Trump Administration Slaps Pharma Industry with International Reference Pricing Rule (But will it Survive?)

A flourish of drug regulatory actions have issued from the Trump Administration during its waning days.  Within the past two weeks, HHS has terminated FDA’s Unapproved Drug Initiative by withdrawing two guidances, finalized a proposed OIG safe harbor regulation on PBM rebates that HHS had earlier withdrawn, and revived a CMS rulemaking proceeding to establish international reference pricing under Medicare.  The first of these actions was addressed in our recent post here.  The OIG safe harbor amendments will be covered in a upcoming post.  This post is devoted to the CMS regulation, an interim final rule with comment period published in Friday’s Federal Register, which establishes a Most Favored Nation (MFN) Model for Medicare Part B drug payment.  If it survives legal challenges and a change in administration, this regulation promises to substantially change the drug reimbursement landscape.  The MFN Model is an extensively reformulated version of the International Pricing Index model set forth in a CMS Advance Notice of Proposed Rulemaking (ANPR) in October 2018 (see our post here), and it follows a September 2020 Trump Executive Order directing the Secretary of HHS to “immediately implement the Secretary’s rulemaking plan” to establish a most favored nation model (see our post here).

Developed under the auspices of CMS’ Center for Medicare and Medicaid Innovation (CMMI), the MFN Model will base Medicare Part B payment for 50 selected drugs on prices in foreign countries instead of average sales price (ASP), and will establish a fixed add-on payment in place of the current 6 percent (4.3 percent after sequestration) of ASP.  The MFN drug payment amount is expected to be lower than the current ASP-based payment limit because U.S. drug prices are generally the highest in the world.  CMS expects that, as the Part B payment amounts for the included drugs are reduced, “in order for MFN participants to purchase MFN Model drugs at prices that does [sic] not lead to financial loss, the manufacturer  will need to make available prices that are competitive with the MFN Drug Payment Amounts.”  (85 Fed. Reg. at 762280)  The essential features of the MFN Model are outlined below.

Performance Period:  The MFN Model will be implemented for seven years beginning January 1, 2021.  As described further below, the MFN pricing will be phased in over the first four years, taking full effect during the last three.

Participating Providers:  MFN-based reimbursement will mandatorily apply to all Medicare participating providers that submit a claim to Medicare Part B for a separately payable MFN Model drug.  These will include physicians and other practitioners, hospitals paid under the Outpatient Prospective Payment System (OPPS), and ambulatory surgical centers, among others.  Certain providers will be excluded from the model, including children’s hospitals, cancer hospitals that are not paid under a prospective payment system, critical access hospitals, rural health clinics, Indian Health Service facilities, Federally Qualified Health Centers, and others.

Covered Drugs:  In 2021, MFN payment will apply to the 50 separately paid drugs identified by CMS as having the highest aggregate 2019 total allowed charges.  In subsequent years, the list will be updated to include new drugs that have the top 50 aggregate allowed charges for the most recent calendar year.  However, drugs that drop out of the top 50 will not be deleted from the list, so the list will undoubtedly grow to more than 50.  Certain drug categories are excluded from the model, including, among others, drugs approved under an ANDA; drugs paid under the End Stage Renal Disease Prospective Payment System, including those paid separately using the transitional drug add-on payment (TDAPA); vaccines covered by Part B (influenza, pneumococcal pneumonia, COVID 19, and hepatitis B); oral anti-cancer agents and antiemetic drugs; oral immunosuppressive drugs; and drugs paid under the DME benefit.  Biosimilars are not excluded.  The list of 50 drugs to be included in the MFN Model for 2021 appears in the preamble at 85 Fed. Reg. at 76194.  The list includes one biosimilar.

