With the reelection of President Obama, the healthcare and Food and Drug Administration (FDA) regulatory agenda in the coming year is beginning to come into focus. In particular, although the future of the Affordable Care Act (ACA) framework is now assured, the complex task of implementation — and inevitable efforts to modify aspects of the law — lie ahead. FDA is faced with implementation of the FDA Safety and Innovation Act (FDASIA) and the biosimilars framework, as well as an intense focus on drug compounding. The following is an overview of critical issues and developments that we expect will be important for our clients in the coming year.  



States may choose a State-based Exchange, or a Federally-facilitated Exchange (including a “partnership” Exchange, which is a subset of Federally-facilitated Exchanges in which the State may design and carry out specified Exchange functions). At this juncture, the breakdown of State-based and Federally-facilitated Exchanges is still uncertain, but the number of Federally-facilitated Exchanges may be significant. To date, the Centers for Medicare and Medicaid Services (CMS) has issued little guidance on how it will run the Federally-facilitated Exchanges, except CMS has said that (at least initially) it will certify as a Qualified Health Plan any plan that meets the minimum requirements specified in ACA. Questions about Federally-facilitated Exchanges could be addressed shortly in a rule or in expanded subregulatory guidance. (Federally-facilitated Exchanges might even be addressed in the proposed rule noted immediately below that is under review at the Office of Management and Budget (OMB), although the title suggests a focus on other Exchange-related issues.)


CMS’ December 2011 Essential Health Benefits Bulletin suggested that CMS would propose a “one-drug-per-class” approach to Essential Health Benefits (EHBs), and would not propose to adopt the Medicare Part D protected classes policy as part of EHB. Whether CMS still maintains those positions should become clear once CMS releases a proposed rule on EHB. An EHB proposed rule is under review at the OMB as of November 8, 2012. The title of the proposed rule is listed as “Exchanges Part II - - Standards Related to Essential Health Benefits; Health Insurance issuer and Exchange Responsibilities With Respect to Actuarial Value, Quality and Accreditation.” A White Paper on “Health Care Quality Provisions in the [ACA]” also appeared at OMB on November 9th.

The title for the proposed rule noted above indicates it will also address actuarial value determinations for “metal” (bronze, silver, gold, platinum) plans. CMS’ actuarial equivalence subregulatory guidance had included an announcement about the subsidies to reduce cost-sharing payments by lower-income people who purchase coverage on an Exchange, i.e., CMS intends to propose limiting those subsidies to people with income below 250% of the Federal Poverty Level (FPL) (not 400% of FPL, the eligibility limit for premium subsidies); it is unclear whether this issue is part of the proposed rule at OMB.


Since the Supreme Court ruled that States may participate in the existing Medicaid program without participating in Medicaid expansion, CMS has yet to answer numerous questions about Medicaid expansion posed by governors. Most importantly, States want to know whether CMS will permit “partial expansion” (which would mean expanding up to 100% of FPL, and directing uninsured people with income between 100-133% of FPL to the Exchanges, where they would presumably receive premium and cost-sharing subsidies funded 100% by the Federal government). While it is possible that CMS could answer this question soon, CMS has little incentive to show its cards on this issue prematurely. CMS may wish to allow partial expansion if necessary to induce States to expand at all in 2014. Until then, CMS may want to see how many States will agree to full expansion, since few States would do so once CMS announced that it would allow partial expansion.  


As of November 8, 2012, OMB is reviewing a proposed rule titled “Patient Protection and Affordable Care Act: Health Insurance Market Rules.” This proposed rule may focus on a set of related insurance reform requirements that take effect in 2014. These include such requirements as guaranteed issue, the prohibition of coverage restrictions based on pre-existing conditions, and various insurance pricing provisions (e.g., premiums can only vary 3:1 based on age, meaning older people can pay premiums no more than three times what younger people pay, which is causing concern about “sticker shock” for the younger people). In this proposed rule or elsewhere, CMS could also address other insurance market reforms that take effect in 2014 - - e.g., annual limits on essential health benefits will be prohibited for many health plans as of 2014 (lifetime limits on EHB were already prohibited in 2010/2011).  


