Trump Administration’s Eleventh-Hour Drug Pricing Regulations Face an Uncertain Path Forward
9 min read
The Trump Administration recently announced two final rules that implement policy objectives to lower drug prices by tying certain Medicare Part B payments to prices paid by other countries and by replacing an anti-kickback safe harbor for drug manufacturer rebates in the Medicare Part D program. Drug manufacturers face practical challenges from these new rules, assuming they survive expected lawsuits from industry stakeholders and potential revocation by the US Department of Health & Human Services ("HHS") under the incoming Biden Administration.
On Friday, November 20, 2020, President Trump, alongside HHS Secretary Alex Azar, announced two finalized drug-pricing rules aimed at lowering the prices consumers pay for certain prescription drugs.1 One rule creates a Most Favored Nation ("MFN") Model that seeks to lower prices by indexing Medicare Part B payments for the top 50 physician-administered drugs to prices paid by other countries. The second rule focuses on the Medicare Part D program, replacing the current federal anti-kickback safe harbor protection for manufacturer rebates to Part D plan sponsors and their contracted Pharmacy Benefit Managers ("PBMs") with a new safe harbor limited to rebates that benefit patients at the pharmacy counter. Both rules seek to carry into effect Trump Administration policy reiterated over the summer through a series of Executive Orders.2 For drug manufacturers, among other issues, the new rules raise anti-kickback and government price reporting compliance risks, while also increasing the complexity of already challenging pricing decisions. Notably, however, industry stakeholders are likely to file legal challenges to block implementation of the new rules. In addition, the Biden Administration may decide to tackle drug pricing using a different regulatory approach, even though certain objectives of the new administration may be in line with policy goals underlying aspects of the Trump Administration rules.3
The MFN Model Rule. The new MFN Model Rule creates an alternative payment method that ties Medicare Part B payments for the top 50 physician-administered drugs to prices paid by other countries.4 To take advantage of lower prices paid outside the US, the rule benchmarks the Medicare Part B payment amount to prices (adjusted for purchasing power) paid by OECD countries with per capita GDP within 60 percent of the US per capita GDP.5 The MFN Price determined under the rule forms the basis for the Part B payment amount, replacing the ASP-based reimbursement currently used for Medicare Part B drugs. The MFN Price will be phased in over four years, applying a formula that blends the ASP and MFN Price; the phase-in may be accelerated if the drug’s price increases faster than inflation or other limits.6 The new rule also creates an alternative add-on payment to the drug’s cost, replacing the statutorily mandated six percent add-on to ASP with a fixed payment that does not vary by drug and that is not connected to the price of the drug being administered. The purpose of this new approach to the add-on payment is to "break the link" between the price of the drug and the add-on payment and to "remove or reduce the incentive to furnish high cost drugs inherent in the current [ASP-based] methodology."7 As an interim final rule, the MFN Model will be tested over the next seven years, starting on January 1, 2021, through December 31, 2027.8
Implementation of the MFN Model alternative payment method presents a number of challenges for drug manufacturers. These challenges include evaluating and implementing pricing in response to the new rule, which may include charging lower prices to providers reimbursed under the MFN Model, making no changes to pricing, altering prices charged outside the US that affect the MFN Price, and other strategies.9 Manufacturers also will need to assess and address potential changes in demand, because providers may "shift utilization" to competing therapies "to avoid using drugs subject to the MFN Model payment."10 Moreover, manufacturers will need to develop a way to exclude from their ASP calculations any units reimbursed pursuant to the new MFN Model. Despite this obligation, the new rule does not require providers to furnish manufacturers with the data necessary to identify and exclude such units, leaving the task of developing a mechanism to obtain such information to the manufacturers.12
The Rebate Safe Harbor Rule. The new rebate safe harbor rule seeks to end the anti-kickback safe harbor for drug manufacturer rebates paid to Medicare Part D plan sponsors or their contracted PBMs.13 In its place, the rule creates a new safe harbor protection limited to discounts that pass through to patients at the pharmacy counter. To qualify under the new safe harbor, the manufacturer price reduction "must be completely reflected" in the price of the drug "at the time the pharmacy dispenses it" to the consumer.14 The rule also adds a safe harbor protection for manufacturer-PBM fixed-fee service agreements that comply with certain conditions, which include annual disclosures from the PBM to its health plan clients. According to HHS, these changes will lower prices by creating incentives for manufacturers to lower list prices, reducing the incentives for Part D plan sponsors to choose higher cost drugs with higher rebates over comparable drugs with lower prices, lowering patient out-of-pocket spending, and improving transparency.15 Notably, HHS certified that the new rule is not likely to increase federal or state spending, a significant concern with the earlier proposed rules, which the CBO concluded would increase federal and state spending substantially and would increase premiums for Medicare Part D enrollees.16
