On September 13, 2020, President Trump issued an Executive Order (the “Executive Order”) directing the Department of Health and Human Services (“HHS”) to issue regulations instituting two most-favored-nations (“MFN”) payment models – one model for prescription drugs covered by Part B of the Medicare program (in general terms, Medicare Part B covers drugs that are administered by infusion or injection in physician offices and hospital outpatient departments, as well as certain drugs furnished by suppliers), and a second model for prescription drugs covered by Part D of the Medicare program (Medicare Part D covers most medications that are dispensed by local and/or mail-order pharmacies and covered under a Medicare prescription drug plan).

The Executive Order is part of the Trump Administration’s efforts to lower prescription drug prices for American consumers. According to the Executive Order, “Americans pay more per capita for prescription drugs than residents of any other developed country in the world.”  In this way, the Executive Order concludes that Americans are, “effectively subsidizing innovation and lower-cost drugs for the rest of the world.”

On November 27, 2020, the Centers for Medicare and Medicaid Services (“CMS”) published an Interim Final Rule with Comment Period (“Final Rule”) implementing a MFN model for the reimbursement of Medicare Part B drugs (the “MFN Model”) – a modification of a drug payment model originally proposed by CMS in an Advance Notice of Proposed Rulemaking (“ANPRM”) dated October 30, 2018.  Although the Executive Order directs HHS to issue regulations for a Medicare Part B MFN model and a Medicare Part D MFN model, the MFN Model as set forth in the Final Rule only applies to Medicare Part B prescription drugs.  As reported by CMS Administrator Seema Verma, CMS is currently in the process of developing a most-favored-nations model for Part D drugs.^[1]

Following the directives of the Executive Order, the purpose of the MFN Model is to, “test whether more closely aligning payment for Medicare Part B drugs and biologicals…with international prices and removing incentives to use higher-cost drugs can control unsustainable growth in Medicare Part B spending without adversely affecting quality of care for beneficiaries.”  According to the  Final Rule, the CMS Innovation Center (the “Innovation Center”) will oversee the implementation of the MFN Model for a seven (7) year performance period (“Performance Period”) starting on January 1, 2021 to assess the MFN Model’s ability to achieve the goals described above.

The comment period for the Final Rule is open until January 26, 2021.

Background; Rapid Increase in Medicare Part B Drug Spending

According to a CMS Press Release dated November 20, 2020, “Trump Administration Announces Prescription Drug Payment Model to Put American Patients First” (the “CMS Press Release”),  Medicare Part B drug spending per enrollee has grown at an annual rate of 8.1% over the last five years – twice as fast as the growth of per capita Medicare Part D drug spending (3.4%) and nearly three times as fast as overall retail prescription per capita drug spending (2.9%).   In response to this data, HHS Secretary Alex Azar lays the blame (at least in part) at the feet of the Medicare Part B drug reimbursement methodology and the methodology’s influence on the prescribing behaviors of physicians.  As reported in the Press Release, Secretary Azar believes that the current Medicare Part B drug reimbursement methodology must be changed to, “protect current beneficiary access to Medicare Part B drugs, make them more affordable, and address the disparity of drug costs between the U.S. and other countries.”

Some may argue that the growth in Medicare Part B drug spending, as compared to Medicare Part D spending and drug spending nationwide, is more a function of the types of drugs that are covered by Part B – generally more specialty medications including medications that can only be dispensed after being compounded in a compounding pharmacy – as opposed to the peculiarities of the Medicare Part B drug reimbursement methodology.  The Press Release and the Executive Order, however, make it clear that the Trump Administration is focusing its attention on changes in reimbursement methodology as opposed to Medicare coverage rules as the proper way to address rising drug costs.

Current Medicare Part B Drug Reimbursement Methodology 

Currently, Medicare Part B reimburses physicians and outpatient hospitals for most separately payable Part B–covered drugs that they furnish to Medicare beneficiaries at an amount equal to a manufacturer’s average sales price (“ASP”) plus a 6% add-on amount.  ASP is defined as the average price realized by a manufacturer for sales to all purchasers (subject to certain exceptions^[2]) net of rebates, discounts, and price concessions, with certain exceptions.  In addition to paying 106% of ASP for a Medicare Part B-covered drug, Medicare Part B allows a separate payment for administering the drug to the patient (e.g., for infusing or injecting the product) under the Medicare physician fee schedule or the Medicare hospital outpatient prospective payment system, whichever is applicable based upon the setting in which the drug is administered.^[3]

As described above,  the current Medicare Part B drug payment methodology requires CMS to reimburse Medicare-treating physicians and providers at 106% of ASP for administered drugs regardless of the actual price of the drug being administered.  As a result, CMS is not able to lower Medicare Part B drug prices through negotiations with drug manufacturers. As highlighted in the CMS Press Release, although state Medicaid programs and Medicare Part D plans have tools to reduce certain drug costs through price negotiations, current law does not allow the Medicare Part B program to do the same.

