Article

Drug Pricing Reforms and Value-Based Pricing: Future and Current Implications for Drug Companies
Part 1: Federal Legislative and Executive Actions


Time to Read: 13 minutes Practices: Health Care

Originally published on August 3, 2020 in Health Law360

Tom Bulleit is a partner, and Scott Falin and Elana Bengualid are associates, in the Health Care practice at Ropes & Gray, LLP. Along with partners Kirsten Mayer and Deborah Gardner, and counsel Peter Holman, Tom and Scott serve on the steering committee of the firm’s Drug Pricing working group.

This article is the first in a series to examine how the current wave of drug pricing reforms may affect drug companies’ business operations and, in particular, their compliance with existing federal price reporting and pricing requirements. It will examine the current bevy of federal administrative and legislative proposals in the context of existing federal law governing drug prices, with the aim of identifying the future and current effects that such proposals may hold for the drug industry. The second article will address the implications of state drug pricing initiatives, and the third article will explore enforcement of federal pricing requirements.

On July 24, President Trump announced a series of executive orders on prescription drug prices, making no current changes in law, but ordering rulemaking on what with one minor exception are longstanding administration proposals that have languished for months.1 The orders most notably direct the administration to revive the rulemaking process for proposals to tie what Medicare pays for certain drugs to international prices and to eliminate rebates in Medicare and Medicaid. Even if adopted as final rules, these proposals would face serious legal challenges, casting doubt on whether they ever could take effect.2 Nevertheless, the widely-publicized ceremony, coming only 100 days before the presidential election, is the latest evidence of the political potency of prescription drug prices.

Members of both parties in Congress also have sought to capitalize on voters’ concerns about drug prices. The politically divided Congress, however, has little to show for itself in terms of enacted legislation. In 2019, the Democratic House passed a sweeping bill that would bring dramatic changes to the U.S. drug market, most notably through required government price negotiations, but has little support among Republicans.3 In the Senate, Republican Finance Committee Chairman Chuck Grassley crafted an initially bipartisan drug pricing package (the “Prescription Drug Pricing Reduction Act” or “PDPRA”)4 that despite a White House endorsement, now seems doomed because it has lost the support of key Democrats.5

While the COVID-19 pandemic and election-year politics may have temporarily halted momentum for these and other such efforts,6 drug prices clearly will remain a focal point of the 2020 election campaign, and many of the proposals discussed below will remain on the table whatever the election’s outcome.

I. The Current Drug Pricing Regulatory Landscape

MDRP. In 1990, Congress created the Medicaid Drug Rebate Program (“MDRP”). In exchange for guaranteeing their drugs are covered by Medicaid, manufacturers must pay rebates through the MDRP that ensure state Medicaid programs receive the “best price” for drugs. Under the MDRP, a manufacturer must track and report various pricing information that is used to calculate its rebate obligations.7

MDRP Calculations. A drug’s Average Manufacturer Price (“AMP”)8 and Best Price (“BP”)9 determine the rebate amount. In short, a drug’s AMP is the average price paid to the manufacturer by wholesalers and retail community pharmacies. BP is the lowest price offered by the manufacturer for that drug to most purchasers, subject to certain exclusions.10

Each drug’s rebate per unit consists of a basic rebate plus, if applicable, an additional rebate. In general, the basic rebate for a brand-name drug equals the greater of the drug’s AMP minus its BP, or 23.1% of its AMP.11 Brand-name manufacturers seek to avoid sales that might result in a new, lower BP that would increase the drug’s rebate. Rebates for generic drugs do not depend on BP and simply equal 13.0% of the product’s AMP.12 When a drug’s AMP increases faster than the rate of inflation, the manufacturer must pay an additional rebate for the amount by which the drug’s AMP exceeds the inflation-adjusted base AMP.13 A drug’s unit rebate amount (the basic rebate plus the additional rebate), however, cannot exceed 100% of AMP.14 Finally, the manufacturer’s total rebate obligations will equal the unit rebate amount multiplied by the number of units paid for by the Medicaid program during the reporting period.15

340B. Under the MDRP, manufacturers also must participate in the 340B Program, under which manufacturers can charge “covered entities”—certain federal grantees and hospitals that serve low-income patients—only up to a “ceiling price.”16 Each drug’s ceiling price derives from values calculated under the MDRP: the ceiling price equals the drug’s AMP minus its unit rebate amount.17

ASP. MDRP-participating manufacturers also must report each drug’s Average Sales Price (“ASP”), which the Centers for Medicare & Medicaid Services (“CMS”) use to calculate Medicare Part B reimbursement rates.18 ASP refers to a manufacturer’s quarterly sales of a drug to all U.S. purchasers, divided by the total units sold, subject to certain exclusions.19

Each of these federal pricing and price reporting programs pose significant compliance risks for drug makers. Failing to report, reporting false pricing information, and miscalculating and underpaying rebates all can result in civil monetary penalties and False Claims Act (“FCA”) lawsuits.20 The third article in this series will examine more closely the ways in which pricing reforms may affect the FCA risks associated with government price reporting laws.