CMS’ protected classes policy requires that Part D plan formularies include all drugs (with limited exceptions) in six classes: anticonvulsants (for epilepsy); antidepressants; antineoplastics (to fight cancer); antipsychotics; antiretrovirals (for HIV/AIDS); and immunosuppressants to prevent rejection of transplanted organs. ACA directed CMS to issue regulations that establish criteria for identifying protected classes; required that CMS maintain protection for the six existing protected classes, until it issues regulations to identify protected classes; and authorized CMS to issue regulations that create exceptions to the general rule that all drugs in protected classes must be included on Part D formularies.  

Since CMS first developed the protected classes policy (at the beginning of Part D coverage), Part D plans and pharmacy benefit managers have urged CMS to end or curtail the protected classes policy, arguing that the policy drives up costs by reducing plans’ leverage to negotiate rebates with manufacturers of protected class drugs. While CMS has not signaled an intent to revisit the protected classes, it has stated that it will not extend the Part D protected classes policy to Exchange plans. CMS may see an opportunity to recalibrate the protected classes policy if it feels an adjustment is in order.


Under the Medicaid Drug Rebate Program (MDRP), a drug manufacturer must calculate and submit to CMS drug pricing data and pay rebates to Medicaid, in order to receive Medicaid (and other Federal program) reimbursement for its covered outpatient drugs. Among other changes, the ACA changed how manufacturers calculate Medicaid Average Manufacturer Price (AMP), added an alternative Medicaid rebate calculation for “line extension” products, changed the minimum Medicaid rebates owed on innovator and generic drugs, and changed Medicaid pharmacy reimbursement for certain multi-source drugs. CMS has since withdrawn its pre-ACA regulations on AMP, and proposed (on February 2, 2012) comprehensive new MDRP regulations.1 A final rule in this area is anticipated in 2013, and could create significant implementation burdens on drug manufacturers.


Under the 340B Program, manufacturers sell covered outpatient drugs at prices at or below specified ceiling prices to certain categories of clinics and hospitals, as a condition of Medicaid reimbursement for their products. The ACA significantly revised the 340B statute, including by significantly expanding the categories of entities eligible for 340B pricing. However, the amended statute limited this expansion by permitting — but not requiring — manufacturers to offer 340B prices to the new categories of 340B covered entities on orphan drugs (i.e., those drugs “designated … under section 526 of the FFDCA for a rare disease or condition”). On May 20, 2011, the Health Resources and Services Administration (HRSA), the agency that administers the 340B Program, proposed to apply this exemption to 340B pricing requirements very narrowly (i.e., only when the orphan drug was being used for its orphan indication).2 HRSA has not yet issued a final rule. The ACA also added many program integrity provisions to the 340B statute, including provisions on refunds to covered entities, reporting 340B pricing to HRSA, civil money penalties, and administrative dispute resolution. To date, HRSA has not implemented these provisions. Finally, HRSA also may issue a long-awaited new proposal to revise the definition of who qualifies as a “patient” to whom covered entities may provide 340B-discounted drugs.3 In 2012 and 2011 HRSA issued several “policy releases” providing guidance on ACA implementation and other 340B issues. This may continue in 2013.


The ACA requires “applicable manufacturers” of covered drugs, devices, biologics, and medical supplies that provide payments (or other transfers of value) to a physician or teaching hospital to submit information about those payments to the Secretary of HHS. The statute specifies that the first “transparency” report is due March 31, 2013 and is to be submitted “in such electronic form as the Secretary shall require.”4 The statutory deadline for final sunshine regulations (October 1, 2011) has long passed, and to date CMS has issued only a proposed rule.5 A lthough a fi nal rule may emerge soon, the complexities of implementation make it highly likely that the first reporting will occur in 2014 at the earliest, and the period of reporting will likely include a partial year report for 2013 at most.