The MFN Model for Medicare Part B Drugs

As a way to lower Medicare Part B drug costs and, as described in the Executive Order, “put American patients first” by allowing Medicare Part B beneficiaries to obtain the benefit of the discounted drug prices negotiated by other countries for their own citizens, the MFN Model limits Medicare Part B costs for certain designated drugs to the lowest price that the drug manufacturers receive in other similar countries for the same drug.

As described in the Final Rule, the MFN Model applies to the top 50 separately payable, physician-administered Medicare Part B drugs (“MFN Model Drugs”), which currently account for approximately 73% of Medicare Part B drug spending. The MFN Model payment system includes two parts.  First, the MFN Model calculates the payment amount for MFN Model Drugs based on a price that reflects the lowest per capita Gross Domestic Product-adjusted (“GDP-adjusted”) price in any Organization for Economic Co-operation and Development (“OECD”) country with a GDP per capita that is at least 60% of the United States’ GDP per capita, based on existing data from CMS.  If the drug is in shortage by the FDA or there is no international sales, volume, or pricing information available for a specific drug, the payment amount will default to the previously used ASP.

Second, MFN Model Drugs will be subject to a single alternative add-on payment equal to approximately six percent (6.112%) of 2019 spending for the MFN Model Drugs as a whole, which will be trended forward with an inflationary factor on a quarterly basis.  This replaces the six percent (6%) add-on currently used for Medicare Part B drug reimbursement purposes, and aims to remove or reduce the financial incentive to prescribe higher-cost drugs.

While the ANPRM initially sought to implement the MFN Model across half the country as part of a randomized controlled trial, under the Rule, CMS has expanded the scope of the MFN Model to be a mandatory nationwide trial program affecting most Medicare providers during the Performance Period.  More specifically, participation in the MFN Model applies to the following entities: (1) Medicare-participating physicians and non-physician practitioners; (2) group practices; (3) hospital outpatient departments; (4) ambulatory surgical centers; and (5) other providers and suppliers that receive separate Medicare Part B fee-for-service payment for the Model’s included drugs, such as home health agencies.  However, cancer hospitals, children’s hospitals,  critical access hospitals, rural health centers, federally qualified health centers, community mental health centers, and Indian Health Service facilities are amongst the entities currently excluded from the Rule.

The MFN Model will be phased in over the first four years of the Performance Period, starting with a hybrid reimbursement model combining the ASP methodology and the MFN Model price.  In the first year, reimbursement will consist of 25% of the MFN Model price and 75% of the previous ASP reimbursement.  For the next three years, the share of the MFN Model price will increase at a rate of 25%  per year.  Reimbursement in years four through seven of the Performance Period will be 100% of the MFN price.

The CMS Office of the Actuary estimates the MFN Model will result in savings of $87.8 billion, but admits that “there is much uncertainty around the assumptions” for such estimates.

Reactions to the Final Rule: Substantitive and Procedural Challenges

As evidenced by multiple lawsuits, damning editorial comments and press releases, to say that the MFN Model has its detractors is a tremendous understatement.

A. Procedural Defects

On December 4, 2020, the Pharmaceutical Research and Manufacturers of America (“PhRMA”), the Association of Community Cancer Centers, the Global Colon Cancer Association and the National Infusion Center Association (collectively, the “MFN Plaintiffs”) filed a lawsuit in the U.S. District Court for the District of Maryland asserting that the Final Rule, including the MFN Model, exceeds the statutory authority provided to CMS, raises serious constitutional questions, and fails to follow required rulemaking procedures as set forth in the Administrative Procedure Act (“APA”). See, Ass’n of Community Cancer Centers v. Azar (D. Md. Dec. 4, 2020) (No. 1:20-cv-03531) (the “MFN Lawsuit”).

As summarized in a December 4, 2020 PhRMA Press Release, “Statement on Litigation Challenging Legality of the Administration’s Most Favored Nation Rule” (the “PhRMA Press Release”), the MFN Plaintiffs’ allegations center on three key areas:

1. The Trump Administration has exceeded the authority granted to the Innovation Center under the Affordable Care Act;

2. The Trump Administration has violated the U.S. Constitution by using a regulatory process to rewrite the Medicare statute and transform the reimbursement system for physician-administered medicines in the United States; and

3. The Trump Administration has failed to demonstrate the “good cause” required for the Final Rule to skip important notice and comment procedures that allow the American public to weigh in on regulations.

For these reasons, the MFN Plaintiffs seek a preliminary injunction to enjoin the enforcement of the Final Rule and a declaration from the court that the Final Rule is unconstitutional and invalid.