II. Price Reporting Challenges Posed by Value-Based Pricing

Value-based pricing presents new opportunities and challenges. For drug makers, these arrangements can help demonstrate a product’s value, overcome market access restrictions, and justify higher price points. For insurers, providers, and patients, they can mitigate risk, expand access, and reduce uncertainty about the value of new, unproven drugs.21 Both the Trump administration and members of Congress have touted their potential.22

Although value-based arrangements for prescription drugs have become more common in recent years,23 widespread adoption remains hampered not only by significant operational issues, but also by what are widely perceived to be substantial regulatory challenges associated with developing and implementing such models.24 Surveys of drug companies indicate that government price reporting laws pose one of the largest obstacles.25

The Increased Rebate Dilemma. One of the key issues is that if a contract ties price to outcomes, a drug that underperforms clinically can result in a much lower price. If that new price qualifies as the drug’s BP, then the manufacturer must extend the same discount to all state Medicaid programs through the MDRP. This is far from a trivial concern, since even a single 100% refund of a drug that fails to meet its guaranteed outcome for one patient could have a disastrous effect. Value-based contracts can influence a drug’s AMP and ASP, in addition to BP, all of which in turn can affect Medicaid drug rebate liabilities, 340B ceiling prices, and Medicare Part B reimbursement rates. Careful contracting is required to account for these considerations. Common workarounds include limiting potential rebates or discounts under an outcomes-based contract to no more than 23.1% of the drug’s AMP (i.e., the MDRP’s rebate floor for brand-name drugs), aggregating prices across a class of patients as a “bundled sale” (discussed below), or tying value-based prices to specific types of sales or purchasers that are excluded from price reporting calculations altogether.26

The Supplemental Rebate Work-Around. An example of the latter approach is to limit any outcome-based price concessions to a Medicaid supplemental rebate agreement (“SRA”), since rebates paid under SRAs are excluded from BP, AMP, and ASP.27 Under the MDRP, states may negotiate agreements directly with manufacturers to pay supplemental rebates in addition to the MDRP rebate. While manufacturers are under no obligation to enter SRAs, many do so to secure more favorable coverage terms for their drugs. As our second article on state drug pricing initiatives will explore in more detail, over the past two years, eight states have obtained CMS approval to enter SRAs that use value-based pricing.28 The PDPRA also would offer some relief in the form of installment payment options.29

The Recently Proposed Rule Fix. CMS recently issued a proposed rule that, if finalized, would provide manufacturers interested in value-based purchasing with additional flexibility regarding government price reporting requirements.30 The rule would offer manufacturers two new options for calculating and reporting BP.

Bundled Sales. Blessing an existing industry reporting practice to remove ambiguity, the rule would modify the MDRP’s definition of “bundled sale” to clarify that manufacturers may “bundle” prices for all units of a drug sold through an outcomes-based contract so that no one sale will set the BP.31 This ensures that a substantial discount for one patient who had particularly poor outcomes would not require the manufacturer to offer the same discount to all state Medicaid programs.

For example, suppose a manufacturer rebates 50% of the drug’s price for each patient who does not achieve a desired treatment outcome. Without bundling, the drug’s BP becomes 50% of the “full price” if just one patient fails to have the expected results. However, a manufacturer who takes advantage of the bundling option would report the drug’s average net price across all patients and sales under the value-based contract. Bundling’s effect on BP can be substantial (e.g., if half-off rebates for 10% of patients, but full price paid for the rest, BP will be significantly higher (95% of full price)).

