This article was published by Law360 on January 14, 2019.

Donald Trump’s election in 2016 placed pharmaceutical companies in uncharted territory. Unlike predecessors from both major political parties, Trump did not shy away from directly criticizing the industry. Whether better seen as creating, or capitalizing on, widespread dissatisfaction with drug prices, President-elect Trump claimed that pharmaceutical companies were “getting away with murder” and promised to take action upon entering office. He went so far as to support the highly controversial idea of allowing the federal government to directly negotiate drug prices with the manufacturers.

After the first year of the Trump administration, industry likely breathed a sigh of relief. While the president would occasionally return to the narrative of drug companies taking advantage, and promising to lower prices, his administration had taken no steps that would really shake up the pharmaceutical industry.

If 2017 was a sleeper on drug pricing, 2018 was a loud wake-up call. In May, the president and  U.S. Department of Health and Human Services Secretary Alex Azar unveiled an “American Patients First” strategy, or the blueprint, to curb prescription drug prices. Without announcing any immediate policy changes, the blueprint set four priorities that have spurred various administration initiatives over the past eight months:

  • Improve competition;
  • Create a framework for better negotiations with drugmakers;
  • Provide incentives to lower the list prices of drugs; and
  • Reduce patients’ out-of-pocket costs.

But as discussed below, while the administration has dialed up the noise on this issue, it has taken few concrete steps that appear likely to have an important impact on drug prices any time soon. Instead, the most consequential ideas (which notably did not include the direct negotiation with drugmakers that then-candidate Trump had suggested) do not appear to have consensus political support and/or appear vulnerable to legal challenge, while the ideas that have been or can be easily operationalized do not promise to be very consequential.

To illustrate this point, consider two of the administration’s most potentially consequential ideas — tying Medicare Part B payment for drugs to (generally lower) international reference pricing, and allowing Medicare Part C and D plans to restrict access to certain expensive drugs. While the administration is proceeding on both ideas by regulation, it is not clear that either idea can be accomplished without legislation, and litigation is virtually guaranteed at least to delay, if not defeat, their implementation.

On the other hand, the list of ideas that are easily accomplished is longer, but none of these is likely to have more than a marginal impact. For example, the administration has:

  • Offered modest reforms to improve the approval process for biosimilars;
  • Publicly called out companies that he alleges engage in “gaming” tactics to stifle competition;
  • Proposed requiring manufacturers disclose a drug’s list price in direct-to-consumer television ads;
  • Convened a working group to study importation of drugs from other countries in narrow circumstances; and
  • Enacted legislation to ban “gag clauses” that bar pharmacists from telling consumers when purchasing a drug without using their insurance would save them money.

Although the administration focused mostly on modest initiatives in 2018, the blueprint has set the stage for more action in 2019, and Secretary Azar has pledged to continue “attacking the very broken system of drug pricing.”

Moreover, the incoming 116th Congress may present new opportunities to pursue broader reforms that cannot be done administratively. With the Democrats controlling the House of Representatives, the president could find an unlikely ally in Speaker Nancy Pelosi — that is, if the two sides want to cooperate. If so, they may also have a partner in Sen. Chuck Grassley, R-Iowa, the Republican chairman of the powerful Senate Finance Committee, who has pledged to work across the aisle to address drug prices.

The end of 2018 marks an appropriate time to review what the Trump administration has done thus far under each blueprint priority and where it might go in 2019. A recap of 2018 drug pricing developments must also account for the increasingly prominent role states have played in addressing drug prices.

Blueprint Priority #1: Improve Competition

Consistent with conventional Republican ideology that market forces are the best way to achieve better prices, the blueprint says that it seeks to promote competition in the prescription drug market by fostering innovation, encouraging generics and cracking down on perceived anti-competitive “abuses” or “gaming” by drugmakers. These strategies would apply to all drugs, not just those covered under Medicare or other federal health care programs.

FDA Initiatives

Since the blueprint’s release, the U.S. Food and Drug Administration has sought to use its administrative authority to spur the development of generics and deter tactics for depressing competition. For example:

  • Generics: The FDA issued product-specific guidances in November to help companies develop generic versions of 63 reference-listed drugs.
  • Biosimilars: The FDA released a biosimilars action plan in July, laying out various steps the agency will consider to improve the approval process for biosimilars and provide better guidance to developers.
  • “Gaming”: The FDA took some modest steps to discourage companies from engaging in what Commissioner Scott Gottlieb dubbed as anti-competitive “shenanigans,” including:
    • Releasing new guidance outlining under what circumstances the FDA will waive the requirement that generic drugmakers negotiate with brand name companies to develop a single shared risk evaluation and mitigation strategy program. The FDA has expressed concerns that some companies exploit this requirement to delay the generic’s market entry.
    • Publishing the names of companies that block generic drugmakers from obtaining samples necessary to reverse engineer a brand name drug.
    • Issuing new guidance to clarify the factors the FDA will use in determining, and publicly stating, that a company’s citizen petition was filed with the primary intent of delaying generic competition.

