If I have not made it clear to this point, I am skeptical that a federal agency struggling to hire qualified people can negotiate anything with an industry armed with Midas' Treasury (which at one time was the U.S. Treasury), the nation's top law firms and more than a few lobbyists. I am even more skeptical that the courts will find it acceptable that a 95% excise tax (based on sales) can be assessed on a drug manufacturer that prefers not to negotiate with the federal government. I am suspicious that political motives will become part of CMS's calculations when selecting the 10-20 drugs out of an eligible 50.
Nonetheless, it is worth the time and effort to consider what might happen if the law performed as intended.
The drug price negotiation portions of the Inflation Reduction Act are fairly prescriptive, which is good in the sense that Congress is not deferring to the SecHHS on as many things as it has in the past. Part of their motivation is fear over a shift in power at the executive level. Part of that could be the influence of West Virginia v. EPA. Whatever the cause, the drug price negotiation provisions establish time tables and guardrails around the SecHHS's negotiation authority.
For 2026 and 2027, the price negotiation provisions only apply to Medicare Part D drugs. From 2028 and onward, prices for Part B and D are to be negotiated. Of the 50 drugs from which CMS can pick ten (in 2024 for 2026 implementation), at least seven years must have elapsed since FDA approval for small molecule drugs and 11 years for biological products. Only drugs with no competing generic or biosimilar are eligible. Authorized generics are treated as the same product as the qualifying drug. Data used in determining eligibility will be aggregated across dosage levels and delivery mechanisms.
The ten drugs selected for negotiation cannot be orphan drugs or low spend Medicare drugs, defined as a Part D or B spend of less than $200M in 2022-23, inflated by CPI-U thereafter. There is also an exclusion for small biotech drugs in 2026, 27 and 28.
Once the ten drugs are selected for the implementation year of 2026 (which would be fall 2023), CMS will enter into a negotiation with the manufacturer using a methodology developed by CMS, presumably via rulemaking. The law specifies that, at the start of the negotiation, the drug makers must submit the "Non-Federal Average Manufacture Price." The Non-Federal Average Manufacture Price (AMP) is the price paid by wholesalers to the manufacturer after considering discounts and price concessions but, not including prices paid by the federal government. Not clear if the federal government includes Medicaid drug purchases.
In other words, the starting point for drug price negotiations will be the AMP.
The drug manufacturers can submit other information which the SecHHS is obligated to consider. These factors include:
- Research & Development costs and the extent to which they may have been recouped.
- Current unit costs of production and distribution of the drug
- Prior federal financial support for novel therapeutic discovery and development
- Market data and revenue and sales volume in the U.S.
Drug manufacturers can also consider evidence about alternative treatments such as the way in which the drug represents a therapeutic advance and comparative effectiveness.
Out of the negotiation process should emerge the "Maximum Fair Market Price" which must be made available to Medicare beneficiaries at the point of sale. The maximum fair price will not apply to 340(B) drugs if it is higher than the 340B ceiling price but it will if it is lower. The Maximum Fair Market Price cannot exceed the lesser of Part D plan specific enrollment weighted amounts or the Part B price under the Medicare fee schedule OR
- 75% of the Average Non-federal AMP for short monopoly drugs (drugs that are not extended monopoly or long monopoly drugs - see below)
- 65% of the Average Non-federal AMP for extended monopoly drugs (drugs for which at least 12 and fewer than 16 years have elapsed since FDA approval)
- 40% of the Average Non-Federal AMP for long monopoly drugs (drugs for which at least 16 years have elapsed since FDA approval. Read: Humira)
Once the price is agreed to, it is published and used at the pharmacy point of sale.
Rulemaking will provide more clarity but here are a few issues that come immediately to mind:
First, as far as I know, no other federal agency has been explicitly granted negotiating authority for products generally available to the public. Will CMS be able to keep the deadline set forth by Congress? Hard to say. Will they have enough human and intellectual resources to evaluate R & D spend as a cost input factor? Unlikely.
Second, the starting price for negotiation is the price wholesalers pay to manufacturers which leaves us wondering where ABC, MCK and CAH will get their 2% spread? Or will manufacturers find another logistics response?
Third, the Fair Market Price as negotiated by CMS must be lower than the 340B price, the Part B fee schedule and/or the plan Part D plan specific enrollment weighted average. In effect, CMS is not willing to pay anymore for drugs than a Part D Plan or a 340B hospital. What becomes of all that spread between list price and the price plans pay post-rebate?
Last, the drug channel has played a significant role supporting margins at NFP hospitals, supply chain managers and health plans. Even if the price negotiation accommodates them in some fashion, it seems likely the drug industry will use the new law as a way to squeeze some of the $250B that gets diverted each year. In which case, price negotiation may turn out to be better for the pharmaceutical industry that we might expect.
The law does recognize one very important reality. Generics and biosimilars are much more effective at driving down costs than government intervention. A biologic drug can delay negotiation if it is very likely a biosimilar will be approved in the next several months.
Emily Evans
Managing Director – Health Policy
Twitter
LinkedIn