Multiple BPs. CMS’s other proposal would change radically how BPs are calculated. The rule would offer drug makers the option to report multiple BPs: the lowest prices available for each outcome in a value-based arrangement, as well as the traditional BP for sales outside of the value-based arrangement.32 Without having to negotiate an outcomes-based contract of its own, each state Medicaid program then would have the opportunity to “participate” in the value-based arrangement according to the terms negotiated between the manufacturer and the original payor.33

Remaining Challenges. Although the rule should be welcome news to industry and should facilitate value-based models, it likely would create significant operational and legal challenges for which the proposed rule provides little guidance. These include:

  • Reporting multiple BPs will require manufacturers to update their current data collection and information systems to capture information at the individual patient level;
  • Identifying and reporting BPs at each outcome level (i.e., tracking patient outcomes and prices within each defined outcome);
  • Tracking which Medicaid beneficiaries are “participating” in value-based arrangements, monitoring outcomes to determine which BP applies, and calculating varying rebate amounts;
  • Resolving issues with value-based arrangements where prices depend on outcomes over time (e.g., rebates based on outcomes at multiple stages);34
  • Considering the impact of privacy and fraud and abuse laws on the additional data to be captured and payments for the data and attendant services (notably, the administration’s proposed rules last fall to protect value-based arrangements under the Anti-Kickback Statute would not apply to drug manufacturers).35

III. Price Reporting Challenges Posed by Congressional Proposals

Although prominent members of both parties have expressed interest in drug pricing reforms, and Congress enacted two minor MDRP reforms as part of larger bills in 2019,36 a comprehensive drug pricing bill has eluded Congress thus far. With initial bipartisan support, Sen. Grassley’s PDPRA was the leading proposal. In light of COVID-19, the upcoming elections, and a breakdown in cooperation between Sen. Grassley and top Democrats, the PDPRA now faces an uphill, if not impossible, battle in 2020.37 Nevertheless, the bill’s range of bipartisan proposals will remain options for future congressional efforts, especially after election-year politics recede.

Reporting of Price Justifications and Increasing Scrutiny of Reporting. The PDPRA would copy states that have enacted new manufacturer reporting laws. Upon notification by the Department of Health and Human Services (“HHS”), manufacturers would have to submit justifications for qualifying list price increases and for new drugs with high initial prices, and HHS could require such justifications to contain a wide range of information.38 The bill also would expand MDRP auditing and create new penalties.39

Changes to Medicare Part B ASP Reporting. The PDPRA would attempt to reduce Medicare payments by:

  • Extending the obligation to report ASP data for Part B drugs beyond MDRP participants to all manufacturers with products covered by Part B;40
  • Requiring manufacturers to subtract from ASP price concessions provided directly to patients through coupons for privately-insured individuals;41
  • Narrowing the definition of “bona fide service fee” to expressly exclude fees based on the percentage of sales and fees that take into account the volume or value of any referrals or business between parties.42

Expanded Inflationary Rebates. Finally, the PDPRA would expand manufacturer rebate obligations by (1) raising the MDRP rebate ceiling from 100% of AMP to 125% (thus increasing the potential cost of price increases that exceed the rate of inflation and trigger the MDRP’s inflationary “additional rebate”),43 and (2) adding new Medicare rebates for price increases greater than the rate of inflation, initially for Part B and then for Part D.44

IV. Pricing Challenges Posed by Less Likely Administration Proposals

As noted at the outset, two of the Trump administration’s most controversial proposals, recently revived by executive order, would eliminate rebates in Medicare Part D and Medicaid and use international prices to determine what Medicare Part B pays for drugs. Despite the orders, there are reasons to doubt either will result in final rules.

Limiting Rebates. This proposal adopts the pharmaceutical industry’s narrative, that rebate arrangements incentivize plans and pharmacy benefit managers (“PBMs”) to negotiate for, and design formularies that reward, drugs with higher rebates, rather than lower list prices, which ultimately results in greater out-of-pocket costs for patients with deductibles or coinsurance.45 Putting aside objections that this would fundamentally change how the industry negotiates and pays for drugs, and despite some continued congressional interest,46 since the EO reviving this rulemaking mandates no increased spending (and the administration’s own estimates show a ten-year price tag of nearly $200 billion), it is difficult to see how it could become law.47

International Reference Pricing. The Trump administration’s 2018 advance notice of proposed rulemaking would have established a demonstration project using an international pricing index, instead of ASP, to set Medicare Part B reimbursement rates at the average price paid for certain drugs in other countries.48 The recent order resumes the rulemaking process, but this time proposes an even harsher price reduction, replacing the index with a more aggressive most favored nation policy where Medicare would pay the lowest, rather than the average, price paid in select countries.49 If implemented, either approach would have significant consequences for manufacturers. By creating market pressure to force manufacturers to lower prices for affected drugs, the rule could result in lower AMPs and BPs and affect manufacturers’ MDRP rebates.50 Putting aside that the industry will mobilize all its forces to prevent the rule from being finalized (including likely pushing Congress to undo it), there are questions about whether a mandatory program affecting half the Medicare Part B population would exceed the agency’s demonstration authority.51