On the whole, the FDA’s actions likely will have only modest effects on drug prices. The FDA approval process is only one aspect of whether a potential manufacturer of biosimilars would view market entry as profitable. Moreover, the FDA’s reliance on public shaming reveals the agency’s limited authority to counter anti-competitive practices.

International Trade

Consistent with his Make America Great Again narrative, Trump has repeatedly attacked foreign countries for “free riding” on the backs of American consumers. In a remarkable rhetorical flourish, the president turns the more aggressive price regulation engaged in by most countries other than the United States from virtue to vice, arguing that American consumers who pay higher prices here are in effect subsidizing lower prices abroad.

The blueprint envisioned using trade negotiations to get foreign countries to pay more for prescription drugs. Taking a much more modest approach, the administration’s new trade deal with Canada and Mexico, which still requires congressional approval, would extend market exclusivity for biologics to 10 years in those countries, up from eight years in Canada and five years in Mexico currently. An increase in the exclusivity periods means that biologics would be able to avoid competition in Canada and Mexico for a longer period of time. As a result, the biologic manufacturer could charge a higher price for a longer period, thereby advancing Trump’s goal to make other countries pay more. However, by extending the time period until biosimilars could be marketed in those countries, the increased exclusivities could dampen incentives for manufacturers to develop new biosimilars, which in the long run compete with biologics and bring down prices.

Blueprint Priority #2: Better Negotiation

The second priority encompasses many of the blueprint’s most significant proposals for addressing drug pricing. Simply titled “Better Negotiation,” this prong contemplates a wide range of changes that would apply to Medicare, Medicaid and other federally funded health care programs, but notably does not mention direct federal negotiation with drugmakers. Many of the ideas discussed in the blueprint incorporate value-based care concepts, which seek to move the health system from fee-for-service models that pay based on the quantity of drugs or services delivered to models that tie the amount of payment to patient outcomes.

Medicare Part B

In October, the administration announced perhaps its most ambitious and controversial step yet: an advance notice of proposed rulemaking for a new Medicare Part B demonstration project that incorporates international reference pricing and would apply to 50 percent of the Part B program. Although sparse on details, the initial plan contemplates three major changes to how Part B pays for select single source drugs and biologics:

  • Create a Vendor-Based Distribution System: Under the current buy-and-bill system, providers assume the financial risk of buying Part B drugs themselves and are later reimbursed by Medicare at the drug’s average sales price plus 6 percent, or ASP+6. Under the proposal, vendors (probably entities like pharmacy benefit managers or specialty pharmacies) would contract with Medicare to serve as “middlemen” who would take on the risk of acquiring drugs and then supply them to providers. Currently, the proposal would apply only to physician practices and hospital outpatient departments. Durable medical equipment suppliers, ambulatory surgery centers and other suppliers of Part B drugs would continue to be reimbursed under the current system.
  • International Reference Pricing: The Centers for Medicare & Medicaid Services would tie reimbursement for the vendors to the average price of the drug in select countries. After a five-year phase-in, the vendor’s reimbursement would be set at 126 percent of the international pricing index.
  • Eliminate ASP+6: Since providers no longer purchase the drugs themselves, the proposal would replace the ASP+6 reimbursement with a fixed add-on fee for each drug administered, regardless of the drug’s cost.

If this proposal is ever to come to fruition, the administration must overcome a number of political, operational and legal challenges. For one, the proposal faces fierce opposition from the drug industry and likely provider and patient groups as well. For some Republicans in particular, the international pricing element may evoke charges of “socialized medicine” and “foreign price controls.”. While congressional Republicans have largely stayed quiet so far, evidence of opposition from conservative groups and politicians has started to emerge. In addition, as the Obama administration learned, overhauling the ASP+6 rate is politically difficult because it guarantees providers a mark-up from their purchase price. In the face of bipartisan opposition, the Obama administration withdrew in 2016 a proposed rule to replace ASP+6 with ASP plus 2.5 percent and a flat add-on payment.

Operationally, challenges also abound. For starters, it is unclear how the vendor model will work or who would participate. To make business sense, vendors would need to convince drug companies to sell them drugs at significantly lower prices. Manufacturers have no obligation to sell the drugs, though, and the vendors lack some forms of negotiating leverage, like formularies reaching a large number of covered lives, to demand large discounts. In 2009, CMS abandoned a similar, albeit voluntary, competitive acquisition program after few providers and only one vendor participated. However, the breadth and mandatory nature of this program might create a large enough market of providers to give vendors both an incentive to participate as well as sufficient clout to get manufacturers to agree to reduced prices.

