On September 16, 2009, Senator Baucus (D-Mont.) released the framework for a bill to be called the "America's Healthy Future Act," containing sweeping health reform provisions, parallel to President Obama's recent proposals. The framework document, as modified in the Senate Finance Committee on September 22, 2009 (the "Chairman's Mark"), tracks several provisions from other in recent bills such as the House and Senate versions of the America's Affordable Health Choices Act of 2009, but it also is different in several respects.

We have noted below some of the provisions of the Chairman's Mark that may be most directly relevant to pharmaceutical and biological manufacturers in the context of their relationships and obligations under federal health care programs. While we believe that the Chairman's Mark will not be enacted without significant negotiation and revisions in Congress, it will be a significant base line document in the evolving health reform debate. In this regard, we have discussed some thoughts about the key proposals for this space, as well as significant items that are not included in the proposal, including some potential implications.

1. MEDICAID DRUG REBATE INCREASE

What is Proposed?

  • The Chairman's Mark proposes to increase the minimum Medicaid Drug Rebate for both "innovator" and "noninnovator" drug products.
  • The minimum innovator rebate would increase to 23.1 percent of average manufacturer price ("AMP") (from the current 15.1 percent of AMP), with limited exceptions for clotting factor and products that are approved exclusively for pediatric indications, which will increase to 17.1 percent of AMP.
  • The minimum noninnovator rebate would increase from 11 percent of AMP to 13 percent of AMP.
  • Additionally, the Chairman's Mark proposes to cap a manufacturer's Medicaid drug rebate liability at 100 percent of AMP.

What is NOT Proposed?

  • Consistent with current law, the Chairman's Mark would not require noninnovator manufacturers to calculate or report a Best Price.
  • The Chairman's Mark does not specify an effective date for the change, or whether there would be regulations required.

What Are Some Implications?

  • The impact of the changes to the minimum rebate would vary significantly from manufacturer to manufacturer. As a practical matter, the bill may have less of an impact on manufacturers of branded products in competitive classes, as some manufacturers may currently be rebating Medicaid at rates in excess of the new proposed minimum rebate, based on the difference between their AMP and Best Price.
  • However, the increase in minimum rebate will impact all generic manufacturers, which do not currently report a Best Price, but rather report AMP only.
  • The provision capping the rebate liability at 100 percent of AMP may prove useful to address the occasional idiosyncrasy in price reporting that results in the calculation of a unit rebate amount exceeding the AMP.
  • Manufacturers with product lines that include exclusively pediatric products may need to adjust their government price reporting systems to capture the differences between the pediatric and nonpediatric product rebate calculations.
  • The impact of the changes likely will carry over to any state program or supplemental rebate agreements that determine rebates based on the federal unit rebate amount. However, such agreements should be reviewed to confirm whether they specify the 15.1 percent or 11 percent calculations.

2. MEDICAID AND MEDICARE PART D COVERAGE FOR SMOKING CESSATION DRUGS, BARBITURATES, AND BENZODIAZEPINES

What is Proposed?

  • The Chairman's Mark proposes to remove smoking cessation drugs, barbiturates, and benzodiazepines from Medicaid's excluded drug list, effective January 1, 2014.

What is NOT Proposed?

  • The Chairman's Mark would not remove the additional eight classes of drugs that currently are excluded from Medicaid, including: (i) agents when used for anorexia, weight loss, or weight gain; (ii) agents when used to promote fertility; (iii) agents when used for cosmetic purposes or hair growth; (iv) agents when used for the symptomatic relief of cough and colds; (v) prescription vitamins and mineral products, except prenatal vitamins and fluoride preparations; (vi) nonprescription drugs; (vii) covered outpatient drugs which the manufacturer seeks to require as a condition of sale that associated tests or monitoring services be purchased exclusively from the manufacturer or its designee; or (viii) agents when used for the treatment of sexual or erectile dysfunction, unless such agents are used to treat a condition, other than sexual or erectile dysfunction, for which the agents have been approved by the Food and Drug Administration.

What Are Some Implications?