V. Conclusion

While COVID-19 temporarily has taken the wind out of the sails of federal drug pricing reform, drug companies must stay vigilant while preparing for the potential changes to come. For example, as industry and regulators alike embrace the shift towards value-based care, manufacturers must rethink how they negotiate contracts, track and collect data, and report prices, while staying in compliance with privacy and fraud and abuse laws. While direct price regulations, such as inflationary rebates and rebate reforms, obviously will affect pricing decisions, more modest tweaks to price reporting laws that more easily can garner bipartisan support also can have significant implications. With drug prices likely to remain on the minds of Congress and the White House—regardless of the outcome of the 2020 elections—drug companies must look ahead and plan for how the regulatory landscape might change.

 

  1. Remarks by President Trump at Signing of Executive Orders on Lowering Drug Prices, The White House (July 24, 2020), https://www.whitehouse.gov/briefings-statements/remarks-president-trump-signing-executive-orders-lowering-drug-prices/. See also Executive Order on Lowering Prices for Patients by Eliminating Kickbacks to Middlemen, The White House (July 24, 2020), https://www.whitehouse.gov/presidential-actions/executive-order-lowering-prices-patients-eliminating-kickbacks-middlemen/; Executive Order on Increasing Drug Importation to Lower Prices for American Patients, The White House (July 24, 2020), https://www.whitehouse.gov/presidential-actions/executive-order-increasing-drug-importation-lower-prices-american-patients/; Executive Order on Access to Affordable Life-saving Medications, The White House (July 24, 2020), https://www.whitehouse.gov/presidential-actions/executive-order-access-affordable-life-saving-medications/. President Trump stated the administration will withhold the text of the executive order regarding international reference pricing in Medicare Part B until August 24th, a move intended apparently to give the drug industry time to develop an alternative that “will substantially reduce drug prices.” Remarks by President Trump, supra note 1.
  2. See, e.g., Tom Bulleit and Scott Falin, Drug Pricing: What Happened in 2019, What to Watch in 2020, Law360 (Jan. 14, 2020), https://www.law360.com/articles/1232594/drug-pricing-what-happened-in-2019-what-to-watch-in-2020; Tom Bulleit et al., A First Look at New HHS Prescription Drug Safe Harbors, Law360 (Feb. 15, 2019), https://www.law360.com/articles/1128564/a-first-look-at-new-hhs-prescription-drug-safe-harbors; Jeff Overley, 5 Takeaways as Trump Eyes Cut to Medicare Drug Payments, Law360 (Oct. 25, 2018), https://www.law360.com/articles/1095721/5-takeaways-as-trump-eyes-cut-to-medicare-drug-payments.
  3. Elijah E. Cummings Lower Drug Costs Now Act, H.R. 3, 116th Cong. (2019).
  4. The PDPRA has gone through several iterations. In July 2020, Sen. Grassley and a group of Republican cosponsors introduced the latest version. See S. 4199, 116th Cong. (2020); Grassley Introduces the Updated Prescription Drug Pricing Reduction Act of 2020, (July 2, 2020), U.S. Senate Finance Committee, https://www.finance.senate.gov/chairmans-news/grassley-introduces-the-updated-prescription-drug-pricing-reduction-act-of-2020. The July 2020 bill updated the version released by Sen. Grassley and Democratic Ranking Member Ron Wyden in December 2019. U.S. Senate Finance Committee, Grassley, Wyden Release Updated Prescription Drug Pricing Reduction Act, Reach Agreement on Health Extenders (December 6, 2019), https://www.finance.senate.gov/chairmans-news/grassley-wyden-release-updated-prescription-drug-pricing-reduction-act-reach-agreement-on-health-extenders. The December bill updated the formal legislative text that was introduced as S. 2543 in September 2019, which is available at U.S. Senate Finance Committee, S. 2543: The Prescription Drug Pricing Reduction Act of 2019 (Sept. 25, 2019), https://www.finance.senate.gov/legislation/details/the-prescription-drug-pricing-reduction-act-of-2019. The original proposal voted on by the Finance Committee in July 2019, as well as other materials from the markup, are available at U.S. Senate Finance Committee, Open Executive Session to Consider an Original Bill Entitled The Prescription Drug Pricing Reduction Act of 2019 (July 25, 2019), https://www.finance.senate.gov/hearings/open-executive-session-to-consider-an-original-bill-entitled-the-prescription-drug-pricing-reduction-act-of-2019.