In addition, CMS has not elaborated on how it will fulfill its promises (1) to protect beneficiaries’ access to treatments if manufacturers refuse to sell to vendors at discounted prices, or (2) to ensure providers will not see cuts in pay as a result of the shift from ASP+6 to a flat add-on fee. Although more details are needed, both promises, if achievable, could help the administration politically in mitigating some of the expected backlash from provider and patient groups.

Lastly, the proposal would likely invite a legal challenge as some speculate the breadth of such a demonstration project could exceed the scope of CMS’s authority.

Medicare Parts C and D

In Part C (Medicare Advantage, which in pertinent part includes prescription drug coverage) and Part D (stand-alone prescription drug plans), the administration has sought to strengthen the negotiating power of plans.

In August, CMS granted Medicare Advantage plans the authority to employ step therapy for Part B drugs, starting in 2019. Step therapy enables plans to require the provider to start with preferred treatments and assess whether they work prior to trying more expensive, nonpreferred drugs. In issuing this new guidance, CMS reversed its prior position that the Medicare statute prohibits step therapy for Part B drugs, which could provide grounds for a legal challenge.

In November, a proposed rule sought, among other things, to give plans similar negotiating flexibility with respect to certain Part D drugs. Currently, Medicare prescription drug plans must cover two drugs per therapeutic class, except for the six “protected classes” in which they must cover all available drugs with few exceptions. With no choice but to cover the drug, plans have little power to demand discounts from manufacturers. According to CMS, discounts for such drugs reach 20 to 30 percent in the commercial market, but average just 6 percent in Medicare. The proposed rule would give plans additional flexibility in three ways:

  • Plans may use prior authorization and step therapy for protected drugs;
  • Plans may exclude a protected drug from their formularies if the drug is simply a reformulation of an existing single source drug; and
  • Plans may also exclude a protected drug whose price rises faster than inflation.

Weakening the protected classes has already resulted in political opposition. In 2014, vigorous opposition from industry and patient advocacy groups forced the Obama administration to withdraw its proposal to eliminate three of the classes. Several patient and provider advocacy groups have indicated that the plan could adversely affect patient care by denying critically ill patients (cancer is a notable example) of the specific drugs they need. Even if the proposed rule survives political and legal challenges, it is unclear whether plans would aggressively use such tools to bring down prices, given the potential backlash from consumers.

Notably, the November Part D proposed rule also mentioned that the administration will consider “for a future year, which could be as soon as 2020,” proposals that would require pharmacies to include concessions in a drug’s negotiated price at the point of sale, which would result in lower out-of-pocket costs for consumers.

Medicaid

Lastly, in the Medicaid context, the administration has signaled a willingness to use its waiver authority to support value-based initiatives in states. In 2018, CMS approved waiver requests that empowered Oklahoma and Michigan to implement value-based arrangements that would tie the amount paid for certain drugs in their Medicaid programs to how well they work. Other states, such as Louisiana, are currently exploring additional innovative, value-based models for paying for high-cost prescription drugs within Medicaid, including subscription models where the state pays a flat fee for unlimited access to a particular drug. According to the Office of Management and Budget, CMS is currently developing a proposed rule to make changes to the Medicaid drug rebate program that would support value-based arrangements.

Blueprint Priority #3: Incentives for Lower List Prices

Although reducing list prices set by manufacturers is said to represent a key component of the Trump administration’s drug pricing strategy, for the most part the blueprint simply solicits ideas for steps that might be taken in the future, many of which, if actually pursued, would be highly consequential. For example, the report contemplated imposing fiduciary duties on pharmacy benefit managers, restricting patient assistance programs, overhauling the Medicaid drug rebate and 340B programs,39 and revisiting the Anti-Kickback Statute safe harbor for rebates.

The OMB is currently reviewing an unpublished proposed rule to revise the discount safe harbor for rebates to plans and PBMs. While the rule’s contents are unknown, its title — “Removal of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection” — suggests potentially big changes, and the industry is closely watching to see whether it moves forward. If the rule significantly curtails rebates, it would substantially disrupt the current drug delivery system and would almost certainly be challenged in court as inconsistent with the anti-kickback statutory exception for properly reported discounts.

“Price Shaming”

In the near-term, the administration’s only strategy to lower list prices has been to try to shame companies through transparency. For example, CMS has proposed requiring direct-to-consumer television ads for certain drugs reimbursable by Medicare and Medicaid to display the list price. Although popular with the public, the proposed rule poses both practical and legal issues, and seems unlikely to have an appreciable effect on pricing. For one, since virtually no consumer pays the list price, critics claim the information is at best useless and at worst misleading or counter-productive. Second, from a legal perspective, the proposed rule could be vulnerable to claims that it exceeds the scope of CMS’s authority or violates the First Amendment.