To date, CMS has approved participation of 115 Medicare Accountable Care Organizations (ACOs) in the Medicare Shared Savings Program (MSSP); these organizations are estimated to serve nearly 1.6 million beneficiaries. The head of CMS’ Innovation Center just predicted on November 13th that over the coming year somewhere between 200-300 ACOs will participate in Medicare.

The MSSP is an ongoing part of the Medicare fee-forservice program; those now participating can continue to do so if they perform adequately, and CMS expects to add additional organizations in January 2013 and each January thereafter. In addition, 37 ACOs, serving in excess of 800,000 beneficiaries, are participating in Medicare on a demonstration basis. CMS has announced its intentions to advance further models under the authority of its Innovation Center, and it is known to be designing at least one possibility, an ACO aimed at end-stage renal disease.  

After removal of uncertainty attached to the possibility that Medicare’s ACO provisions would be repealed, we may expect to see CMS proceed with alternative ACO models and potential applicants commit to developing ACOs and participating in both the MSSP and in Medicare’s anticipated offerings. While continued evolution of the models in use today may be anticipated as experience accumulates, it appears that ACOs will be a part of the Medicare fee-forservice program for the foreseeable future.


The Independent Payment Advisory Board (IPAB) is charged with recommending cuts to Medicare if aggregate spending, for 2015 and subsequent years, is projected to exceed certain targets; the proposed cuts would receive special handling in Congress and would go into place unless replaced with others achieving comparable savings. The IPAB has been a lightning rod for controversy and would have been a prime target for repeal. Although it will remain a target of legislative activity, it is not clear that the IPAB’s activities will ever be triggered. In March 2012, CBO estimated that Medicare program growth would be sufficiently low under current law during the period 2015 to 2022 that IPAB recommendations would not be triggered, though it cautioned that the estimates are significantly uncertain and triggering is possible. Even if the trigger conditions were met, it is not clear that the IPAB could even be formed, since all members would require Senate confirmation and opposition to its activities by even a few Senators could leave it without members.


CMS and interested states can be expected to proceed with implementation of demonstration projects aimed at improving integration of service delivery to those eligible for both Medicare and Medicaid. CMS received proposals from 26 States for dual eligible integrated care demonstrations in the Spring of 2012. So far, Massachusetts and Washington State have secured approval for their projects, and additional states are likely to follow in the next few months. Massachusetts will test a Capitated Model (the most common model States are proposing) and Washington will test an ACO-like model called a “managed fee-for-service” model. Pharmaceutical manufacturers have watched the development of the dual demonstrations carefully, partly due to a concern that CMS might consider waiving the protections of Part D, including formulary requirements and protected classes. CMS has so far said it would not waive or relax these protections, but state interest in relief from them as a way of securing savings is thought to be high, and this area merits continued monitoring.


The ACA provided CMS sweeping authority to test innovations in Medicare and Medicaid policy. CMS, through the “Innovation Center” established by ACA, has been using this authority creatively to launch a variety of initiatives aimed at changes in service delivery, including some of the projects summarized above. Also of particular interest is a set of projects for “bundling” of care associated with an inpatient hospitalization by various providers in several settings. Stakeholders have followed these projects with great interest because of the potential changes for the coordination and use of specific services, and hence for demand for diagnostics, devices, and pharmaceuticals. The Innovation Center and its broad authority have been criticized by some in Congress, but it now seems likely they will survive and, in the second Obama Administration, continue to develop and test significant innovations.


The Patient-Centered Outcomes Research Institute (PCORI), an independent entity chartered by the ACA to advance comparative effectiveness research, has made a robust start and can be expected to proceed with its work as outlined in ACA now that the threat of immediate repeal has passed. To date, the Institute has concentrated largely on agenda setting and on developing and validating methodologies. In the future, it will command a significant budget with which to fund research, and it has set forth the following priority areas for allocating its research budget: assessment of prevention, diagnosis, and treatment options; improving healthcare systems; communication and dissemination; addressing disparities; and methodology. The pharmaceutical and medical device industries have been in general most concerned about PCORI’s potential activities that would fall in the assessment area because such research may involve trials of their products with outcomes that are difficult to predict. PCORI expects to allocate approximately 40 percent of its funding to this priority area.