  5. Peter Sullivan, Top Democrat Dropping Support for Previously Bipartisan Senate Drug Pricing Effort, The Hill (June 29, 2020), https://thehill.com/policy/healthcare/505068-top-democrat-dropping-support-for-senate-drug-pricing-effort-amid-finger.
  6. Riley Griffin and Emma Court, Drug Makers Have Even Less Reason to Fear Price Reform Now, Bloomberg (June 18, 2020), https://news.bloomberglaw.com/health-law-and-business/drug-makers-have-even-less-reason-to-fear-price-reform-now.
  7. 42 U.S.C. § 1396r-8.
  8. 42 U.S.C. § 1396r-8(k)(1); 42 C.F.R. §§ 447.504, 447.507.
  9. 42 U.S.C. § 1396r-8(c)(1)(C); 42 C.F.R. § 447.505.
  10. See 42 U.S.C. § 1396r-8; 42 C.F.R. §§ 447.504, 447.505. BP generally applies to sales to any wholesaler, retailer, provider, health maintenance organization (“HMO”), nonprofit entity, or governmental entity within the United States.
  11. This rebate formula applies specifically to single source drugs and innovator multiple source drugs. The former generally refers to brand-name drugs with no available generics, while the latter refers to brand-name products that have generic competition. The MDRP provides different formulas for calculating the rebates for clotting factors and exclusively pediatric drugs. 42 U.S.C. § 1396r-8(k)(7)(A)(ii), (iv); 42 C.F.R. § 447.502.
  12. 42 U.S.C. § 1396r-8(k)(7)(A)(iii); 42 C.F.R. § 447.502. This rebate formula applies specifically to non-innovator drugs, which generally refer to generic drugs.
  13. 42 C.F.R. § 447.509(a)(2).
  14. 42 C.F.R. § 447.509(a)(5).
  15. 42 C.F.R. § 447.509(a).
  16. 42 U.S.C. § 1396r-8(a)(5); 42 U.S.C. § 256b(a)(1). The 340B Program’s name derives from Section 340B of the Public Health Service Act (“PHSA”), which established the program as part of the Veterans Health Care Act of 1992. Pub. L. No. 102-585, § 602, 106 Stat. 4943, 4967–71.
  17. 42 C.F.R. § 10.10. Unlike the MDRP, the 340B Program sets prospective price ceilings rather than requiring retrospective rebates. Therefore, for new covered drugs, manufacturers must estimate a ceiling price. To do so, manufacturers reduce the drug’s wholesale acquisition cost (“WAC”) by a rebate percentage derived from the MDRP’s rebate floors. If the estimated price is later determined to exceed the actual ceiling price (as calculated retrospectively), the manufacturer must refund or credit covered entities the difference. Id.
  18. 42 C.F.R. § 414.904(a).
  19. 42 U.S.C. § 1395w-3a(c)(1); 42 C.F.R. § 414.804(a)(1).
  20. FCA lawsuits regarding government price reporting requirements can result in multi-million dollar settlements for drug makers. See e.g., AstraZeneca and Cephalon to Pay $46.5 and $7.5 Million, Respectively, for Allegedly Underpaying Rebates Owed Under Medicaid Drug Rebate Program, U.S. Dep’t Justice (July 6, 2015) https://www.justice.gov/opa/pr/‌astra‌‌zeneca-and-cephalon-pay-465-million-and-75-million-respectively-allegedly-underpaying; GlaxoSmithKline to Plead Guilty and Pay $3 Billion to Resolve Fraud Allegations and Failure to Report Safety Data, U.S. Dep’t Justice (July 2, 2012), https://www.justice.gov/opa/‌‌pr/glaxosmithkline-plead-guilty-and-pay-3-billion-resolve-fraud-allegations-and-failure-report; Mylan Agrees to Pay $465 Million to Resolve False Claims Act Liability for Underpaying EpiPen Rebates, U.S. Dep’t Justice (Aug. 17, 2017), https://www.justice.gov/opa/pr/mylan-agrees-pay-465-million-resolve-false-claims-act-liability-underpaying-epipen-rebates; Wyeth and Pfizer Agree to Pay $784.6 Million to Resolve Lawsuit Alleging That Wyeth Underpaid Drug Rebates to Medicaid, U.S. Dep’t Justice (Apr. 27. 2016), https://www.justice.gov/opa/pr/wyeth-and-pfizer-agree-pay-7846-million-resolve-lawsuit-alleging-wyeth-underpaid-drug-rebates.
  21. See, e.g., Developing a Path to Value-Based Payment for Medical Products: Background Paper, Duke Margolis Ctr. Health Pol’y 2 (Apr. 28, 2017), https://healthpolicy.duke.edu/sites/default/files/atoms/files/value_based_payment_background_paper_-_october_2017_final.pdf.
