Drug prices have emerged as an important US political issue in recent years, with roughly 140 bills on drug prices introduced in the US Congress since January 2019. On November 20, 2020, the US Department of Health and Human Services (HHS) announced an interim final rule with comment that will introduce sweeping changes to the way many drugs are reimbursed by Medicare Part B in the United States by adopting a system of external reference pricing (ERP) using a “most-favored nation” (MFN) pricing approach. With a change in administration on January 20, 2021, and potential legal challenges on the horizon, it is uncertain whether this rule will be implemented as published. There is bipartisan interest in drug pricing legislation with an ERP approach having support across the political aisle. This suggests that even if the MFN interim final rule is not implemented as published, an ERP approach may likely be a part of future policymaking on ratesetting for drugs under Medicare.
Drug prices have emerged as an important US political issue in recent years, with roughly 140 bills on drug prices introduced in the US Congress since January 2019. On November 20, 2020, the US Department of Health and Human Services (HHS) announced an interim final rule with comment that will introduce sweeping changes to the way many drugs are reimbursed by Medicare Part B in the United States by adopting a system of external reference pricing (ERP) using a “most-favored nation” (MFN) pricing approach. With a change in administration on January 20, 2021, and potential legal challenges on the horizon, it is uncertain whether this rule will be implemented as published. There is bipartisan interest in drug pricing legislation with an ERP approach having support across the political aisle. This suggests that even if the MFN interim final rule is not implemented as published, an ERP approach may likely be a part of future policymaking on ratesetting for drugs under Medicare. SPECIAL REPORT POLICY UPDATE: DRUG PRICING 4 While the direct intent of the MFN model are savings on drug expenditures for the Medicare program and for US patients, there may be significant spillover effects in the global marketplace that could potentially alter the order of entry into global healthcare markets, or even affect the decision whether to enter some markets at all. Currently, ex-US pricing and reimbursement frameworks generally do not constrain US pricing and reimbursement nor do the ex-US marketplaces generally impact whether or when pharmaceuticals are introduced in the US. With implementation of the MFN model, however, given the size and wealth of the United States, pharmaceutical companies will need to consider the ex-US marketplace—including relatively small marketplaces—when considering pricing applicable to the US and vice versa. SPECIAL REPORT POLICY UPDATE: DRUG PRICING 5 Stakeholders should consider both short- and long-term strategies to respond to the MFN. Short-term response options include advocacy while the rule is open to comment as well as potential legal challenges by those with standing to challenge the rule. In the long term, stakeholders should plan for the possibility that an ERP policy will persist in some form and consider the potential impact on availability, access, and pricing for pharmaceuticals in the US and outside the US. With the publication of the MFN model interim final rule, below we review ERP proposals in the United States, drug pricing regimes in several other Organization for Economic Cooperation and Development (OECD) countries, and the implications of implementation of an ERP regime in the United States for global pharmaceutical market entry. Important links: MFN model news release MFN rule MFN model website SPECIAL REPORT POLICY UPDATE: DRUG PRICING 6 DOMESTIC US MEDICARE DRUG RATESETTING POLICY EXISTING POLICY AND CHANGES UNDER THE MFN MODEL Under current US drug pricing laws, Medicare generally pays average sales price (ASP) plus 6% for drugs billed under Medicare Part B, which includes a limited group of drugs, primarily physician-administered drugs and infusion drugs administered through durable medical equipment. Medicare Part D plans cover outpatient prescription drugs. Medicare does not establish rates for drugs covered by Medicare Part D plans, but health insurers offering the plans and their benefit managers have had the ability to negotiate discounts and rebates from manufacturers. The MFN model is a seven-year mandatory “model” with a four-year phase-in period involving the entire nation, and will set the reimbursement rate of a list of generally high-expenditure drugs equal to the lowest adjusted price from a market basket of other nations (i.e., the MFN price). The market basket will be composed of OECD nations with a per-capita GDP of at least 60% of that of the United States. Rate adjustment will be based on relative percapita GDP. The current drug list includes 50 drugs, although drugs may be added over the next seven years as new drugs make it into the top 50 on total expenditures. Rates will be updated quarterly based on international drug prices preferentially obtained from current volume and price data, although alternative data sources may be used when this data is not available. The table below shows model MFN pricing data, adapted from the rule, for an example country. The MFN model currently includes a market basket of 22 countries (Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Ireland, Israel, Italy, Japan, Republic of Korea, Luxembourg, Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland and the United Kingdom) and could potentially include up to 36 additional countries (the total count of OECD members excluding the United States). The MFN model thus will use one of the largest market baskets among countries in the OECD that use a market-basket ERP regime. Large market baskets are often selected by a country when the pricing goal is to minimize sensitivity to outlier prices. However, the MFN model will, by design, select the low outlier price from this large basket. Central to the MFN model is the issue of what the MFN model (or any ERP model) considers to be a “price” in the external reference basket. Timely data that reflect the settlement prices of real transactions are the most meaningful representations of the prices foreign markets are willing to bear. The MFN model recognizes this, placing recent transaction data that includes both price and volume at the top its data-source hierarchy. However, when recent transaction data are unavailable for a country, the MFN model will use older transaction data and, in the absence of data reflecting transactions, will resort to using the list price in a country. This means that there are different strategic and financial planning considerations between drugs that already have transaction data available in OECD countries, including the drugs already selected for MFN model inclusion, and drugs that have not yet been introduced to the global marketplace and have not yet been included in the MFN model. SPECIAL REPORT POLICY UPDATE: DRUG PRICING 7 HHS appears to be aware that the MFN model may have domestic healthcare implications in other OECD countries, noting that countries may leave the OECD to avoid having their drug prices tied to the United States. The rule notes that OECD membership on October 1, 2020, will be used to define the countries considered OECD members going forward. CMS bases its authority to bypass the current statutory framework for Part B drug rate-setting from its authority to implement cost savings models under the Center for Medicare and Medicaid Innovation. Key Takeaway: On average, the MFN price generally represents a significant discount to the ASP. In 2021, the MFN drug payment amount will be 75% weighted on the ASP (as reported by the manufacturer in the US) and 25% weighted on the MFN price. In each of the subsequent 3 years of the model, the MFN drug payment will be weighted 25% more heavily on the MFN price until the model bases rates on 100% of the MFN price for years 4 through 7 of the model. Data shown below are adapted from Table 6 in the rule. The Illustrative MFN Drug Payment Amount is a blending of the applicable ASP and the MFN price representative of the first year of the phase-in period (2021). The MFN price is, on average, 33% of the ASP. Illustrative Drug Payment Amounts for First Year of Model