Administration Finalizes Medicare Drug Pricing Rules

Article | 24 November 2020

Administration Finalizes Medicare Drug Pricing Rules

On Nov. 20, 2020, the U.S. Department of Health and Human Services (HHS) issued two new drug pricing rules that follow through on Executive Orders (EOs) signed by President Trump this summer. The HHS Office of Inspector General (OIG) released a prepublication version of a final rule that bans drug rebates in Medicare Part D that are not passed on to patients at the point of sale (POS). Additionally, the Centers for Medicare & Medicaid Services (CMS) released a prepublication version of an interim final rule to lower what Medicare Part B pays for certain drugs based on what other countries pay by establishing a mandatory nationwide demonstration to test a new “most favored nation” (MFN) payment model.

Drug Rebate Rule

Effective Jan. 1, 2022, the drug rebate rule removes Anti-Kickback Statute safe harbor protections for rebates manufacturers negotiate with Medicare Part D plans that are not applied at the POS. A new safe harbor protection will become effective 60 days after publication of the rule to permit plans, pharmacies, and pharmacy benefit managers (PBMs) to apply rebate discounts at the POS to lower patients’ out-of-pocket (OOP) costs. A second new safe harbor, also effective 60 days after publication, will protect flat service fee arrangements that Part D plan sponsors establish with PBMs.

Initially proposed in Feb. 2019, the rule was withdrawn from further regulatory action a few months later in recognition of the negative impact on both Medicare beneficiaries and taxpayers. It was estimated the proposed rule would increase Part D premiums by approximately 25-40%. The Congressional Budget Office and CMS Office of the Chief Actuary further estimated it would result in a significant increase in federal spending over ten years ($177 billion and $196 billion, respectively), making it one of the most expensive proposed regulations in U.S. history. On July 24, 2020, President Trump signed an EO that directed HHS to complete its prior rulemaking process. The EO also included a requirement that the HHS Secretary publicly confirm that the action will not increase federal spending, Medicare beneficiary premiums, or patients’ total OOP costs prior to finalizing any rule. In tandem with the final rule’s release, Secretary Azar issued a letter asserting confirmation in which he relied on his personal experience to project that those costs would not increase. 

Most Favored Nation Rule

CMS released an interim final rule (IFR) to implement a MFN Model to test whether more closely aligning payment for Medicare Part B drugs with international prices can better control Medicare Part B spending without adversely affecting quality of care for Medicare fee-for-service (FFS) beneficiaries. Beginning Jan. 1, 2021, the MFN Model will initially link 50 single source drugs and biologicals to a price calculated from the lowest price among Organisation for Economic Co-operation and Development (OECD) members that have a per-capita Gross Domestic Product (GDP) similar to the US. To cover administration costs, providers will be paid a flat “add on” per dose fee, which will be the same for each MFN Model drug. Paying a flat fee rather than a percentage of each drug’s cost, which Part B currently does, is expected to reduce the financial incentive for providers to administer higher-cost drugs.

Participation in the MFN Model is mandatory, and will include all providers and suppliers nationwide that receive separate Medicare Part B FFS payment for a MFN Model drug, with limited exceptions. The model will have a seven-year demonstration period beginning Jan. 1, 2021.

FDA Unapproved Drugs Initiative Cancelled

In addition to the two new rules, HHS released a notice to terminate the U.S. Food and Drug Administration (FDA) Unapproved Drugs Initiative. The original intent of the program was to reduce the amount of unapproved drugs on the market by requiring manufacturers to remove those drugs from the market or obtain FDA approval by demonstrating evidence of safety and efficacy. However, the program provided manufacturers a “period of de facto market exclusivity,” which allowed them an opportunity to raise prices in an environment largely insulated from market competition. The initiative has also been linked to drug shortages. HHS concluded that the initiative’s termination will have a positive impact on public health because the program limited patient access due to price increases or drug shortages.

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