Last week, the Trump administration issued an interim final rule that would allow Medicare to obtain far lower pricing on a specific list of high-cost part B pharmaceuticals. A reading of the text of the most-favored nation (MFN) rule, which evolved directly from Congress’s 2019 proposal to fix the price of 250 medications to an international pricing index, makes clear that this rule was not considered with the biosimilar industry in mind. Overall, it seems lacking in its consideration of the greater pharmaceutical ecosystem in trying to lower drug costs.
According to the interim final rule, the MFN Model will be tested and phased in over 7 years, starting January 1, 2021. The pilot will be a test only in the sense that 50 single-source part B medications (including biosimilars) will be affected in year 1. The MFN Model requires mandatory participation by all “providers and suppliers that participate in the Medicare program and submit a separately payable claim for an MFN Model drug with limited exceptions, such as providers and suppliers that are paid for separately payable Medicare part B drugs based on reasonable costs.” The target population will be all Medicare beneficiaries enrolled in part B, have Medicare as the primary payer and are not covered under Medicare Advantage or any other group health plan.
The 50 provider-administered medications were identified through HCPCS-code claims paid by Medicare. Several of these medications are of interest to the biosimilar world:
|Pegfilgrastim (Neulasta only)||Ustekinumab|
|Pegfilgrastim (Udenyca only)||Trastuzumab|
|Infliximumab (Remicade only)|
Several of these are already available (e.g., pegfilgrastim, bevacizumab, trastuzumab, rituximab), soon to be ready for FDA filing or marketing (ranibizumab, aflibercept), or may be under development (ustekinumab, certolizumab, eculizumab). Additional agents would be added in subsequent years. The original IPI proposal included 250 medications (but not only part B drugs).
From Price Negotiation to Mandated Pricing
The idea of Medicare using its leverage for drug negotiations has been around for some time. Today, CMS can only pay average sales price (ASP) + 6% for part B medications; that is, it is limited to paying the manufacturers’ wholesale average cost minus discounts and rebates, and then tacking on 6% (or 4.3% based on financial sequestration) for the provider’s pocket. On the other hand, Medicare Advantage plans are not limited in their ability to negotiate part B pricing.
Instituting an MFN model does not imply a negotiation. Under the model, CMS would “Calculate the payment amount for MFN Model drugs based on a price that reflects the lowest per capita Gross Domestic Product-adjusted (GDP-adjusted) price of any non-US member country of the Organisation for Economic Co-operation and Development with a GDP per capita that is at least sixty percent of the US.” The agency cited a previous analysis, demonstrating the US pays 80% more for medications than comparable countries. Any way you cut it, the MFN Model means that Medicare would reimburse a much lower amount for the drug itself.
In addition to the new payment for the part B drug, CMS would pay a flat fee to providers for administration. Unlike the current ASP + 6% model, this flat payment would not incentivize the provider’s use of more-expensive agents.
Into the Unknown
This MFN model would be a huge policy shift, should the new Biden administration not delay its implementation or modify it substantially. It raises a host of questions, and rather than try to answer them at this early stage, we thought it might be more useful to outline why it could have important implications.
What Happens to Commercial Payer Pricing? If Medicare pricing drops steeply, that may affect the way commercial payers view their own price negotiations. Hence this will further reduce a drug’s ASP. A yawning gap between what traditional Medicare pays for a part B biologic, what a Medicare Advantage plan pays, and what the commercial plan pays is likely to cause systemic tension and differing expectations.
What Will Pharma Do? It may force a reckoning on the part of the manufacturers. The US is the largest pharmaceutical market in the world and generally produces the greatest revenues for a reference biologic. The argument has long been made that by paying far higher prices, the US subsidizes the lower prices paid by other countries. Normal responses by a manufacturer of existing drugs would be to (1) raise prices worldwide to compensate (to the extent new contracts/tenders can be negotiated), (2) accept lower profitability (which shareholders won’t like at all), (3) license or sell the product to a manufacturer who can accept the lower profitability, or (4) develop the next generation of medication and sell it at a substantial premium while discontinuing production of the original drug.
Pharma companies will very likely revise their predictions of future revenue for investigational products. This could in turn cause a reappraisal of their pipelines.
How Does This Affect Biosimilars? Today, only Udenyca is in Medicare’s top 50 HCPCS code annual spending list. With the success of other oncology biosimilar agents, this may change quickly.
As such, the MFN model could fuel a reconsideration of biosimilar pipelines. The sole basis for biosimilar competition is pricing. If the ceiling price drops dramatically, biosimilar makers will have a smaller window of profitability, and perhaps see a faster downward trend on price. Quickly, a blockbuster reference drug target might not make business sense if several manufacturers are fighting for low double-digit marketshare.
According to Bernstein Research’s analysis, part B biologics and their biosimilar competition are seeing 10% to 15% annual reductions in net prices (based on ASP). The downward effect on ASP pricing can be substantial, even if commercial pricing remains on this trend. In Europe for example, the net price of Remicade® has dropped around 70% (we assume from a lower perch than in the US to begin with) since the introduction of biosimilars, based on 74% biosimilar marketshare (data from Bernstein Research). In the US, the ASP price of Remicade fell around 40%, despite the reference product holding on to the lion’s share of the market. An additional big drop caused by MFN pricing could certainly affect the three biosimilar players (Pfizer/Celltrion, Merck/Samsung, and Amgen) with low marketshares.
The upside is that CMS has included some cost-sharing savings for members who receive biosimilars, which could incentivize their use. Although this increased utilization would be at a less profitable price.
What Is the Effect on a Biobetter? Should Celltrion receive approval by the Food and Drug Administration on its subcutaneous form of infliximab, how will the potential lower price of the reference infusible product Remicade affect this drug’s pricing and prospects for utilization? If the subcutaneous version is subsequently covered under part D, but Remicade and its biosimilars are covered under part B (at a far lower initial price), how does that affect Celltrion’s decision making?
What Happens to Other US-Based Pricing? If the MFN Model is implemented and is mandatory across the country, this would certainly have an impact on other pricing models, like 340B, Department of Defense, Public Health Service, and others, which leverage considerably lower pricing than for Medicare and the commercial markets. It would then create a need to reset these structures.
A Myopic View of a Cloudy Future
This is clearly an exercise in broad speculation. Myriad variables can affect the success or failure of the model, and we shouldn’t get ahead of ourselves in deciding whether biosimilar manufacturers will ultimately view this as an opportunity or a barrier. And the unintended consequences of the MFN Model can only be viewed objectively after it has been fully phased in.
The CMS Office of the Actuary estimates that the MFN Model will result in $64.4 billion savings in Medicare fee-for-service benefits, $49.6 billion in Medicare Advantage (MA) payments, and $9.9 billion in Medicaid spending over the course of the 7-year project. Beneficiaries could save $28.5 billion over that period, according to CMS. But only if the project lasts that long.