Editor's Note: On April 5, 2015, the Centers for Medicare and Medicaid Services (CMS) issued a preliminary recommendation for a Healthcare Common Procedure Coding Systems (HCPCS) code for Zarxio, the first biosimilar product ever to be approved by the Food and Drug Administration (FDA). CMS's recommendation provides the first indication of how the agency will establish HCPCS codes for biosimilars that are not interchangeable with the reference products they are based on, and also has significant implications for how such biosimilars will be reimbursed under Medicare Part B. In a new issue brief, summarized below, Manatt Health provides background information on biosimilars, reviews coding for Medicare Part B reimbursement of drugs and biologics, and discusses reimbursement incentives. Click here to download a free PDF of the full brief.

Background on Biosimilars

A similar biologic medicinal product, commonly referred to as a biosimilar, is a copy of an approved original biologic medicine whose data protection has expired. A biosimilar, as its name implies, is similar to but not an exact copy of the original product. Because biologics are derived from living cells or organisms and consist of relatively large and often highly complex molecules, the biosimilar cannot be entirely identical to the original biologic, also referred to as the reference product.

The FDA approved the first biosimilar, Zarxio, on March 6, 2015. Zarxio is a biosimilar of the biologic reference product Neupogen, active ingredient filgrastim.1 As part of the approval, FDA also gave Zarxio a temporary name, filgrastim-sndz, composed of the name of the biologic and a modifier identifying the manufacturer, Novartis (Sandoz).

When physician-administered biologics are provided in freestanding physician clinics and hospital outpatient departments, Medicare Part B payment amounts for drugs and biologics are tied to the HCPCS codes assigned to them. In April 2015, as part of its annual review of HCPCS code applications, CMS announced its preliminary recommendation that Zarxio (filgrastim-sndz) be assigned HCPCS code Q5101 [Injection, Filgrastim (G-CSF), Biosimilar, 1 microgram].2 This preliminary code descriptor reveals CMS's approach to biosimilar coding, and its acknowledgement that this approach is subject to change. Below, we explain the main concepts of HCPCS coding, how it relates to Medicare Part B payment, and some implications.

Coding for Medicare Part B Reimbursement of Drugs and Biologics

The HCPCS is divided into two principal subsystems. Level I of the HCPCS is comprised of CPT (Current Procedural Terminology), a numeric coding system maintained by the American Medical Association (AMA). It is a uniform coding system consisting of descriptive terms and identifying codes that are used primarily to identify medical services and procedures furnished by physicians and other healthcare professionals. Level II of the HCPCS is a standardized coding system that is used primarily to identify products, supplies and services not included in the CPT codes, including drugs and biologics.

For drugs and biologics, one of three types of HCPCS codes may be assigned. Most drugs and biologics eventually receive a permanent "J code." Initially, but not always, CMS may assign a temporary but specific "Q" code for the particular biologic,3 as in the case of Zarxio. In these cases, CMS may lack the information it needs to assign a permanent code. If a manufacturer has not yet applied for a HCPCS code or CMS has not yet assigned a specific HCPCS code for the particular drug or biologic, providers would report the drug or biologic using a "J" code designated for unclassified biologics or unclassified drugs.

There are several interesting observations about CMS's preliminary recommendation to assign Zarxio (filgrastim-sndz) the HCPCS code Q5101 [Injection, Filgrastim (G-CSF), Biosimilar, 1 microgram]:4

  • First, CMS assigned Zarxio (filgrastim-sndz) its own unique code and not the code of the reference product Neupogen, which is reported with J1442 [Injection, Filgrastim (G-CSF), 1 microgram]. Generally, a brand-name drug and therapeutically equivalent generic versions of the drug would have the same HCPCS code.5 CMS's assignment of a unique HCPCS code for Zarxio suggests that CMS does not consider biosimilars with the Purple Book designation of "B" (biosimilar to the reference product) as therapeutically equivalent.
  • Second, CMS chose not to use the FDA's temporary naming convention, filgrastim-sndz, but rather to include the name of the active ingredient only, filgrastim. Traditionally, CMS has established HCPCS code descriptors that are neutral to manufacturers.
  • Third, CMS chose to use the term "biosimilar" in the code descriptor. This is unique to biologics.
  • Fourth, by assigning a "Q" code, which is a temporary code assignment, CMS indicates that this initial coding assignment and descriptor are subject to change.
  • Finally, as with most HCPCS code descriptors, the unit of measure follows CMS's preference for billing units tied to the ingredient, rather than the standard billing units established by the National Council for Prescription Drug Programs, Inc. (NCPDP).

