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Home»Health»Getting Deeper Discounts May Be A Challenge In Drug Price Negotiations
Health

Getting Deeper Discounts May Be A Challenge In Drug Price Negotiations

August 6, 2023No Comments6 Mins Read
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Getting Deeper Discounts May Be A Challenge In Drug Price Negotiations
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WASHINGTON, DC: U.S. President Joe Biden shakes hands with Sen. Joe Manchin (D-WV) after signing The … [+] Inflation Reduction Act with Senate Majority Leader Charles Schumer (D-NY) and House Majority Whip James Clyburn (D-SC) in the State Dining Room of the White House on August 16, 2022. The $737 billion bill focuses on climate change, lower healthcare costs and creating clean energy jobs.(Photo by Drew Angerer/Getty Images)

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Under the Inflation Reduction Act’s drug pricing provisions, for the first time Medicare will soon be able to negotiate the prices of a limited subset of prescription drugs. Drug manufacturers and the investment community are worried about the impact drug price negotiations may have on the prices and corresponding revenues of certain drugs in the tail end of their lifecycles. Several drug manufacturers as well as the Chamber of Commerce have filed lawsuits challenging Medicare’s new pricing powers, calling them “unconstitutional” and “tantamount to extortion.”

But for certain drugs Medicare selects for price negotiation it may be difficult to achieve deeper discounts than the rebates these pharmaceuticals currently face. As such, the fears of the IRA leading to a crippling of revenue streams in the later stages of these drugs’ lifecycles may be exaggerated.

The Centers for Medicare and Medicaid Services will select the first batch of 10 Medicare Part D (outpatient) drugs for negotiation by September 1, 2023. The prices of these drugs will be negotiated over roughly a one-year time period, with the final “fair” prices posted in the fall of 2024.

Drugs will be selected based on statutory criteria, including their appearance in the top 50 of Medicare Part D spend, lack of generic or biosimilar competition and being at least seven years removed from approval for small molecules and 11 years for large molecules. By the time CMS implements negotiated prices of these drugs they must be nine and 13 years post approval, depending on whether they’re small or large molecules, respectively.

The maximum percentages of the non-federal Average Manufacturer Price are 75% for small molecules between nine and 12 years after FDA approval, 65% for drugs between 12 and 16 years post approval, and 40% for all drugs beyond 16 years of approval. For biologics, it’s the same range except the 75% applies to large molecules between 11 and 12 years post approval. The non-FAMP is the average price paid by wholesalers for drugs distributed to non-federal purchasers.

By law, the negotiated price may not be higher than the net price Medicare plans currently pay after rebates or higher than a maximum percentage of the non-FAMP. The maximum percentage, the flipside of which can be seen as a minimum discount, depends on how long a drug has been on the market: The longer the period, the lower the maximum percentage or larger the minimum discount.

Among this first group of 10, several household name products are expected to be chosen by Medicare, including Eliquis, Xarelto, Jardiance and Enbrel. The first three will face a minimum discount of at least 25%, while Enbrel, because it was approved more than two decades ago, faces a minimum discount of at least 60%.

Unlike a list price, such as the Wholesale Acquisition Cost, the non-FAMP is proprietary. In 2021, the Congressional Budget Office estimated the non-FAMP to be at around 82% of the WAC. Rebates negotiated by Medicare plans are similarly proprietary but can be inferred from a number of different sources, including differences between gross (calculated on the basis of WAC) and net sales reported to the Securities and Exchange Commission.

Recently published research of Dickson and Hernandez demonstrates that for six of the 10 drugs, current rebates may exceed the minimum discounts required by IRA. For these drugs, which face a considerable amount of competition, Dickson and Hernandez estimated very high rebates. For example, one of the drugs likely to be targeted by CMS for price negotiation, Jardiance, has a rebate of approximately 60% off of the WAC. Its minimum discount required by the IRA, on the other hand, is 25% of the non-FAMP. This translates to about 38% off of the WAC. It’s an empirical question whether CMS can get a better deal during its negotiation with the manufacturer. In addition to Jardiance, another five of the 10 drugs to be selected, have rebates ranging from 38% to 68% off of the WAC. These numbers are at or above the minimum discount required by the IRA.

On the other hand, the minimum statutory discounts are greater than the current rebates for four of the 10 drugs. Here, rebates range from 6% to 39%. The drug with the 39% rebate, Enbrel, has a minimum discount required by the IRA of 60%. The other three drugs are in therapeutic classes with either less competition or protected by Medicare, meaning all drugs in a class must be covered. Oncology is one of the protected classes.

Surely CMS will aim for a price that is below the current net price after rebates. The minimum discount percentages are just benchmarks, not CMS’s initial offer. Furthermore, as there is no floor and CMS is a monopsonist or single purchaser it will in all likelihood seek to undercut the present net price. CMS will also be incentivized to do so. This is because in order to reach the CBO savings estimate of $3.7 billion for implementation of fair prices in 2026, CMS would have to attain an average 10% discount below the current rebates for the 10 drugs.

While certainly possible, this may not be an easy task for CMS. This is partly due to the fact that during the offer and counteroffer process drug manufacturers have plenty of leeway. To justify counteroffer prices, they can provide supportive evidence regarding their drugs’ comparative effectiveness evidence, therapeutic advantages, unmet need and R&D costs, among other things. If the data is compelling, it would be hard for CMS to ignore.

While Medicare drug price negotiations are a bugaboo for the pharmaceutical industry, for outpatient specialty or high cost per unit pharmaceuticals potentially bigger threats to drug prices may come from redesign of Medicare’s Part D benefit. This is because starting in 2025 all such drugs will be hit with a mandatory 20% discount once in a given year beneficiaries enter the catastrophic phase. And that’s as early as January for many beneficiaries who are on expensive cancer medications, for example.

Moreover, Medicare plans will be motivated to strike harder bargains than before for high-cost drugs, as in 2025 their cost liability in the catastrophic phase of Part D jumps from 15% to 60% while the government’s drops from 80% to 20%. In turn, this could put further downward pressure on net prices of specialty drugs.

At the same time, the annual out-of-pocket cap of $2,000 on Medicare beneficiary spending in the Part D benefit goes into effect in 2024. This will likely lead to utilization increase, which could offset the price decrease to some degree.

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Challenge Deeper discounts Drug Negotiations Price
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