MFN Drug Payment Amount Calculation Methodology:  The payment for an MFN Model drug will be the MFN Drug Payment Amount plus a fixed add-on payment.  The MFN Drug Payment Amount will be derived from the lowest price of the drug in a covered foreign country, adjusted for the difference in gross domestic product (GDP) between that country and the U.S.  Essentially, the method for establishing the MFN Drug Payment Amount for each quarter will be to (1) use a pricing data source in each of the 22 countries to identify available average price information corresponding to the HCPCS code descriptor for each of the 50 drugs; (2) identify each country’s price for each drug; (3) adjust each price for the difference in GDP between that country and the U.S.; (4) select the lowest country-level adjusted price; (5) compare the latter price with the ASP for the drug and select the lower of the two as the MFN Price; and (6) apply a phase‑in percentage to the MFN Price to obtain the MFN Drug Payment Amount.  This exercise will be repeated quarterly.

• Covered countries: The covered foreign countries are the 22 member countries in the Organisation for Economic Co-operation and Development (OECD) that have a per capita GDP that is at least 60% of the U.S. per capita GDP as of October 1, 2020.  According to the preamble, the rationale for this selection criterion is to identify countries that are economically similar and have comparable purchasing power to the U.S., and generally have drug pricing data available (85 Fed. Reg. at 76200).  The 22 countries from which pricing data will be collected are identified on page 76200 of the preamble.  The list will not be updated during the seven years of the Model.
• Foreign average price data sources: Wherever possible, CMS will select drug pricing data in each country for the same quarter for which the drug’s ASP was calculated (i.e., two quarters before the payment quarter).  Ideally, the data source for each drug in each country will have both sales and volume data, but if not, other sources may be selected based on a hierarchy of criteria identified in the regulation.  The price will be extracted from the data source by “aligning the MFN Model drug’s HCPCS code long description … with the data sources’ standardized method for identifying scientific names or nonproprietary names and dosage formulations, as applicable.”  We caution our readers that this “alignment” is not a strict one.  For example, there is at least one instance where the HCPCS code long description identifies a specific drug brand and formulation that is not sold outside the U.S., yet CMS has calculated an MFN Drug Payment Amount for it based on foreign pricing data listed under a general nonproprietary name that includes numerous other drugs.
• GDP adjustment: Each country-level price derived from its average price data will be adjusted by a GDP adjuster, which is simply the country’s per capita GDP (obtained from the CIA’s World Factbook) divided by the U.S. per capita GDP.  The resulting price is the MFN Price.  A list of GDP adjustors for each of the 22 countries appears on pages 76203-4 of the preamble.  The GDP adjuster for France, for example, is 0.737, so if a drug costs the equivalent of $100 in France, the GDP-adjusted price (MFN Price) is $135.69.
• Phase-in adjustment: After the lowest GDP adjusted country-level price (MFN Price) is selected for a drug, a phase-in formula is applied to obtain the final MFN Drug Payment Amount during the first four years of the model.  The phase-in formula for year one (2021) is 75% of the ASP plus 25% of the MFN Price, for year two, 50% of the ASP plus 50% of the MFN Price; and so forth, until 100% of the MFN price is used for years five through seven.
• Price increase penalty: To counteract the incentive for manufacturers to increase their prices in the commercial market to subsidize lower prices on MFN Drugs to Medicare Part B, the MFN Model incorporates a penalty for price increases, which operates differently during and after the four-year phase-in period.  During the phase-in period, the phase-in percentage of the MFN Price will be accelerated by 5% each quarter if the cumulative percentage increase in the ASP of an MFN Drug, or any of the WACs for any of the NDCs in the drug’s HCPCS Code, is greater than the cumulative percentage increase in both (1) the CPI-U, and (2) the MFN Price.  The cumulative percentage increase in the ASP, the CPI‑U, and the MFN Price will be measured from the end of a baseline quarter to the end of the applicable ASP calendar quarter (i.e., the second quarter before the payment quarter, because that is the quarter whose ASP is ordinarily used to set the payment rate for the current quarter).  The baseline quarter for a drug on the market during 1Q 2021 is 3Q 2020, and the baseline quarter for subsequently launched drugs will be two quarters before the first quarter in which an ASP is published and in effect for the drug.  If conditions (1) and (2) above persist from quarter to quarter, the phase-in percentage of the MFN price will continue to increase 5% each quarter.  For example, if a price increase triggers both (1) and (2) in 3Q 2021 and continues to do so for 4Q 2021, then the phase-in percentages in 2021 will be 25% MFN Price/75% ASP for 1Q 2021, 25% MFN Price/75% ASP for 2Q 2021; 30% MFN Price/70% ASP for 3Q 2021, and 35% MFN Price/65% ASP for 4Q 2021.  Once accelerated, the MFN Price percentage will not decrease, even if the manufacturer lowers its price so that the triggers are no longer met.  After the fourth year of the phase-in period, in every quarter in which both of the triggering conditions are met, the excess percentage increase of ASP or WAC  compared to the percentage increase of CPI-U or MFN Price (whichever increase is greater) will be subtracted from the MFN Drug Payment Amount.  For example, if the greatest cumulative increase is in the ASP compared to the MFN Price and that increase is 3%, then the MFN Drug Payment Amount will be reduced by 3%.
• Add-on payment: To break the link between the add-on payment and the price of the drug, which encourages the use of more expensive drugs, CMS has substituted a fixed add-on payment for 2021 of $148.73 per dose, to be adjusted for inflation in subsequent years.  This will represent a reduction in payment for more expensive drugs and an increase for less expensive ones, but CMS estimates that it will constitute an increase for 70% of drug doses compared to the current 4.3% add-on (after sequestration).

