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Administration Offers Up New Proposals to Cut Drug Costs
Thursday, November 29, 2018


On November 26, CMS released a notice of proposed rulemaking, “Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out-of-Pocket Expenses,” which includes provisions that aim to reduce overall drug spending by giving Medicare Advantage and Part D plans additional tools to control use of high-cost drugs and by addressing cost shifting across programs. This On the Subject takes a closer look at three specific proposals from the most recent Proposed Rule, provides historical context for these developments, and offers insights into what is to come in the policy space for prescription drug pricing. 

In Depth

On November 26, 2018, the Centers for Medicare & Medicaid Services (CMS) released a notice of proposed rulemaking: Modernizing Part D and Medicare Advantage to Lower Drug Prices and Reduce Out-of-Pocket Expenses (the Proposed Rule). The Proposed Rule includes provisions that aim to reduce overall drug spending by giving health plans additional tools to control use of high-cost drugs and by addressing cost shifting across programs.

The Proposed Rule is the latest in a series of policy and regulatory announcements flowing from President Trump’s American Patients First Blueprint, a plan to lower drug prices and reduce beneficiary out-of-pocket spending on drugs in the Medicare program. The Blueprint provides a broad framework intended to reduce spending on prescription drugs in the United States while encouraging growth and innovation. Previously released policies include an advance notice of proposed rulemaking on an International Price Index model, which would shift Medicare payments for physician-administered drugs to a level more closely aligned with prices in other countries, and efforts to require drug manufacturers to include prices in television advertisements. 

This On the Subject takes a closer look at three specific proposals from the most recent Proposed Rule and offers insights into what is to come in the policy space for prescription drug pricing.  

Giving Medicare Advantage Plans Authority to Use Step Therapy for Part B Drugs  

In an August 2018 memorandum to Medicare Advantage (MA) plans, CMS rescinded previous guidance that prohibited step therapy for Part B drugs. In its place, CMS issued new guidance allowing MA plans to use step therapy for these drugs beginning January 1, 2019. Step therapy is a form of prior authorization that allows insurers to require that patients try a less expensive drug before moving on to a more expensive option. In a blog post accompanying the release of the August guidance, CMS Administrator Seema Verma explained CMS’s view that the new approach will likely decrease costs for beneficiaries and health plans by increasing plans’ ability to negotiate with manufacturers.

CMS is now building on that guidance, proposing regulatory provisions under which MA plans may apply step therapy for Part B drugs. CMS previewed many of these requirements in the August 2018 guidance, such as disclosure of step therapy requirements in member materials and a prohibition on the application of step therapy to existing and ongoing drug therapies. The regulatory proposal reflects some distinctions from the subregulatory guidance, such as requiring, rather than “encouraging,” Part D P&T committees to consider the medically appropriate use of step therapy, and largely aligning coverage determination and appeals timeframes with those used in Part D. The Proposed Rule also retreats from the requirement in the August 2018 guidance that step therapy initiatives be paired with care coordination services and rewards to incentivize beneficiary participation. Instead, MA plans would have the option, for 2020 and beyond, to offer rewards and incentives to beneficiaries, or to reflect any anticipated savings in the MA plan’s bid, which would serve to reduce overall premiums and CMS costs.

Some stakeholders have expressed concerns that implementing step therapy for Part B drugs would create barriers to beneficiary access and increase administrative burdens for providers. CMS acknowledges these concerns in the Proposed Rule, stating that it “expect[s] MA plans to work closely with the provider community and to adopt best practices that streamline requirements and minimize burden.” CMS also cites the continued development and advancement of electronic prior authorization processes as one way to improve the administrative implementation of step therapy requirements. Some stakeholders have questioned CMS’s legal authority to permit step therapy for Part B drugs. Perhaps in response to these concerns, the preamble to the Proposed Rule makes a point of addressing CMS’s perspective on the statutory basis for this change in MA policy.

Including Pharmacy Price Concessions in Negotiated Price

In the Proposed Rule, CMS revisits the possibility of redefining the term “negotiated price”—a recurring topic that was addressed in proposed (but never finalized) guidance in 2014 and most recently in a November 2017 Request for Information. The Proposed Rule takes a new approach to the issue but appears to share similar policy objectives. CMS stated that it is considering these changes for 2020 or later years.

The term “negotiated price” refers to the price that a Part D plan sponsor pays for a covered Part D drug, and is used in the Part D program as the basis for determining plan, beneficiary, CMS and manufacturer (coverage gap) liability. Under current regulations, the negotiated price includes all price concessions from network pharmacies, except for “contingent amounts” that cannot reasonably be determined at the point of sale. These contingent amounts are instead reported as “direct or indirect remuneration” (DIR) and are taken into account in final CMS payment reconciliations with Part D plans. 

CMS has long expressed concerns about pharmacy price concessions that are reported as DIR rather than included in the negotiated price, because these price reductions are not passed on to the beneficiary at the point of sale. Some industry participants argue that by requiring pharmacy price concessions to be included in the negotiated price paid at the point of sale, only beneficiaries purchasing drugs from pharmacies offering the price concessions would benefit. On the other hand, allowing pharmacy rebates to be applied against the estimated and actual allowable drug costs incurred by sponsors may reduce sponsors’ bid submissions—and thus the direct subsidies paid by CMS to the sponsors and the premium obligations for all beneficiaries enrolled in their Part D Plans—as well as the allowable drug costs determined during the annual reconciliation. There are policy tradeoffs associated with different approaches to defining the negotiated price, and these are recurring themes in the debate over this topic that has spanned several years.

