Actions to Reduce Prescription Drug Costs: The Most Favored Nation Model and the Rebate Rule

Manatt on Health

On November 20, President Trump held a press briefing at which he unveiled two long-awaited actions to reduce prescription drug costs. Both actions had been called for in Executive Orders he issued this summer. Although each of these actions, described below, faces an uncertain legal and political future, their proposal by a Republican president may mark a significant turning point in the long-standing national discussion of prescription drug prices. At a minimum, these late-term actions tee up prescription drug pricing as an early agenda item for the new Biden Administration and Congress.

Most Favored Nation Model

On November 20, the Centers for Medicare & Medicaid Services (CMS) released the “Most Favored Nation”  Model (MFN) interim final rule with comment period (IFC). The IFC announces the MFN Model, through which CMS will test a new provider reimbursement amount for the 50 most costly Medicare Part B drugs and biologicals. The rule will take effect immediately upon being published in the Federal Register on November 27, allowing CMS to begin the process of implementing the model. CMS indicates that the model will be implemented on January 1.

For all 50 MFN Model drugs, the model replaces the current average sales price (ASP) plus 6 percent add-on with an MFN Drug Payment Amount and a uniform add-on payment per dose. The MFN Drug Payment Amount will be based on the lowest, gross domestic product (GDP)-adjusted international price selected from among 22 non-U.S. Organisation for Economic Co-operation and Development (OECD) countries with a GDP per capita that is at least 60 percent of the U.S. GDP per capita. The change from ASP reimbursement to MFN Drug Payment Amount will be phased in over four years, but will be accelerated for included drugs that have significant U.S. price increases. Unlike the current Part B drug payment system, the add-on payment made to providers will not vary based on the drug, the amount of drug furnished in a dose, the billing units billed on the claim line, or the MFN participant or specialty.

The intent of the model is to modify the typical Part B “buy and bill” model by reducing the “bill” portion of reimbursement from the ASP-based formula to the MFN payment amount for selected Part B drugs, as an incentive for manufacturers to lower the “buy” component, i.e., manufacturer drug prices. However, the model keeps the Part B drug buy-and-bill model intact by not including a third-party vendor component, which was part of the October 2018 Advance Notice of Proposed Rulemaking (ANPRM) International Pricing Index (IPI) Model (an earlier Trump Administration drug pricing proposal).

The mandatory MFN Model will operate nationwide (including in U.S. territories) for seven years, from January 1, 2021, to December 31, 2027, and will apply, with some exceptions, to all Medicare-participating physicians, hospitals and ambulatory surgical centers. In the model, beneficiary cost-sharing will be based on the MFN payment amount only and will not include cost-sharing on the add-on payment. The MFN Model will collect only one quality measure, focused on patient experience, to help better understand the impact of the model on beneficiary access and quality of care. Quality will be measured based on a patient experience survey.

CMS is conducting the MFN Model test under legal authority granted by the Affordable Care Act (ACA) to the Center for Medicare & Medicaid Innovation (CMMI) to conduct tests of innovative payment and service delivery models. Those statutory provisions give CMS wide latitude to waive any provision of Medicare law to the extent necessary for the purposes of carrying out such tests. Exercising that authority, CMS is broadly waiving multiple provisions relating to the payment for drugs under Part B, including a “catchall” waiver of any provisions that it neglected to waive but are nonetheless necessary to carry out the MFN Model.

The President announced the idea for the MFN Model in an Executive Order released in September 2020. Reflecting the Trump Administration’s long-standing focus on addressing drug pricing, the Executive Order was preceded by the October 2018 IPI Model ANPRM. The IPI Model would have reduced reimbursement for a subset of drugs through a formula based on the average price in a group of countries outside of the United States.