Reimbursement Incentives

For drugs and biologics, a single HCPCS code may apply to multiple National Drug Codes (NDCs) where each NDC captures different labelers, strengths, dosages, and packaging. For example, the HCPCS code for the biologic epoetin alfa is J0885 [Epoetin Alfa (for non-esrd use),1000 units] and it applies to Amgen's Epogen (represented by six NDCs) and Janssen's Procrit (represented by eight NDCs).6 Regardless of the NDC, the billing units for the HCPCS code is the same, namely 1000 units of the ingredient, as indicated in the HCPCS code descriptor.

For physician-administered biosimilars such as Zarxio, statute sets the Medicare Part B reimbursement at average sales price (ASP) plus 6 percent of the reference biologic when provided in freestanding physician clinics.7 Statute does not, however, specify how physician-administered biosimilars are to be reimbursed when provided in hospital outpatient departments.8

This ASP-based payment amount is the weighted average of the manufacturer's ASP for all NDCs assigned to the HCPCS code, the billing and payment code. More specifically, it is the manufacturer's sales of a drug to all purchasers in the United States in a calendar quarter divided by the total number of units of the drug sold by the manufacturer in that same quarter. The ASP is net of any price concessions such as volume discounts, prompt pay discounts, and cash discounts; free goods contingent on purchase requirements; chargebacks; and rebates other than those obtained through the Medicaid drug rebate program.9 The Medicare database of ASPs is the basis for many private payers in setting drug reimbursement, although some private payers pay higher or lower percentages than Medicare's ASP plus 6 percent.10 Until information on the manufacturer's ASP is available for the biosimilar, CMS pays 106 percent of the wholesale acquisition cost (WAC) of the product.11

At this time there is only one biosimilar assigned to the HCPCS code Q5101 [Injection, Filgrastim (G-CSF), Biosimilar, 1 microgram]. In recent guidance, CMS indicated it will create a separate code to distinguish the biosimilar from the reference biological, but is considering other policy options for coding of additional biosimilars.12

If a biosimilar product does not have the same HCPCS billing code as the reference biologic, then there is no change to the ASP-based payment of the reference biologic. Because the payment amount for the biosimilar as established under the ACA includes 6 percent of the reference product instead of the biosimilar, there is a modest incentive to use the biosimilar, because the payment amount for the reference product is unaffected.

If the biosimilar biologic product shares the same HCPCS billing code with the reference biologic, then the ASP-based payment creates more incentive to use the biosimilar and reduces the incentive to use the reference biologic. The presumably lower sales price of the biosimilar product will be factored into the weighted ASP paid by a physician for either product. This would increase the margin on the lower-priced biosimilar product for the physician and decrease the margin on the reference product for the physician. Assuming an increase in utilization, the payment incentive to use the biosimilar will attenuate over time as the biosimilar weighs more heavily in the ASP.

Conclusion

CMS's preliminary recommendation for the HCPCS code assigned to Zarxio gives an indication of how it will set reimbursement for biosimilars that are not interchangeable. It would allow CMS to assign each subsequent biosimilar of the same reference product to the same HCPCS code and not necessarily create a unique HCPCS code for each biosimilar. However, by assigning a temporary "Q" code, CMS suggests that its approach is subject to change.

CMS has already taken important steps to make its HCPCS coding decisions more transparent. Continued transparency will be particularly important as CMS revisits its "HCPCS Decision Tree for External Requests to Add or Revise Codes" to address coding for biosimilars. The resulting implications for payment and coverage are significant. Depending on CMS's approach, private payers may choose to use CMS's assigned HCPCS codes or may choose to develop their own HCPCS codes, i.e., "S" codes are temporary national HCPCS codes established by private payers that are not recognized by Medicare.