Financial Hardship Exemptions:  Providers may apply for a financial hardship exemption if they were unable to obtain covered drugs at price below the MFN Model Payment during the year, despite exhausting all reasonable methods of doing so.  The request must be submitted within 60 days after the end of the year, and must contain specified information on cost and the methods used to try to obtain each MFN model drug.

The Prospects for This Rule

Although the MFN Model interim final rule with comment period is effective as of November 27 and the model payment methodology is scheduled to begin on January 1, 2021, it faces uncertain prospects for implementation.  In the first place, the authority for the regulation is Section 1115A of the Social Security Act, which established CMMI, and which was added by the Affordable Care Act.  Paradoxically, the Trump Administration has joined a lawsuit brought by several states seeking to invalidate the Affordable Care Act in its entirety in a case pending before the Supreme Court.  See Brief for the Federal Respondents, State of California, et al. v. State of Texas, et al., Nos. 19-840 and 19-1019.  If the suit is successful, this rule will have no effect.

A more likely impediment will be the almost certain prospect of a pharmaceutical industry lawsuit challenging the regulation.  PhRMA has issued a statement criticizing the Administration for “blindly proceeding” with a rule that takes unilateral action to set prices.  At the very least, this interim final rule is vulnerable to a procedural challenge under the Administrative Procedure Act, since it was not preceded by a proposed rule, and is substantially different from the 2018 ANPR.  The APA permits an agency to forego ordinary notice and comment procedures if there is good cause for a finding that they are “impracticable, unnecessary, or contrary to the public interest.”  5 U.S.C. 553(b)(B).  The preamble explains that good cause exists because the Medicare population is in urgent need of relief from high drug prices in the midst of the financial burdens caused by the COVID-19 pandemic.  (85 Fed. Reg. at 76249)  However, it is uncertain whether this justification would prevail in an APA challenge.  An industry lawsuit can also be expected to challenge the substance of the rule.

Finally, President-Elect Biden will take office before the 60-day comment period for the rule expires, and the incoming administration may change or withdraw the rule in the infancy of the MFC Model.  As a concept, international reference pricing does have support among Democrats.  Indeed, a form of it was included in H.R. 3, the drug pricing bill that passed the Democrat-controlled House on December 12, 2019.  However, the scope and details of the rule, and especially its timing, may not suit the priorities of the Biden Administration.  President-Elect Biden has emphasized that his first priority is defeating COVID-19, and his administration will, to a large extent, be dependent on the cooperation of pharmaceutical companies in order to achieve that goal.  His administration may be unwilling to go to battle with the pharmaceutical industry at this sensitive time.  Nevertheless, even if this particular regulation does not come to fruition, the bi-partisan concept of international reference pricing is likely to find its way into a future regulation or legislation, especially if Democrats take control of the Senate.