B. Patient Harm; Drug Access and Utilization

As originally described by CMS in the ANPRM, the MFN Model is intended to lower Medicare drug costs without limiting Medicare beneficiary access to drugs. However, in the Final Rule, it seems as if CMS has abandoned its claim that the MFN Model will have its intended results without limiting drug access and utilization

According to the Final Rule, “a portion of the [Medicare] savings [from the MFN Model] is attributable to beneficiaries not accessing their drugs through the Medicare benefit, along with the associated lost utilization.” In other words, if a provider cannot negotiate favorable enough deals with manufacturers to accommodate the reduced MFN Model reimbursement that the provider will receive for dispensing and administering MFN Model-covered drugs,  the provider may decline to take the financial risk of acquiring the particular drugs at all, meaning that their patients may no longer be able to access them.  According to the CMS Office of the Actuary (“OA”), Medicare Part B drug utilization is expected to be reduced by 19% by 2023 due to beneficiaries’ inability to access their drugs through the Medicare benefit under the MFN Model.

In response to the access concerns that have been triggered by the Final Rule and the CMS Office of the Actuary conclusions, CMS Administrator Verma tweeted, “[a]s for concerns regarding access, I cannot imagine any manufacturer who will withhold access to their drugs from American seniors because we’re simply seeking a fair deal on price.”

In a December 11, 2020 Press Release (the “COA Press Release”) issued by the Clinical Oncology Alliance (“COA”), “Oncologists Sue to Stop ‘Dangerous and Unlawful’ Most Favored Nation Drug Pricing Scheme,” in which COA announced the filing of its own suit against the enforcement of the Final Rule (See, Community Oncology Alliance v. Azar, D. D.C. Dec. 11, 2020 (No. 1:20-cv-03604)), Ted Okon, COA Executive Director, said that the MFN Model poses a potentially life-threatening risk to a substantial number of seniors. Using CMS’ own OA estimates, the COA Press Release states that, “in the first year of the MFN experiment, 20 percent of seniors will be forced to find new oncologists and treatment elsewhere; however, nearly half of those will “forgo” treatment. By 2023, 30 percent of Medicare seniors may be displaced, with an alarming 1 in 5 seniors not getting treated.”  As concluded by Okon, the MFN Model, if implemented, would be a “death sentence for patients with cancer and other serious diseases.”

C. Impact on Medical Innovation

Biopharmaceutical industry participants and watchers have expressed concerns that the international drug price controls within the MFN Model will have a significant and negative impact on biopharmaceutical research and development (“R&D”).

In a November 20, 2020 PhRMA Press Release, Stephen J. Ubl, PhRMA President and CEO stated that, “it defies logic that the administration is blindly proceeding with a ‘most favored nation’ policy that gives foreign governments the upper hand in deciding the value of medicines in the United States.  History proves that when governments take unilateral action to set prices, it disrupts patient access to treatments, discourages investment in new medicines and threatens jobs and economic growth.  In addition, according to a December 1, 2020 PhRMA blog article, “No matter how you look at it, the Most Favored Nation rule is bad policy.” European countries that implemented MFN Model-like government drug price setting laws in the 1980s and 1990s saw their biopharmaceutical R&D industries migrate to other countries with more pro-innovation policies, principally the United States.  According to Ubl, “we’ve seen immense progress with vaccine candidates showing promising clinical trial results and treatments making their way through FDA review. This progress is possible largely because of America’s global leadership in biopharmaceutical R&D. Despite this, the administration is willing to upend the entire system with a reckless attack on the companies working around the clock to end this pandemic.”

In a similar vein, Michelle McMurry-Heath, MD, Biotechnology Innovation Organization (“BIO”) President and CEO, issued a strongly worded statement in a September 13, 2020 BIO Press Release condemning the Trump Administration’s pursuit of MFN Model price controls.  “With scientists and researchers at America’s biopharmaceutical companies working around the clock to fight a deadly pandemic, it is simply dumbfounding that the Trump administration would move forward with its threat to import foreign price controls and the inevitable delays to innovation that will follow.”

And Now What?

Because the Final Rule will be open for comment until January 26, 2021 – 60 days following its November 27^th publication date – and the new Biden Administration will be in place prior to the closure of the comment period, the Biden Administration will have a short window of opportunity to quickly modify or suspend the Final Rule before the comment period closes.  However, absent a temporary restraining order in any of the currently pending lawsuits, providers and others are well advised to prepare for compliance with the Final Rule and the MFN Model effective January 1, 2021.

FOOTNOTES

^[1] See, https://twitter.com/NicholasFlorko/status/1329899243641970695.

^[2] For example, ASP excludes nominal sales to certain entities and prices that are exempt from the determination of Medicaid best price (e.g., sales or discounts to other federal programs, 340B-covered entities, state pharmaceutical assistance programs, and Medicare Part D plans, as well as manufacturer coupons to consumers meeting certain criteria).

^[3] Drug-specific Medicare Part B spending data can be found on the Medicare Part B Drug Spending Dashboard – an interactive, web-based tool that presents historic spending information for Medicare Part B drugs – drugs administered in doctors’ offices and other outpatient settings and paid through the Medicare Part B program.

Ariana Stobaugh is a law clerk in the firm’s Century City office.