As the country’s largest health insurer, Medicare has immense influence on the health care market.  In the wake of the recent approval of Sandoz’s Zarxio (filgrastim-sndz), the first FDA-approved biosimilar, last month the Center for Medicare and Medicaid Services (CMS) released several policy statements (here, here, and here) regarding reimbursement for biosimilars.  Medicare Part B covers drugs prescribed and administered in an outpatient setting (e.g., a doctor’s office or outpatient clinic), including many biologic drugs (given that they are often injectable drugs that must be administered by a health practitioner).  With Zarxio’s approval, the practical impact of Medicare Part B’s reimbursement policy for biosimilars will soon be tested in the marketplace.

Drugs covered under Medicare Part B are reimbursed through a so-called “buy and bill” approach:  the health care provider buys the drugs and bills Medicare for their use.  Medicare pays the provider the average sales price (ASP) of the drug plus a markup of six percent of the ASP.  The six percent markup is generally considered compensation to physicians for the storage, handling, and other administrative costs associated with these specialty drugs, and is where economic incentives can influence provider choice.

Because generic versions of small-molecule specialty drugs are substitutable for the brand product, once a generic becomes available the generic and the name-brand drug are reimbursed based on the same blended ASP.  This creates an overwhelming financial incentive for providers to rapidly adopt, and then continue to use, the generic drug.  When a low-cost generic first enters the market (and has not yet influenced the ASP), the provider is compensated based on the ASP of the reference product (plus 6%) for both generic and brand-name drugs.  Because generic drugs are cheaper, this results in high profit margins on the lower-cost generic in the short run.  Once the generic has been on the market long enough to drive down the ASP, physicians who do not adopt the generic are penalized by paying higher acquisition costs but getting reimbursed at the now-lower ASP.

Unlike small-molecule generic drugs, biosimilars are not substitutable for the brand-name biologic unless the biosimilar maker demonstrates that its product is “interchangeable” with the brand-name biologic, see 42 U.S.C. § 262(k)(4), and thus will not necessarily be reimbursed under Medicare Part B based on the same ASP as the brand-name biologic.  Rather, non-interchangeable biosimilars and their brand-name counterparts are different drugs and will each be reimbursed based on their respective ASPs.  To incentivize the use of biosimilars, however, Congress made the Part B six percent markup for biosimilars depend not on the biosimilar’s own ASP, but on the presumptively-higher ASP of the reference product.  Thus, although the makers of brand-name biologics will be compensated based on their own ASP rather than that of the biosimilar, the profits for doctors and health-care providers who administer the medicines will be the same for biosimilar and name-brand products.  Indeed, last month, prompted by the approval of Zarxio, CMS confirmed that “[o]nce ASP information is available for this biosimilar product, Medicare payment will equal the ASP for the biosimilar product plus six percent of the ASP for the reference product.”  (“[U]ntil ASP information is available” for the biosimilar product, “once the manufacturer’s wholesale acquisition cost (WAC) is available, Medicare will pay 106 percent of the WAC for the product.”)

The practical impact of Medicare’s reimbursement policy on the biosimilars market remains to be seen.  Nevertheless, both Congress and CMS view biosimilars as an opportunity to reduce costs in the healthcare system in this country.  See also Center for Medicaid and CHIP Services, Release No. 169 (Mar. 30, 2015) (“States and managed care organizations are encouraged to provide biologics that achieve desirable, cost-effective clinical outcomes for beneficiaries using the various drug utilization and cost management tools they have available . . . . We remind states that educating physicians and pharmacists on how to prescribe and dispense cost effective biosimilar biologicals is important to encourage and maximize their use.”).  Experts will be watching the impending launch of Zarxio (filgrastim-sndz) – which could occur as early as May 11, 2015, see Amgen, Inc. v. Sandoz Inc., No. 14-cv-04741-RS, ECF No. 129, slip op. at 2 n.1 (N.D. Cal. Apr. 15, 2015) (order denying injunction pending appeal) – very closely.  So too will Biologics Blog.