  22. See, e.g., American Patients First: The Trump Administration Blueprint to Lower Drug Prices and Reduce Out-of-Pocket Costs, U.S. Dep’t Health and Hum. Servs. (May 2018), https://www.hhs.gov/sites/default/files/AmericanPatientsFirst.pdf; S. 4199 and S. 2543, supra note 4.
  23. See Value-Based Contracts: 2009 – Q4 2019, PhRMA (last updated Feb. 2020), https://phrma.org/-/media/Project/PhRMA/PhRMA-Org/PhRMA-Org/PDF/V-Z/ValueBasedContracts_Q4_2019.pdf (PhRMA tracker of publicly announced value-based arrangements since 2009).
  24. For a discussion of the various challenges, see supra note 21, at 9–15.
  25. For example, in 2017, PhRMA released a survey of its members that indicated that more than 80% of respondents rated federal price reporting metrics as a barrier to outcomes-based contracts of “high” or “very high” importance. Barriers to Value-Based Contracts for Innovative Medicines: PhRMA Member Survey Results, PhRMA 7 (Mar. 2017), https://www.phrma.org/-/media/Project/PhRMA/PhRMA-Org/PhRMA-Org/PDF/P-R/PhRMA_ValueBased_MemberService_R23.pdf.
  26. Commentators have suggested other proposals, some of which are less comfortably in the realm of the permissible. See, e.g., supra note 21, at 11–12; Gregory W. Daniel et al., Overcoming the Legal and Regulatory Hurdles to Value-Based Payment Arrangements for Medical Products, Duke Margolis Ctr. Health Pol’y, 24–7 (Dec. 2017) (suggesting that in some circumstances, a 100% rebate could be excluded from BP calculations as a “free good”), https://healthpolicy.duke.edu/sites/default/files/atoms/files/overcoming_legal_and_regulatory_hurdles_to_value-based_payment_arrangements_for_medical_products.pdf; Rachel E. Sachs et al., Innovative Contracting for Pharmaceuticals and Medicaid’s Best-Price Rule, U. Mich. J. Health Politics, Pol’y, & L. (Apr. 28, 2017) (forthcoming), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2959939.
  27. For the exclusion of SRAs from Best Price, see 42 C.F.R. § 447.505(c)(7); from AMP, see 42 C.F.R. § 447.504(c)(19); and from ASP, see 42 U.S.C. § 1395w-3a(c)(3) and 42 C.F.R. § 414.804(a)(2)(i).
  28. Since June 2018, CMS has approved state plan amendments authorizing six states (Alabama, Arizona, Colorado, Massachusetts, Michigan, and Oklahoma) to pursue contracts with manufacturers that tie supplemental rebates to clinical outcomes. Medicaid State Plan Amendment, Medicaid.gov (Apr. 28, 2020), https://www.medicaid.gov/sites/default/files/State-resource-center/Medicaid-State-Plan-Amendments/Downloads/AZ/AZ-19-0004_0.pdf (Arizona); Medicaid State Plan Amendment, Medicaid.gov (Dec. 20, 2019), https://www.medicaid.gov/sites/default/files/State-resource-center/Medicaid-State-Plan-Amendments/Downloads/AL/AL-19-0009_0.pdf; Medicaid State Plan Amendment, Medicaid.gov (July 31, 2019), https://www.medicaid.gov/sites/default/files/State-resource-center/Medicaid-State-Plan-Amendments/Downloads/MA/MA-19-0001.pdf (Massachusetts); Medicaid State Plan Amendment, Medicaid.gov (Feb. 25, 2019), https://www.medicaid.gov/State-resource-center/Medicaid-State-Plan-Amendments/Downloads/CO/CO-18-0044.pdf (Colorado); Medicaid State Plan Amendment, Medicaid.gov (Nov. 14, 2018), https://www.medicaid.gov/State-resource-center/Medicaid-State-Plan-Amendments/Downloads/MI/MI-18-0009.pdf (Michigan); Medicaid State Plan Amendment, Medicaid.gov (June 27, 2018), https://www.medicaid.gov/sites/default/files/State-resource-center/Medicaid-State-Plan-Amendments/Downloads/OK/OK-18-08.pdf. Louisiana and Washington also have implemented subscription-based models where the state pays a flat fee to a manufacturer of Hepatitis C drugs for unlimited access to the drug product. CMS Approves Louisiana State Plan Amendment for Supplemental Rebate Agreements Using a Modified Subscription Model for Hepatitis C Therapies in Medicaid, Ctrs. for Medicare & Medicaid Servs. (June 26, 2019), https://www.cms.gov/newsroom/press-releases/cms-approves-louisiana-state-plan-amendment-supplemental-rebate-agreements-using-modified; CMS Approves Washington State Plan Amendment Proposal to Allow Supplemental Rebates Involving a “Subscription” Model for Prescription Drug Payment in Medicaid, Ctrs. for Medicare & Medicaid Servs. (June 12, 2019), https://www.cms.gov/newsroom/press-releases/cms-approves-washington-state-plan-amendment-proposal-allow-supplemental-rebates-involving.
