The President’s Budget and Shifting Policy on Prescription Drugs

Manatt on Health

On February 12, the Trump administration released the President’s Budget (or “the Budget”), outlining spending priorities for FY 2019. The Budget—though an important annual milestone and barometer of the administration’s policy views—is largely a visionary document and not an actual blueprint that Congress is likely to follow. Particularly in an election year such as this one, Congress will take what it wants and dispose of much of the rest. While the Budget certainly matters, not everything in it matters equally.

It is in this context that the Budget’s many healthcare proposals should be viewed; some are more likely to be enacted than others, and perhaps the most likely to see full consideration this year are policies related to prescription drug pricing. Notably, the President’s Budget came closely on the heels of the Bipartisan Budget Act of 2018, which included significant healthcare policies, including a one-year acceleration of the Part D “donut hole” closing and an increase of the manufacturer coverage gap discount obligation from 50% to 70% of the negotiated Part D drug price. The Budget signals that the administration is not content to stop there and wants to address President Trump’s promise to lower drug prices. His sentiments have been echoed by the new Department of Health and Human Services (HHS) Secretary and former pharmaceutical company executive, Alex Azar.

Prescription Drug Proposals

The Budget made prescription drug-related proposals in three main areas: Medicaid, Medicare (Part B and Part D), and the 340B program.

Medicaid. The Budget proposes to create a five-state pilot program that would enable participating states to negotiate prices with manufacturers and exclude drugs from the state’s formulary if the two sides cannot reach agreement on price. The negotiated price would be exempt from the Medicaid “best price” rules, meaning that if the manufacturer agreed to provide a low price to one state, that discounted price would not require the manufacturer to pay a higher rebate in regard to drugs dispensed in other states. Although the Budget frames this pilot program as a legislative initiative, it is unclear whether the administration actually needs congressional action to implement this plan. Therefore, this will be an important initiative to watch.

The pilot proposal comes on the heels of a still-pending Section 1115 waiver request from Massachusetts to implement a closed formulary. Nationwide, there is significant state interest in employing new strategies to address prescription drug costs.

In addition to this pilot, the Budget proposes to tighten rules that may have allowed drug makers to misclassify some products as generic drugs instead of brand-name drugs. Such a misclassification would allow manufacturers to improperly pay the lower generic (rather than branded) rebate amount to state Medicaid agencies. Here again, the Centers for Medicare & Medicaid Services (CMS) has already taken actions to prevent such practices, and it is unclear how important congressional action might be.

Medicare Part D. The Budget wades into the controversy over whether Part D drug plans should be required to pass through some or all of the rebates they collect from manufacturers to beneficiaries at the point of sale. The Budget proposes to pass through at least one-third of the rebates. Last year’s proposed Part D rule advanced this issue through a request for information that included a specific proposal related to rebate pass-through. Inclusion of this issue as a legislative proposal in the Budget does not preclude CMS from taking action, as it appears to have the flexibility under current law to require rebate pass-through.

The Budget also seeks major changes in the structure of the Part D benefit. Echoing ideas advanced by the Medicare Payment Advisory Commission (MedPAC), the Budget calls for the creation of an out-of-pocket maximum for Part D drugs. It also recommends shifting more risk during the catastrophic phase to Part D plans by reducing government payments from the current 80% to 20%. Finally, the Budget suggests not counting manufacturers’ discounts paid in the coverage gap toward the calculation of beneficiary true out-of-pocket costs (TrOOP). This would slow beneficiary progress through the gap to the catastrophic phase of the benefit.

These significant changes in the Part D benefit would require congressional action to “open up” Part D. It is not clear whether Congress will have the time and appetite to address these recommendations.

Another proposal in the Budget would change the formulary requirements for Part D plans. Instead of requiring Part D plans to offer at least two drugs in each category and class of drugs, the proposal would reduce that standard to just one drug. In addition, the Budget suggests unspecified changes to “expand plans’ ability to use utilization management tools for specialty drugs and drugs in protected classes.”

These represent significant changes in the Part D program that would, presumably, increase plans’ ability to negotiate rebates while potentially reducing beneficiary access to drugs. It may be possible for CMS to make some or all of these changes administratively.

Medicare Part B. The Budget proposes a substantial change that would impose a penalty on the reimbursement for drugs whose price increases exceed the consumer price index (CPI). Part B, unlike Medicaid, currently does not have a CPI penalty. If enacted by Congress, starting in 2019, CMS would set the reimbursement rate at the lower of the actual average sales price (ASP) + 6% or the inflation-adjusted ASP + 6%.

The Budget also suggests but does not provide details on a plan to authorize CMS to move some Part B drugs into Part D when CMS believes that such a move would result in savings.

340B Drug Discount Program. The Budget proposes multiple changes to the 340B Drug Discount Program (or, the “340B program”) that, at least in some instances, align with recommendations issued by Congress (via reports, requests for information and legislative proposals) over the past several months, though with less detail.

This proposal would enable the Health Resources & Services Administration (HRSA) to “ensure that the benefits derived from participation in the program are used to benefit patients, especially low-income and uninsured individuals,” and to require covered entities to report on use of 340B program savings. The Budget would also redistribute savings that will be generated by the already-implemented change of Medicare reimbursement for drugs purchased through the 340B program from ASP + 6% to ASP – 22.5%.

Savings generated by hospitals that provide uncompensated care equal to at least 1% of their patient care costs would be redistributed to those hospitals based on their share of aggregate uncompensated care. Savings generated by hospitals that do not meet that threshold would be returned to the Medicare trust fund. The Budget would also introduce a user fee on drug purchases made by 340B program entities.

Outlook for Prescription Drug Proposals

The proposals on Medicare Part D, many coming from MedPAC recommendations, combined with the Budget law’s increase in manufacturer coverage gap rebate obligations, have placed major reform of Medicare Part D more firmly on the congressional agenda. The pharmaceutical industry’s interest in ameliorating the impact of the coverage gap change, combined with a broader interest in easing cost-sharing burdens on beneficiaries, could portend interest and action in Congress. However, given the limited legislative calendar of an election year and the political risks of making Medicare changes, action may not be swift, and indeed, even modest actions might not occur until after the 2018 midterm elections.

Building on the administration’s change to reimbursement for drugs purchased through the 340B program, the Part B Budget proposals signal that the withdrawal of the previous administration’s Part B drug payment demonstration will not end consideration of changes to drug reimbursement. In fact, we can expect a lively discussion of ways that Part B drug payments may change, in a debate that will certainly engage providers, manufacturers and beneficiaries.

Finally, the proposals related to Medicaid will appeal to states and an administration firmly in the camp of increased state flexibility. Together, this creates the possibility of fundamental changes in Medicaid drug payment that could hasten efforts to introduce more value-based contracting into the program.