The recently enacted Patient Protection and Affordable Care Act (Pub. L. No. 111- 148) and Health Care and Education Reconciliation Act (Pub. L. No. 111-152) make numerous changes affecting those that manufacture or distribute drugs, biological products and medical devices.

The changes wrought by the new laws (i) affect reimbursement both under the Medicaid Rebate Program and Medicare Part D, (ii) mandate compliance programs and transparency, including the reporting of all payments to physicians and teaching hospitals that exceed $10, (iii) impose new industry fees and taxes, (iv) require the Food and Drug Administration (FDA) to further regulate clinical trials and labeling, (v) create a new biosimilar approval process, and (vi) impose new labeling requirements.

The implementation of these and other reforms will be a complex and ongoing process, with varying effective dates and substantial delegation of executive branch rulemaking. Below we discuss a few of the more salient provisions that will impact the drug and device sector. Unless otherwise noted, section references are to the Patient Protection and Affordable Care Act.

This Alert is intended as a summary only and is not to be relied upon for drawing legal conclusions or advising clients about specific issues.

Medicaid Rebate Programs

Beginning in 2014, state Medicaid programs will be required to extend eligibility to all individuals who are not already eligible for Medicaid or Medicare and whose income does not exceed 133 percent of the federal poverty level for the size of the family involved. This is expected to increase Medicaid enrollment by approximately 16 million individuals, expanding access to outpatient prescription drugs under Social Security Act § 1927.

Changes to Rebates and Definition of AMP (Sec. 2501)

Effective January 1, 2010, the minimum manufacturer rebate for brand-name drugs purchased by State Medicaid programs will increase from 15.1 percent of the average manufacturer price to 23.1 percent of the average manufacturer price (except for the rebate for clotting factors and drugs approved exclusively for pediatric use, which will increase to 17.1 percent). The Medicaid rebate for noninnovator, multiple source drugs will increase to 13 percent of the average manufacturer price. The additional Medicaid rebate will apply to new formulations of brand-name drugs.

Changes to Federal Upper Limits (Sec. 2503)

The details for calculating the rebates due the states by manufacturers will change. Rebates for multiple source drugs are based on the average manufacturers prices (AMP) subject to the Federal Upper Limit (FUL). The new law changes the methodology for calculating the FUL: no less than 175 percent of the weighted average (based on utilization) of the most recent AMPs for pharmaceutically and therapeutically equivalent multiple source drugs available in commercial pharmacies nationally. The use of the term “no less than” implies that the Department of Health and Human Services (HHS) has discretion to set FULs at a higher level. This provision is self-executing and will go into effect on October 1, 2010.

Smoking Cessation Products Included (Sec. 2502)

Under prior law, Medicaid did not cover smoking cessation drugs. Effective January 1, 2014, the new laws authorize coverage for these products — even when available over-the-counter — as well as barbiturates and benzodiazepines.  

Medicare Part D — Prescription Drug Benefits  

The new laws make many significant changes to Medicare Part D. We highlight a few below.  

Closes Coverage Gap (Sec. 3301)  

Beginning July 1, 2010, drug manufacturers must provide a 50 percent discount to Part D beneficiaries for brandname drugs and biologics purchased during the coverage gap (i.e., donut hole) beginning July 1, 2010. In addition to this discount, Section 1101 of the Reconciliation Act provides a $250 rebate for all Medicare Part D enrollees who enter the “donut hole” in 2010. It reduces the beneficiary payment obligations by 75 percent for brand name and generic drugs by 2020 and by an additional 25 percent each year thereafter.  

Improved Formularies (Sec. 3307)

For Prescription Drug Plan (PDP) years 2011 and beyond, the current six classes of drugs of clinical concern are codified. The Secretary is empowered to identify classes of clinical concern through rulemaking, without the constraints of the criteria specified in section 176 of Medicare Improvements for Patients and Providers Act (MIPPA).

Reducing Part D Premium Subsidy for High-income Beneficiaries (Sec. 3308)

Starting in January 2011, the Part D premium subsidy for beneficiaries with incomes above the Part B income thresholds based on Adjusted Gross Income will be reduced or eliminated. This will be recalculated each September to determine the premiums for the following plan years.  

Compliance Programs Mandated (Sec. 6401)

This section amends section 1866(j) of the Social Security Act, which deals with provider and supplier agreements, by requiring providers and suppliers to adopt and implement compliance programs. This requirement is linked to entities with agreements under Medicare, Medicaid or CHIP. Many pharmaceutical and device manufacturers are neither providers nor suppliers under Medicare and therefore would not be directly affected by this provision. However, it is unclear whether a Medicaid rebate agreement under section 1927(k) of the Social Security Act would create the nexus necessary to trigger the compliance requirement.  

