Institute for Clinical and Economic Review to analyze counteroffers. Presently, Medicare doesn’t have the requisite expertise, so it stands to reason CMS will outsource at least some the evaluation to a third party.

Furthermore, the use of certain metrics, such as the Quality Adjusted Life Year (QALY), will be off the table. The bill prohibits the use of evidence from comparative clinical effectiveness in a manner that “treats extending the life of an elderly, disabled, or terminally ill individual as of lower value than extending the life of an individual who is younger, non-disabled, or not terminally ill. ” In sum, the legislation imposes a number of controls, such as minimum discounts off of non-federal AMP, as well as a framework regarding how to define “fair” prices and how the negotiating process will ultimately determine prices based on factors CMS must consider, which include R&D costs, unmet need, therapeutic gain, and comparative clinical effectiveness.

Given the level of detail spelled out in the legislation with respect to the criteria drug manufacturers may use to support their case for a counteroffer price, it’s very unlikely CMS will lowball drug manufacturers if they present a counteroffer that’s substantiated by documentation in support of the criteria outlined above. Suppose CMS were to ignore drug makers’ pleas regarding the merits of drugs being considered, the agency could subject itself to legal action. A farcical negotiation that doesn’t account for the criteria which the bill lays out could make CMS liable.

Follow me on Twitter . * The number of negotiated drugs will expand to 15 Part D drugs in 2027, 15 Part B (physician-administered) and Part D drugs in 2028, and 20 Part B and Part D drugs in 2029 and later years. Analogous to Part D drugs, Part B drugs will be chosen from the top 50 Part B drugs in terms of total Medicare spending.

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