Manufacturers will face challenges adjusting business practices to ensure compliance with the new safe harbor provisions by the January 1, 2022, effective date and to avoid running afoul of the federal anti-kickback statute, a violation of which risks substantial criminal and civil penalties and may form the basis for actions under the False Claims Act. For example, absent further clarification, views among stakeholders may differ regarding how to structure and implement discounts in order to satisfy the new safe harbor protection, which may result in protracted and difficult negotiations with PBMs and others in the pharmaceutical distribution and payment chain. Value-based arrangements, which may involve data generated and payments made after point of sale, present similar concerns and would require case-by-case analysis to determine whether they fit within one of the new safe harbors.17
Potential Challenges to Implementation. Both rules are expected to face lawsuits from industry stakeholders as well as political challenges. For example, the pharmaceutical industry has already signaled its intention to challenge the MFN rule.18 The industry has long opposed the imposition of regulations that it views as price controls, arguing that such measures reduce innovation and lead to the discovery, development and approval of fewer new drugs. The rebate safe harbor rule faces similar opposition from the Pharmaceutical Care Management Association, a PBM trade association.19 Likewise, the insurance industry trade association, America’s Health Insurance Plans, has warned, "We will … explore all options to reverse this misguided policy and stop its implementation."20 Further, with concerns already being expressed about the quantitative data used to show that insurance premiums and federal spending will not increase under the finalized rules, both measures seem likely to attract legal challenges on procedural and substantive grounds.21
The Trump Administration’s new rules also face political uncertainty. Despite indications of bipartisan support for some type of international index pricing, Democrats have criticized the Trump Administration for finalizing these rules only weeks before the Biden Administration takes over.22 And while the President-elect has vowed to decrease prescription drug prices, reports suggest the Biden Administration may block both rules and seek instead to focus on its own election-campaign proposals, such as allowing Medicare to negotiate prices with drug manufactures and capping price increases based on inflation.23 For the time being at least, the legal and political fate of these two rules is uncertain.
1 Department of Health and Human Services, Interim Final Rule, Most Favored Nation (MFN) Model, 42 CFR § 513 (2020) (the "MFN Model Rule"), https://innovation.cms.gov/media/document/mfn-ifc-rule; Department of Health and Human Services, Final Rule, Fraud Abuse; Removal of Safe Harbor Protection for Rebates Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection for Certain Point-of-Sale Reductions in Price on Prescription Pharmaceuticals and Certain Pharmacy Benefit Manager Service Fees, 42 CFR § 1001 (2020) (the "Rebate Safe Harbor Rule"), https://www.hhs.gov/sites/default/files/rebate-rule-discount-and-pbm-service-fee-final-rule.pdf.
2 We reviewed these Orders previously at President Trump's Most Favored Nation Policy for Medicare Drug Costs Unlikely to Bring Near Term Changes and Uncertainty on Drug Pricing Remains Following Trump Administration Executive Orders.
3 Lovisa Gustafsson & Elizabeth Fowler, "Health Care in the 2020 Presidential Election: Prescription Drugs," The Commonwealth Fund (Oct. 7, 2020).
4 MFN Model Rule, supra n.1, at 6. The rule does not apply to Medicare Advantage or any other group health plan and excludes certain Part B drugs and providers. Id. at 223-24 (§ 513.2).
5 Id. at 7.
6 Id. at 109.
7 Id. Patient cost-sharing of the alternative add-on payment is waived. Id.
8 Id. at 16.
9 Id. at 181, 190-91.
10 Id. at 46.
11 Id. at 28.
12 Id.
13 This rule also applies to rebates provided to Medicaid Managed Care Organizations and their PBMs. Rebate Safe Harbor Rule, supra n.1, at 7-8.
14 Id. at 91.
15 Id. at 5-7.
16 "Secretary Azar Confirmation in Response to Executive Order on Lowering Prices for Patients by Eliminating Kickbacks to Middlemen," U.S. Department of Health and Human Services (Nov. 20, 2020); see also "Incorporating the Effects of the Proposed Rule on Safe Harbors for Pharmaceuticals Rebates in the CBO’s Budget Projections – Supplemental Material for Updated Budget Projections: 2019 to 2029," Congressional Budget Office (May 2019).
17 Rebate Safe Harbor Rule, supra n.1, at 66-67.
18 Yasmeen Abutaleb, "Trump Pushes Last-Minute Drug Pricing Rules Likely to Face Big Legal Challenges," Wash. Post (Nov. 20, 2020).
19 Cathy Kelly, "Medicare Part D Drug Rebate Rule Finally Sees Light of Day: Now What?," Pink Sheet (Nov. 22, 2020).
20 Id.
21 Jacquie Lee, "Trump Unveils Disputed, Long-Shot Drug Rules Upending System (2)," Bloomberg Law (Nov. 20, 2020).
22 Abutaleb, supra n. 18.
23 Cole Werble, "The Rebate Rule May Not Last, But It Changed the Pricing Debate," Pink Sheet (Nov. 30, 2020); Kevin Miller & Melinda Grenier, "What’s Ahead Under President Joe Biden, Industry by Industry," Bloomberg (Nov. 7, 2020).
Constantin F.R. Nuernberger (Law Clerk, White & Case, New York) also assisted in the development of this publication.
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