Transparency Provision (Sec. 6002)

Beginning in 2013, manufacturers and distributors of drugs, devices, biological products and medical supplies will be required, with certain limited exceptions, to report all payments to the Secretary to physicians and teaching hospitals other than payments to W-2 employees. Meals in excess of $10 will need to be reported. The Secretary, in turn, will be required to post this information in a searchable format on the Internet.  

Annual Fees and Taxes on Manufacturers  

To assist in the financing of the laws’ coverage expansions, industry specific fees and taxes will be imposed on the drug and device industries.

Annual Fee for Brand Drugs (Sec. 9008 as amended by Reconciliation Act Sec. 1404)

Beginning in calendar year 2011 and annually thereafter, a fee will be imposed on any person that manufactures or imports branded prescription drugs or biologics for sale in the United States. Between 2011 and 2018, the aggregate fee for all such manufacturers will range from $2.5 billion to $4.1 billion. It will remain at $2.8 billion in 2019 and for subsequent years. Each manufacturer’s share of the fee will be based on the ratio of its branded drug sales to the branded drug sales of all covered entities during the prior year.

Excise Tax on Device Manufacturers (Reconciliation Act Sec. 1405)

Beginning in 2013, the new laws impose a 2.3 percent excise tax on sales of all medical devices, independent of class. Exemptions are provided for eyeglasses, contact lenses, hearing aids, and other devices determined by Treasury to be of a type that are generally purchased by the general public at retail for individual use.  

Biosimilar Approvals (Generic Biologics) (Secs. 7001-7003)

Amendments to the Public Health Service Act create a new approval mechanism for biological products shown to be biosimilar to, or interchangeable with, a licensed reference product. A biosimilar product is defined to mean one that is both “highly similar to the reference product notwithstanding minor differences in clinically inactive components” and for which “there are no clinically meaningful differences between the biological product and the reference product in terms of the safety, purity, and potency of the product.”

An interchangeable product is defined as one that “may be substituted for the reference product without the intervention of the health care provider who prescribed the reference product.”

Borrowing from Hatch-Waxman, the law also grants market exclusivity for the reference product and the first interchangeable product, establishes patent dispute procedures, and amends the Food, Drug, and Cosmetic Act (FDCA) to make user fees under the Prescription Drug User Fee Act applicable to biosimilar and interchangeable biological products. The law provides for up to 12.5 years of market exclusivity for a biological product approved under a biologic license application, with special considerations for pediatric indications.

The first company to obtain approval of an interchangeable product would be eligible for a period of exclusivity that would expire on the earlier of (1) one year after first commercial marketing of the interchangeable product, (2) 18 months after the resolution of patent litigation, or (3) 42 months after initial approval of the interchangeable product if patent infringement litigation is ongoing.

Patent disputes would be initiated and resolved after a reference product sponsor and a follow-on applicant exchange required information on applicable patents covering the reference product. The submission by a biosimilar or interchangeable biologic sponsor of a statement challenging certain patents identified by the patent holder constitutes an act of infringement of the patents that cover the biological product.  

Drug Labeling  

Labeling Changes and Generic Drug Approval (Sec. 10609)

The laws amend the FDCA’s abbreviated new drug application (ANDA) (see FDCA § 505(j)) to authorize FDA to approve an ANDA notwithstanding certain changes to the Reference Listed Drug (RLD) labeling approved within 60 days of anticipated ANDA approval — that is, within 60 days before the expiration of a period of patent or non-patent market exclusivity or a 30-month stay blocking final ANDA approval. Changes to the “Warnings” in the label are excluded.  

Presentation of Prescription Drug Benefit and Risk Information (Sec. 3507)  

The laws require the Secretary of Health and Human Services to determine whether “the addition of quantitative summaries of the benefits and risks of prescription drugs in a standardized format (such as a table or drug facts box) to the promotional labeling or print advertising of such drugs would improve health care decision making by clinicians and patients and consumers.” In making such a determination, the Secretary must “review all available scientific evidence and research on decision making and social and cognitive psychology” and consult with various stakeholders and experts. By March 23, 2011, the Secretary must report to Congress on whether such quantitative summaries would improve health care decision making and the reasoning and analysis of that determination. If the Secretary determines that quantitative summaries would improve health care decision making, then the Secretary would be required to issue a notice of proposed rulemaking not later than three years after submitting the report to Congress