CMS did not issue a proposed rule regarding the MFN Model. In issuing an IFC, CMS is bypassing proposed rulemaking and any delay in the effective date based on its assessment that this IFC qualifies for an exception under the Administrative Procedure Act (APA)—namely, that high drug prices in the U.S. have serious economic and health consequences for beneficiaries in need of treatment, and any delay in implementation of the MFN Model would be contrary to the public interest, especially during the COVID-19 emergency. CMS claims that this argument allows it to bypass the normal process of first proposing a rule and then making changes based on public comment. In other words, unless reversed by a court, issuing the model as an IFC does not require further action before CMMI can begin to implement the model.

As acknowledged by the President during the model’s unveiling late last week, the Administration expects to be sued in response to the rulemaking, and—even if the rule is upheld in court—some skeptics question whether the model will be implemented by this Administration or the incoming Biden Administration. There are many legal and practical uncertainties about when the Trump Administration could carry out the model, and—if a Biden Administration were to choose to delay or otherwise alter the rule—when and how it can make those changes. Once a regulation has been finalized, it takes a new regulation to unwind it; should the Biden Administration choose to depart from the requirements set out in the rule, it will have to initiate new rulemaking.

The Rebate Rule

On November 20, President Trump and Department of Health and Human Services (HHS) Secretary Alex Azar announced the release of HHS’s final rule regarding pharmaceutical rebates under the anti-kickback statute (AKS). President Trump described the rebate rule as “preventing middlemen…from ripping off Medicare patients with high prescription prices,” a statement that was echoed by Secretary Azar who said the rule “end[ed] a broken system of shadowy kickbacks that drove prices higher and higher every single year and left so many patients shocked at the out-of-pocket costs that they owe at the pharmacy.”

Issued by the HHS Office of Inspector General (OIG), the rule revises the regulatory discount safe harbor to the AKS so that rebates that pharmaceutical manufacturers pay to Medicare Part D plans are no longer protected by the safe harbor. While the revision would not make such rebates illegal per se, HHS anticipates that pharmaceutical manufacturers and Part D plans will conclude that—absent the safe harbor’s protection—rebate payments would present too great a legal risk, and the practice of paying such rebates would come to an end. HHS believes that pharmaceutical manufacturers and Part D plan sponsors, unable to use rebates, will renegotiate the rebate payments into reduced list prices and price discounts delivered at the time and point of sale. Since Medicare beneficiary cost sharing is often based on the amount a Part D plan pays to a pharmacy, the goal is that providing discounts at the point of sale will reduce beneficiary coinsurance and costs while in a deductible period. The rule seeks to avoid 2021 Part D plan year disruptions by delaying implementation of the removal of the safe harbor protection until January 1, 2022.

There is significant uncertainty as to how the rule will impact drug prices and Medicare beneficiaries. One actuarial analysis found that the rule would increase Part D premiums by 25 percent and increase federal spending by $196 billion over 10 years. Other analyses, using different assumptions about manufacturer and plan behavior, estimated the rule would reduce federal spending and lower cost sharing with only a marginal impact on premiums. The range of estimates reflects the lack of agreement on how Part D plans and manufacturers will react to the rule, and whether rebates actually will be replaced by list price reductions and point-of-sale discounts.

The Trump Administration finalized the rule despite nearly abandoning it. The release of the proposed rule was accompanied by actuarial analyses showing a likelihood of Part D premium increases, resulting in concern within the Administration that enacting such a policy was bad politics. In July 2019, a White House Deputy Press Secretary announced that the rule was being withdrawn, and the withdrawal was reflected in the subsequent regulatory agenda. But in July 2020, the President issued an Executive Order which directed HHS to finalize the rule if the HHS Secretary confirmed that the rule was not projected to increase federal spending, Medicare beneficiary premiums or beneficiaries’ total out-of-pocket costs. In conjunction with the issuance of the rule, Secretary Azar provided such a confirmation based on “my extensive experience in this field, coupled with the fifteen year history of the program.”

There are significant questions about the fate of this final rule. There likely will be litigation to try to stop the rule, asserting both substantive and procedural objections. In addition, because of estimates that the rule will increase beneficiary premiums, government costs and, possibly, increase net drug prices, the new Biden Administration and Congress may consider efforts to revise or reverse the rule.

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