  • Beginning 2014, Medicaid drug coverage will be available for those classes listed above. This also would mean that Medicare Part D coverage would be available for such drug classes, and some private payors that carve out drug coverage based on the federal list may (but will not be required to) begin to offer coverage for such drugs.
  • Manufacturers of products in the newly "not excluded" drugs would need to be more cognizant of the federal health care anti-kickback statute and similar laws, as federal health care program reimbursement will be available for these products.

3. MEDICAID DRUG REBATE FOR MEDICAID MANAGED CARE UTILIZATION

What is Proposed?

  • The Chairman's Mark proposes to require Medicaid Drug Rebates with respect to utilization by Medicaid Managed Care Organization ("MCO") lives. Medicaid MCOs will be permitted to negotiate for rebates above the statutory minimums.

What is NOT Proposed?

  • There is no provision regarding how manufacturers and states will be able to verify Medicaid MCO utilization.

What Are Some Implications?

  • Medicaid MCO utilization currently is not rebated under the Medicaid Drug Rebate Program. However, manufacturers may have separate contracts to pay rebates to Medicaid MCOs at negotiated rebate levels. A manufacturer potentially could be liable under a commercial agreement as well as the Medicaid Drug Rebate Program for the same utilization. As such, contracts may need to be terminated, to the extent permitted, for changes in law.
  • At a minimum, the Chairman's Mark would increase the utilization submitted under the Medicaid Drug Rebate Program, and this increase will be relevant with respect to analyzing the larger impact on manufacturers, including the increase in base Medicaid rebates, discussed above. This increase may be particularly pronounced in states with high Medicaid managed care populations, such as Arizona.

4. APPLICATION OF MEDICAID REBATE TO NEW FORMULATIONS

What is Proposed?

  • The Chairman's Mark proposes to "treat new formulations of existing brand name drugs as if they were the original product for purposes of calculating Medicaid's additional drug rebate."
  • This will be accomplished by requiring the base date AMP to carry over from the original product to the new formulation.

What is NOT Proposed?

  • It is not clear whether the scope of the "new formulations" language will be limited only to "extended release" formulations, as in the House bill.
  • There is a carve out for new formulations of orphan drugs.
  • The Chairman's Mark is not clear regarding how it would address a new formulation developed by another manufacturer, such as an authorized generic.
  • An effective date for the change.
  • The Chairman's Mark does not address the impact of deflation on the additional rebate (an issue that has become relevant in the current economy).

What Are Some Implications?

  • The "additional" rebate is a penalty rebate that essentially represents the difference between the increases in a product's AMP versus the rate of inflation over time. The base date AMP typically is set based on the pricing during the first full quarter of sales after a product is introduced, and is used as the benchmark against which price increases will be measured over time to determine whether an "additional" rebate will be owed.
  • For example, under the Chairman's Mark, if an "extended release" formulation is introduced and priced at a premium to the original product, it would be subject to the additional rebate calculated generally based on the ratio between its premium price and the price at which the non-extended release formulation was originally marketed.

5. CHANGES TO FEDERAL UPPER LIMIT, AMP, AND "RETAIL SURVEY PRICES"

What is Proposed?

  • The Chairman's Mark proposes to "clarify what transactions, discounts, and other price adjustments" are "included in definition of AMP."
  • The Chairman's Mark would require monthly disclosure of "retail survey prices" that would not include mail order or long term care pharmacies.
  • The Chairman's Mark would reduce the federal upper payment limit ("FUL") used for capping reimbursement for multiple source drugs under Medicaid from 250 percent to no less than 175 percent of AMP.
  • The Chairman's Mark requires the Comptroller General to review state laws that negatively impact federal health care program generic drug utilization, including but not limited to restrictions on generic substitution,.

What is NOT Proposed?

  • The Chairman's Mark released publicly does not specify what the "clarifications" regarding the AMP calculation will be.
  • The Chairman's Mark released publicly does not specify whether "retail survey prices" will be reported by manufacturers or another source.
  • The Chairman's Mark does not address the "freeze in time" provisions under the 340B statute that could potentially result in the "old" Medicaid rebate percentages continuing to be used for calculation of 340B prices.