  29. S. 4199, supra note 4, at § 208. The PDPRA would authorize state Medicaid programs to enter into installment-based contracts with manufacturers of certain gene therapies intended to cure rare diseases. States would pay for the drug in installments over a period of up to five years with reduced payments if the drug fails to meet certain clinical parameters. Importantly, these contracts would be exempt from BP, AMP, and ASP.
  30. 85 Fed. Reg. 37286 (June 19, 2020). For a more detailed summary of the proposed rule, see Tom Bulleit et al., A Look at CMS’ Proposed Medicaid Drug Rebate Changes, Law360 (July 9, 2020), https://www.law360.com/articles/1289245/a-look-at-cms-proposed-medicaid-drug-rebate-changes.
  31. 85 Fed. Reg. at 37292. As CMS notes, some manufacturers already are doing this by making “reasonable assumptions” in their price reports that value-based arrangements fit within the current definition of bundled sales. The current definition of bundled sale is located at 42 C.F.R. § 447.502. The proposed rule would resolve any ambiguity by amending the definition to expressly include value-based arrangements.
  32. 85 Fed. Reg. at 37292–94.
  33. Id. If the state participates, the rebate for sales to each beneficiary will depend on the beneficiary’s particular outcome and the BP reported for that outcome. If the state declines to participate, the rebate for all sales involving Medicaid beneficiaries will be calculated using the traditional BP. Id.
  34. The proposed rule would permit manufacturers to revise past AMPs and BPs beyond the current three-year window for adjustments to allow for discounts based on outcomes assessed more than three years after the sale. Id. at 37301.
  35. See 84 Fed. Reg. 55694 (Oct. 17, 2019); 84 Fed. Reg. 55766 (Oct. 17, 2019). For example, contracting with payors and providers to track and collect data related to patient outcomes could raise issues under HIPAA that must be properly addressed. Likewise, value-based contracts can implicate the federal Anti-Kickback Statute. If not properly structured, such arrangements may be viewed as improper inducements, while compensation for enhanced data collection and/or follow-up testing also may raise concerns.
  36. See Medicaid Services Investment and Accountability Act, H.R. 1839, 116th Cong. (enacted Apr. 18. 2019) (containing the bipartisan Right Rebate Act, S. 205, 116th Cong. (2019), which established new penalties for manufacturers that knowingly misclassify their drugs under the MDRP and provided HHS with new enforcement authorities); Continuing Appropriations Act, 2020, and Health Extenders Act of 2019, H.R. 4378, 116th Cong. (enacted Sept. 27, 2019) (prohibiting manufacturers from including the sales of authorized generics—drugs that the brand-name manufacturer either sells or allows a secondary manufacturer to sell as a generic drug—in the calculation of the brand-name drug’s AMP to reduce its MDRP rebate obligations, effective October 1, 2019).
  37. See Andrew Kragie, Drug Pricing Legislation in Doubt After COVID-19 Relief Bill, Law360 (Mar, 26, 2020), https://www.law360.com/articles/1257013/drug-pricing-legislation-in-doubt-after-covid-19-relief-bill); Sullivan, supra note 5.
  38. S. 4199, supra note 4, at § 141. The reporting requirements would go into effect in July 2022. Information required in the justifications may include an explanation of the factors contributing to the increase, spending on research and development, and the drug’s total revenue and profit. HHS, however, would have to protect proprietary information from public disclosure.
  39. Id. at § 204. The bill would expand oversight of MDRP reporting by requiring HHS to audit manufacturers’ reported information and authorizing the agency to survey wholesalers and manufacturers to verify pricing. The bill also would establish new civil monetary penalties for refusing to provide information in connection with such audits and surveys, as well as increase the penalty for the knowing submission of false information. Id.
  40. Id. at § 101.
  41. Id. at § 102. Under current law, manufacturers need not subtract the value of such coupons from a drug’s sales price, which may result in a higher ASP and, thus, a higher Part B reimbursement amount. Coupons would be defined to mean “any financial support that is provided to a patient, either directly to the patient or indirectly to the patient through a physician, prescriber, pharmacy, or other provider, under a drug coupon program of a manufacturer that is used to reduce or eliminate cost sharing or other out-of-pocket costs of the patient, including costs related to a deductible, coinsurance, or copayment.” Id.