In September 2014, CMS proposed, through subregulatory guidance, that a contingent price concession that could be “reasonably approximated using recent experience” would need to be reported in the negotiated price, essentially limiting the definition of what could truly be considered “contingent.” Following extensive comments from stakeholders, CMS elected not to finalize this guidance. In November 2017, CMS reprised the issue, seeking feedback on whether all price concessions should be included in the negotiated price but not proposing any specific regulatory changes. CMS has now proposed and is seeking comment on a different regulatory approach to the negotiated price. This proposal appears to address similar policy objectives to those underlying CMS’s prior proposals and statements on this topic.

Specifically, the most recent proposal would revise the definition of the negotiated price as follows: 

  • Negotiated price would include all price concessions, not just those that are “reasonably determined at the point of sale.”

  • The term would be defined as the lowest amount a pharmacy could receive as reimbursement for a covered Part D drug under its contract with the Part D sponsor or the PBM (i.e., the amount the pharmacy would receive net of the maximum possible negative adjustment that could result from any contingent pharmacy payment arrangement).  

CMS has also proposed to define the term “price concession,” which is currently not defined in regulations, to include any discount, subsidy or rebate received by Part D sponsors or their intermediaries from any source that serves to decrease the costs incurred by the sponsor. This term is relevant to negotiated price as well as DIR reporting and other payment-related requirements.  

Providing Plan Flexibility to Manage Protected Classes

Under a policy that has been in place since the beginning of the Part D program, Part D plan sponsors must include on their formularies all covered Part D drugs in certain classes of “clinical concern”: anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals and immunosuppressants for the treatment of transplant rejection. Policymakers and stakeholders have long debated the pros and cons of the protected class policy, as well as the categories of drugs that should be included. As noted in the Proposed Rule, CMS has repeatedly expressed concerns that “requiring essentially open coverage of certain drug categories and classes presents both enrollee cost and welfare concerns, as well as increased costs for the Part D program as a result of overutilization . . . and increased drug prices due to lack of competition.” Drug manufacturers, health care providers and beneficiary advocates have expressed opposing views, citing concerns about the ability of patients with sensitive conditions—such as cancer and HIV—to readily access clinically appropriate drugs.  

With the passage of the Affordable Care Act, Congress mandated that CMS establish clear criteria for the identification of classes of clinical concern before changing the existing categories of protected classes. In 2014, CMS proposed to establish such defining criteria, the application of which would have removed protected class status for three of the six existing drug classes: antidepressants, immunosuppressants and antipsychotics. Following political pressure from several members of Congress and industry stakeholders, CMS decided not to finalize this proposal and has never established formal criteria for identifying classes of clinical concern.

CMS now proposes a different approach to address the impact of the protected class policy on utilization and pricing in the Part D program. Instead of limiting the drug classes included within the policy, which would be somewhat constrained by statute, CMS proposes to revise the protected class policy itself, essentially making it somewhat less “protective.” The three proposed changes to the policy include: 

  • Allowing broader use of prior authorization and step therapy for protected class drugs

  • Allowing Part D plan sponsors to exclude new formulations of protected class drugs when the new formulation has the same active ingredient or moiety and is not provided through a unique route of administration

  • Permitting Part D sponsors to exclude single-source drug or biological products that are protected class drugs that experience price increases, relative to the price in a baseline month and year, that exceed the rate of inflation 

Overall, these changes would leave the existing categories of clinical concern intact, but would give Part D plans additional tools to control utilization of drugs in these six classes, with the goal of reducing plan, CMS and beneficiary spending on these prescription drugs. The Proposed Rule addresses CMS’s prior proposals surrounding the protected classes and acknowledges the patient access concerns expressed in connection with those proposals. CMS notes its belief, however, that these concerns are substantially mitigated by the existing beneficiary protections and access pathways in the Part D program, which have evolved considerably since the protected class policy was enacted 12 years ago. Specifically, CMS refers to the protections afforded by electronic prior authorization processes; mandatory transition periods for non-formulary drugs; the formulary exception process; and the expedited exception, coverage determination and appeal processes. CMS is soliciting comments on the impact of this proposal on Part D enrollees, and will no doubt receive substantial input from a variety of stakeholders.


CMS estimates that this proposal could save more than $1.5 billion and reduce beneficiary out-of-pocket expenses by almost $700 million between now and the end of 2019. CMS believes that beneficiary savings may be offset somewhat by increased plan premiums, and acknowledges that estimating the cost and impact of its policies can be complicated and imprecise. Behavioral responses on the part of both patients and providers are unknown, and the manner in which stakeholders react to these changes will have a dramatic effect on the savings that could be realized. Part D plan sponsors and MA plans may also incur added costs to develop, review and implement the systems necessary to carry out the proposed policies.

The coming year promises to bring additional action regarding drug pricing. The Trump Administration likely will continue to roll out proposals, like this one, included in its Blueprint, although it is unclear which proposals will ultimately be implemented. When the new Congress begins in 2019, even with divided party control, the House and Senate may find agreement on prescription drug pricing policies. House Democrats may use oversight authority to draw more attention to the drug pricing issue, with a particular focus on how manufacturers determine initial pricing and make decisions regarding price increases. The incoming Chairman of the Senate Finance Committee, Sen. Chuck Grassley, is no stranger to prescription drug issues, as he pushed through the original Medicare Part D legislation during his previous stint in the committee’s top post. This likely means that prescription drug pricing will continue as a high priority issue on the Hill and for the Administration in 2019.

The Proposed Rule will be published in the Federal Register on November 30, 2018, and stakeholders are encouraged to submit comments by the January 25, 2019 deadline.

This On the Subject was co-authored by Mara McDermott, Rachel Stauffer and John Warren at McDermott+Consulting.

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