What Are Some Implications?

  • The application of AMP-based FULs, mandated by the Deficit Reduction Act of 2005, has been stalled by litigation by the pharmacy industry, essentially challenging that the definition of AMP does not adequately reflect prices paid to the pharmacies against which the FULs would apply.
  • This provision likely is to be controversial for both manufacturers and pharmacies, as they determine how to implement the AMP changes, what is the meaning of the "retail survey price" and whether the FUL is appropriately based on either.

6. PATIENT-CENTERED OUTCOMES RESEARCH INSTITUTE

What is Proposed?

  • The Chairman's Mark would establish a private, non-profit corporation to be called the "Patient-Centered Outcomes Research Institute." The Institute would "assist patients, clinicians, purchasers, and policy makers in making informed health decisions by advancing the quality and relevance of clinical evidence through research and evidence synthesis." Among other things, the research conducted would include comparative effectiveness research, including with respect to drugs or biologicals.
  • There are certain limitations on the use of Institute findings, including: (i) a requirement that the Institute cannot mandate coverage, reimbursement or other policies for any public or private payor; (ii) a requirement that the U.S. Department of Health & Human Services ("HHS") Secretary cannot deny coverage based solely on the Institute's research; and (iii) a prohibition on the HHS Secretary "determining coverage, or creating reimbursement or incentive programs, for a treatment in ways that treat extending the life of an elderly, disabled, or terminally ill patient of lower value than extending the life of a person who is younger, non-disabled, or not terminally ill [or]… for a treatment in a manner that precludes, or with intent to discourage, an individual from choosing a health care treatment based on how the individual values the tradeoff between extending the length of their life and the risk of disability."

What is NOT Proposed?

  • There are no limitations on the "application of differential copayments based on factors such as cost or type of service."
  • There are no limitations on the ability of the HHS Secretary to use comparative effectiveness evidence in "determining coverage, reimbursement or incentive programs based upon comparing the difference in the effectiveness of alternative treatments in extending a patient's life due to the patient's age, disability, or terminal illness."
  • There are no parameters set forth in Chairman's Mark regarding how a manufacturer may use the Institute's research within the confines of the Food & Drug Administration ("FDA") regulation.

What Are Some Implications?

  • The Institute research may become an important factor in public and private reimbursement systems, and, in connection with other provisions in the Chairman's Mark such as expanded demonstration project authority and the creation of a CMS Innovation Center, may be a signal that Congress is considering permitting outcomes-based reimbursement in the federal health care programs.
  • Manufacturers will want to be cognizant of FDA regulatory parameters in working with the Institute and in training its sales and medical personnel how to respond appropriately to questions regarding the Institute's work.

7. PART D COVERAGE GAP

What is Proposed?

  • The Chairman's Mark would require manufacturers to agree to participate in a "discount program" for Medicare Part D beneficiaries with drug spending in the "coverage gap" as a condition for Part D drug coverage.
  • The discount made available by manufacturers will be equal to 50 percent of the "negotiated price" between the Part D plan and the pharmacy.
  • The full negotiated price would count toward a beneficiary's true out of pocket costs.
  • The Centers for Medicare & Medicaid Services ("CMS") may contract with a third party administrator to "administer the drug discount program and establish performance requirements and data standards for the third party contractor to coordinate benefits" with Part D plans.

What is NOT Proposed?

  • A specific system in which to administer the discount and under which manufacturers and the administrator may validate claims.
  • An exemption from the discount for manufacturers where more than 50 percent of the beneficiary payment is waived by the pharmacy, paid by a secondary payor, or where the beneficiary purchases through another discount program.
  • A process for a manufacturer to offer greater than a 50 percent discount.

What Are Some Implications?