  42. This would require including in (and therefore reducing) ASP many fees currently paid by manufacturers to wholesalers and group purchasing organizations. S. 2543, supra note 4, at § 108. The July 2020 bill dropped the earlier versions’ amendment of the definition of bona fide services in favor of requiring HHS to provide a report within 18 months on the effect of bona fide service fee arrangements on Medicare Part B spending. S. 4199, supra note 4, at § 108.
  43. Id. at § 209. This change would take effect in October 2022.
  44. Id. at §§ 106, 128. Specifically, beginning in 2022, brand-name manufacturers must pay a rebate to Medicare Part B for the amount by which a brand-name drug’s ASP increases in excess of the inflation rate. Starting one year later, manufacturers also would be required to pay a rebate to Medicare Part D for the amount by which any brand-name drug’s list price increases faster than inflation.
  45. See 84 Fed. Reg. 2340 (Feb. 6, 2019) (the administration’s initial proposed rule to implement this proposal that was withdrawn in July 2019); Executive Order on Lowering Prices for Patients by Eliminating Kickbacks to Middlemen, The White House (July 24, 2020), https://www.whitehouse.gov/presidential-actions/executive-order-lowering-prices-patients-eliminating-kickbacks-middlemen/ (recent executive order reviving the rulemaking process for the rebate proposal).
  46. For example, Sen. Grassley attempted to add some form of the administration’s proposal to the PDPRA, but ultimately opted for a more modest measure to share pharmacy price concessions to plans and PBMs with Medicare beneficiaries at the point of sale. See Ariel Cohen and John Wilkerson, Revamped Finance Bill Further Lowers Seniors’ Part D Costs, InsideHealthPolicy (Dec. 6, 2019), https://insidehealthpolicy.com/daily-news/revamped-finance-bill-further-lowers-seniors%E2%80%99-part-d-costs; S. 4199, supra note 4, at § 121B (defining “negotiated price” to include pharmacy price concessions, which should result in lower out-of-pocket spending for Medicare Part D beneficiaries). On the other hand, the Senate Health, Education, Labor, and Pensions (“HELP”) Committee’s Lower Health Care Costs Act—a bipartisan package of various health care proposals that was reported out of committee in 2019—would take a different approach. Instead of eliminating rebates, the bill would require PBMs of group health plans to remit 100% of rebates from manufacturers to the plan, which presumably would use the money to reduce premiums. Lower Health Care Costs Act, S. 1895, § 306, 116th Cong.
  47. See Executive Order, supra note 45. The administration’s 2019 proposed rule projected that while redirecting rebates to the point of sale should reduce out-of-pocket costs at the pharmacy for Medicare beneficiaries, it also likely will result in higher premiums since plans would no longer receive rebates that could be used to lower premiums. As a result of higher premiums, the proposed rule would have increased federal spending by as much as $196 billion over ten years. 84 Fed. Reg. at 2357–59.
  48. 83 Fed. Reg. 54546 (Oct. 30, 2018). The proposal has three main components: (1) CMS would contract with vendors that would undertake the risk of purchasing drugs and selling them to providers; (2) CMS would reimburse the vendors at a rate tied to the drug’s average price in certain countries (after a five-year phase-in, the rate would equal 126% of the international pricing index); and (3) providers would receive a fixed fee for each drug administered, as opposed to the current system where providers purchase the drugs themselves and are reimbursed at ASP plus a six percent add-on. Id.
  49. See Remarks by President Trump, supra note 1.
  50. Id. at 54558–59. With respect to the proposed rule, HHS took the position that it lacked the authority to waive MDRP requirements for demonstration projects under 42 U.S.C. § 1315a. As a result, the agency noted that the demonstration could impact manufacturers’ MDRP calculations. Id.
  51. Overley, supra note 2.
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