Medicare, having added pay-for-reporting incentives in several of its payment systems, has been gradually moving in the direction of pay-for-performance, partly as result of ACA provisions; these provisions will be implemented over the next several years, following blueprints that CMS has largely articulated in regulations but with possible changes in specific metrics and other details from year to year.

The hospital value-based purchasing provision of ACA, building on pay-for-reporting initiatives, started to reward hospitals for good performance on quality measures in FY 2013. Incentive payments will be funded by reducing all hospital base operating payments in order to form a pool of funds; the reduction starts at 1.0 percent in FY 2013 and rises gradually to 2.0 percent in FY 2017 and subsequent years. CMS will award all of the resulting funds to those hospitals that meet minimum standards on the specified measures, with amounts dependent upon attainment or improvement in scores, in accord with CMS-specified rules.  

The ACA strengthens the voluntary pay-for-reporting incentive program for Medicare payment to physicians and phases in mandatory participation from CY 2015 to CY 2017. A pay for performance system for Medicare physician payments, called the “value-based payment modifier,” will be phased in from 2015-2017.



The implementation of the reauthorized new user fee programs for generic drugs and biosimilars will require a significant effort to meet performance goals and clear the generic drug application backlog. FDASIA also provided significant new authorities for, and limitations on, efforts to reinvent the current regulatory approach for medical device products. However, the broader goal of tackling the globalization of the FDA compliance and enforcement mission will likely be the main test for FDA in the coming years. The Agency must focus on supply chains and achieving overall parity in domestic versus foreign inspections, yet the mission for the Agency in this area is enormous. The Agency also must show progress in fostering innovation — important decisions must be made in implementing a new exclusivity framework for qualified infectious disease products and interpreting new standards for encouraging rapid development and approval, such as for “breakthrough” drugs. Given the current heat being applied to FDA around the compounding crisis, the Agency is seen as a primary House target for political attacks, and will remain under intense scrutiny in its efforts to implement FDASIA.


The history of amendments to the Federal Food, Drug, and Cosmetic Act largely tracks safety crises, and compounding will be no exception. Given the national focus on the New England Compounding Center disaster, and the remaining legal ambiguity around FDA’s authority to address compounding, it is highly likely that a new compounding regulatory framework will be enacted in the coming year. Commissioner Hamburg has outlined a proposed approach in which the Agency would focus on tougher standards and inspections for high risk compounding activities, while leaving states as the primary regulators of traditional compounding activities. Such a bifurcation remains essential — FDA cannot regulate all pharmacy compounding effectively, and there is no funding available even if it could. Under any scenario, compounding operations that were essentially operating as manufacturing companies outside of FDA’s purview will likely cease operation. Legislation in this area could create opportunities for other FDA legislation, such as a new framework for tracking and tracing prescription drug products, which was left out of the FDASIA framework.  


Constitutional challenges to the regulation of drug and device promotion are intensifying in response to enforcement efforts, and the prosecution of individuals in particular. Concurrently, FDA has gotten the message that it can no longer avoid providing broader guidance to industry relating to scientific exchange, social media, and other important promotional areas, and it is working on a series of guidance documents. Given FDA’s highly restrictive approach to date in areas such as reprints and unsolicited requests, it is likely that such documents will produce further topics for litigation. If such a case reaches the Supreme Court, there is a good chance that a decision could require fundamental changes to the Agency’s current approach to the line between promotional and scientific exchange communications.


To date, FDA has not had time to confront some of the thorniest issues relating to implementation of the biosimilars framework, including responding to the reaction to its draft guidance documents. However, as biosimilars progress toward applications, FDA will need to confront important and controversial issues such as whether a certification regarding biosimilar applicant compliance with the statutory patent dispute resolution framework should be required, the extent of reliance on studies relating to ex-US approved biosimilars, product nomenclature requirements, and the breadth of applicability of reference product exclusivity. One result will be the advent of a new era of biosimilar-related litigation.