  • The impact of this provision may be mixed for manufacturers: On the one hand, many will be pleased to have the opportunity to do something directly to help Part D beneficiaries in the coverage gap, as this would help to ensure that such individuals do not jeopardize their health by failing to fill needed prescriptions. On the other hand, there would be real financial costs to manufacturers in connection with this "pay to play" requirement.
  • Manufacturers also may wish to revisit their patient assistance program structure.

8. DISCLOSURE OF FINANCIAL RELATIONSHIPS WITH PHYSICIANS

What is Proposed?

  • The "physician payments sunshine" provision generally requires, among other things, that manufacturers report electronically payments and transfers of value greater than $10 (unless annual aggregate exceeds $100) to a physician, a physician medical practice, a physician group practice, or hospital with an approved medical residency training program. Reports must identify recipients.
  • The provision also would require reporting of certain physician ownership and investment interests in manufacturers.
  • "Delayed" reporting would be required for certain development and research payments.
  • Recipients will be permitted to submit corrections under a process to be established by the Secretary.
  • The Chairman's Mark would establish civil monetary penalties ("CMPs") for failure to report up to $1 million annually.
  • Under the Chairman's Mark, the HHS Secretary is required to establish procedures by October 1, 2010 (with reporting effective March 31, 2012, and public Internet availability of such information by September 30, 2012).
  • There would be limited preemption of state laws (but see "What is NOT Proposed," below).

What is NOT Proposed?

  • There is no preemption of any "state (or political subdivision of a state) law or regulation that requires the disclosure or reporting of (1) any information not required under this provision; (2) the types of information excluded from reporting requirements under this provision, with the exception of the $10 de minimis/$100 aggregate reporting requirement; (3) information by any person or entity other than an applicable manufacturer or covered recipient described above; and (4) information reported to a Federal, state, or local government for public health purposes."
  • Payments to pharmacies, health plans, pharmacy benefit managers, non-physician prescribers, CME program sponsors, patient advocacy groups are not addressed.
  • No reporting is required for: "samples intended for patient use, patient educational materials, loan of a covered device for a short-term time period, discounts and rebates, payments made to a physician for the provision of health care to employees, payments to a physician who is also a licensed, non-medical professional if the payment is solely related to non-medical services, payments to a physician solely for services related to a civil or criminal action or an administrative proceeding, and in-kind items used for charity care."
  • The bill does not specify that the HHS Secretary's process will be subject to notice and comment rulemaking.

What Are Some Implications?

  • The sunshine provisions do not address the logistics of reporting payments. Notice and comment rulemaking will be critical to clarify the open issues to mitigate the potential for manufacturers to assume CMP liability under the new CMP provisions.
  • Without preemption, there is possible duplicate reporting requirements under the federal and state laws (that are not generally consistent).
  • Operationally, while many manufacturers already have established (or are in the process of establishing) payment tracking systems, the payment required to be tracked under the federal law is more extensive and varies from the state requirements (e.g., the "deferred" reporting of research and clinical expenses for unapproved products) and likely will require systems expenses and policy and training updates to implement.
  • The publicity of the payment data may implicate manufacturer proprietary concerns.
  • Arguably, there could be a false claim or false certification case based on the payment reports.

9. PRESCRIPTION DRUG MARKETING ACT REPORTING REQUIREMENTS

What is Proposed?

  • The Chairman's Mark would require manufacturers to provide the drug sample distribution records they maintain under the Prescription Drug Marketing Act to the Secretary of HHS.

What is NOT Proposed?

  • A reason for the provision of this information, and what will be done with it once supplied to HHS.
  • Confidentiality provisions or FOIA protection.

What Are Some Implications?

  • Manufacturers are already required to maintain records of drug sample distribution for PDMA compliance purposes. However, those records are not generally or routinely made available to the government. There is a possibility that the requirement could increase potential exposure under health regulatory laws including kickback, false claims, and diversion theories. Manufacturers will want to review their PDMA systems and ensure that their field force is adequately trained to avoid falsifying or missing physician requests for samples.

10. ENHANCED FRAUD AND ABUSE PROVISIONS

What is Proposed?

