Two Final Rules on Drug Pricing

On Friday, November 20, 2020, the Trump Administration issued two final rules related to drug pricing in response to the President’s July executive orders which we had discussed in August here.  One final rule is focused on pricing changes to Medicare Part D and the other to some prescriptions under Part B, so neither rule on its surface bears an imminent impact on employer-sponsored prescription drug benefit plans.

A final rule seeks to replace “safe harbor protections for opaque rebates” in Medicare Part D with “a system that offers true discounts reflected at the point of sale.”  A notice of proposed rulemaking had been issued January 31, 2019, but they abandoned it in July 2019 after the Congressional Budget Office determined it would result in higher premiums and significant costs to taxpayers ($196 billion over a decade).  The President’s July executive order revived the proposal, so with public comments considered they are now finalizing changes effective January 1, 2022, with hopes that drug manufacturers will lower list prices to help mitigate cost increases.

  • The main focus is to eliminate prescription drug rebates to insurers and pharmacy benefit managers (PBMs) in favor of seeing discounts to Part D plan members at the point of sale instead. They argue that the current system “has had increasingly pernicious effects,” including that most recent price increases are due to increased rebates, and that ever-increasing list prices disproportionately hurt those with coinsurance plans.
  • But they also comment that “Congress has more power to prohibit rebates in commercial insurance.”
  • The original proposal had intended to also include Medicaid managed care organizations (MCOs), but the final rule will not apply to them.

An interim final rule with opportunity for public comment implements a “most favored nation” (MFN) pricing methodology for a set of 50 Medicare Part B drugs and biologicals for the next seven years, from January 1, 2021 to December 31, 2027.  This rule had been proposed in October 2018.

  • “The MFN Model will test paying Part B drugs at comparable amounts to the lowest adjusted price paid by any country in the Organisation for Economic Co-operation and Development (OECD) that has a Gross Domestic Product (GDP) per capita that is at least 60 percent of the U.S. GDP per capita. The model will also test a redesign of the percentage add-on payment structure under Medicare Part B to remove incentives for use of higher-cost drugs through a flat per-dose add-on payment, and will include a financial hardship exemption for MFN participants.”
  • They are taking a phased approach, with room for some adjustments: “The MFN Price will be phased-in over the first 4 years of the 7-year model, phasing in 25 percent per year for years 1-4, and then continuing at 100 percent of the MFN Price for years 5-7. For example, for the first year the phase-in calculation will use 75 percent of the ASP and 25 percent of the MFN Price. In years 4-7, the MFN Price will be fully phased-in.”

Both of these rules would appear to be on legally shaky ground which might be fought in court.  The Part B rule taking effect in just a few short weeks during the holidays seems particularly challenging.

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.

This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.