The White House’s public focus on drug pricing prompted a number of companies to commit to voluntary price freezes for the remainder of 2018. As these commitments end, though, indications are that many companies will return to raising prices in 2019. The administration’s short-lived success at demanding voluntary concessions underscores the difficulty of relying on transparency and publicity to drive lasting changes to prices.

Blueprint Priority #4: Lower Out-of-Pocket Costs

Of the four priorities, reducing out-of-pocket costs carried the most modest set of potential policy ideas. The blueprint primarily called for exploring ways to arm consumers with more information about drug prices and lower cost alternatives.

“Gag Clauses”

The president’s lone legislative win regarding drug prices involved signing two acts that prohibit PBMs in commercial and Medicare plans from using “gag clauses” to restrict pharmacists from telling consumers when purchasing a drug out of pocket, rather than with their insurance, would save them money. This modest reform may help some consumers save on out-of-pocket costs, but will do little to address the underlying factors that drive drug prices.

Drug Importation

Although the blueprint did not address importation, HHS Secretary Azar directed the FDA to establish a working group to examine allowing consumers to use imported drugs in narrow cases of a significant price increase for a drug produced by only one manufacturer and not protected by patents or exclusivities. Given the longstanding position of the FDA, under Republican and Democratic administrations, that there is no way to guarantee the safety of the supply chain if importing is allowed, many see commissioning this study as just a negotiating tactic to bring about drugmaker concessions on prices.

The States: Laboratories for Drug Pricing Initiatives

Maintaining a trend that started in 2017, states have continued to play an important role on the frontlines of drug pricing. State legislators introduced at least 274 bills related to drug pricing in 2017 and 2018, a few dozen of which have become law. The most common measures considered by states include: targeting PBMs through gag clause prohibitions and licensing or disclosure requirements; requiring manufacturers of “critical drugs” or drugs with significant list prices to disclose certain information; prohibiting “price-gouging”; and seeking federal approval for drug importation.

Since our last article examining state drug pricing initiatives, the action has moved from state legislative halls, many of which adjourned earlier in the year, to the courtroom. Like their federal counterparts, state drug pricing initiatives have invited litigation. Notable examples include:

  • Regulating PBMs: The Eighth Circuit has struck down state laws in both Arkansas and Iowa that sought to regulate reimbursement of PBMs as preempted by the Employee Retirement Income Security Act and the Medicare statute. Thirty-two states have filed an amicus brief supporting Arkansas’ petition for Supreme Court review.
  • Price Gouging”: The Fourth Circuit struck down a Maryland statute that authorized enjoining, and imposing civil penalties on, manufacturers who pursue “unconscionable [price] increases” for qualifying generic drugs. The court held that the law violates the dormant commerce clause by substantially burdening interstate commerce and regulating prices in upstream sales that occur outside of Maryland.
  • Price Transparency: The drug industry is currently challenging California’s price transparency law that requires manufacturers to justify, and provide 60 days advance notice before, increasing the list price for qualifying drugs on dormant commerce clause and First Amendment grounds. The industry dropped a similar lawsuit regarding Nevada’s transparency law for diabetes medications after the state adopted regulations to protect company trade secrets from public disclosure.

2019: What Lies Ahead?

As we enter the new year, it seems a safe bet that drug pricing will remain in the headlines and on the minds of both federal and state policymakers.

The Trump administration shows no signs of retreating from this issue, but it remains to be seen whether more consequential reforms, such as the Part B international reference pricing proposal or the cryptic rebate rule pending at OMB, will ever take effect.

Equally unclear is whether House Democrats and Trump are willing to put aside their many differences to cooperate on a shared priority. If so, Speaker Pelosi will need to keep her caucus focused on more modest proposals that could garner support in a Republican-controlled Senate, which likely rules out progressive priorities like direct federal price negotiation. In a November floor speech, incoming Senate Finance Chairman Grassley highlighted potential legislation that could attract bipartisan, bicameral support, including bills to address the use of REMS to stifle competition, pay-for-delay patent settlements and the misclassification of drugs as generics for the purposes of the Medicaid drug rebate program.

Even in the absence of legislation, drugmakers can expect increased attention from congressional committees. Sen. Grassley has a reputation for vigorous oversight, and incoming House Democratic committee chairs have pledged to use their new powers to scrutinize drug prices.

Despite some recent losses in court, states should also resume their role as laboratories for drug pricing initiatives, as legislatures reconvene for the new year and agencies continue to implement new laws.

2018 marked an unprecedented year for drug pricing. Right now, it looks like 2019 could be even more eventful.