  • The Chairman's Mark would make several changes to so-called "fraud, waste and abuse" provisions, including the federal health care anti-kickback statute, various CMP provisions, and the HHS Office of Inspector General federal health care program exclusion authority.
  • Significantly, the Chairman's Mark would amend the federal health care anti-kickback statute to define "willfully" as "a person acted voluntarily and purposefully to do what the law forbids and the person need not have actual knowledge of the law or specific intent to violate that law" [emphasis added].
  • Additionally the Chairman's Mark would permit "hardship waivers" of federal health care program exclusion based on hardship imposed on beneficiaries of any federal health care program (not just Medicare Part A or B, as is the case under current law).
  • Medicare Part D plan sponsors would be exempt from the CMP provisions with respect to beneficiary inducements for the limited purposes of waiving copayments for "first fills" of generic drugs.

What is NOT Proposed?

  • The Chairman's Mark does not provide much detail regarding the possible changes to the CMP and exclusion laws.
  • The Chairman's Mark does not specify who may request or authorize a "hardship waiver."
  • The generic copayment waiver change does not modify the federal health care program anti-kickback statute.

What Are Some Implications?

  • Any changes to CMP and exclusion authorities could be potentially significant to pharmaceutical manufacturers, and would require close review upon issuance of specific legislative text.
  • The revised kickback definition will make prosecution under the federal health care anti-kickback statute easier for enforcement agencies, who were previously required to prove a more strenuous "knowledge" requirement.

OTHER NOTABLE PROVISIONS: In addition to the provisions described above in greater detail, manufacturers will want to consider the implications of the provisions described below and follow legislative developments related to such provisions:

  1. "National Plans": Although the Baucus bill has eliminated the concept of a "public" health plan that appeared in other versions of proposed health reform legislation, it has retained the concept of federal regulation over "national plans" offering a uniform benefit package.
  2. Manufacturer Fees. The Chairman's Mark establishes $2.3 billion in annual fees to be levied on "any person that manufactures or imports prescription drugs for sale in the United States." The fees will be paid into the Medicare Trust Fund, and will be apportioned annual among the manufacturers based on each entity's relative market share of covered domestic sales for the prior year.
  3. Medicaid Bundled Payments Demonstration Project: This provision would authorize demonstration projects in Medicaid to include bundled payments. The Chairman's Mark would also establish a "Medicaid Global Payments" demonstration project" under which a large, safety net hospital system participating in Medicaid would be permitted to alter its provider payment system from a fee-for-service structure to a capitated, global payment structure. Such demonstration projects could be significant, if, for example, used to limit the availability of separate payment for drug costs. The impact of any such change would, at least in the short run, be limited to the applicable demonstration project.
  4. "Strengthening Formularies with Respect to Certain Categories or Classes of Drugs": This would codify the "Six Classes of Clinical Concern" for which "all or substantially all" products must be covered under Medicare Part D – immunosuppressant, antidepressant, antipsychotic, anticonvulsant, antiretroviral, and antineoplastic products. It would also give the HHS Secretary greater discretion to determine additional classes.
  5. Limitation on Removal or Change of Coverage of Covered Part D Drug Under a Formulary Under a Prescription Drug Plan or a MA-PD: This would restrict CMS's discretion over Part D formulary changes, by requiring that, beginning 2011, a Part D plan cannot:
  • remove a drug from a Part D formulary,
  • apply a cost or utilization management tool that imposes a restriction or limitation on the coverage of such a drug (such as through the application of a preferred status, usage restriction, step therapy, prior authorization, or quantity limitation), or
  • increase the cost sharing of such a drug (such as through the placement of a drug on a tier that would resulting higher cost sharing for a beneficiary)

other than the date on which Part D Sponsors may begin marketing their plans with respect to the immediately succeeding plan year. There are exceptions for introduction of generic, or safety issues. This provision may have significant implications for manufacturer rebate negotiations.

  1. 6.Quality Payment Modifier. The Chairman's Mark establishes a separate Medicare payment modifier to "pay physicians or groups of physicians differentially based upon the relative quality of care they achieve for Medicare beneficiaries relative to cost."