Preparing for Possible Drug Pricing Changes

The COVID-19 pandemic that has pushed the U.S. healthcare system to its limits and crippled the economy has brought stark attention to the need for new legislation to lower medication prices. Such legislation could address lowering the acquisition price of medicines or lowering reimbursement for medicines when the federal or state government is the payer. In either case, the benefit to patients is reduced co-pays and other savings. In late July 2020, four executive orders addressing drug pricing were signed, each addressing a different aspect, with one limited to just two drugs and the others broader in scope. This column addresses one of those known as the Most Favored Nations (MFN) model. 

The release of the interim final rule of the MFN model in late fall with a Jan. 1, 2021, start date was met with immediate criticism and pushback from a variety of stakeholders, as well as a flurry of lawsuits resulting in a temporary hold. The model tackled the issue of drug pricing by lowering reimbursement of drugs, leaving it to healthcare facilities to negotiate lower prices with manufacturers and suppliers. The fate of the MFN rule will be determined by the current administration that can eliminate it, appeal the California preliminary injunction or do nothing. Despite a comment period that ended Jan. 26, implementation has been blocked by federal courts. In addition, a court in Maryland has issued a temporary restraining order, and courts in New York and California have granted preliminary injunctions.

Even if the MFN model is eliminated, drug pricing is extremely likely to be addressed in the near future as either a revised version of the MFN model and/or applying other creative approaches to lowering drug prices in the U.S. Yet, regardless of what approaches are taken, healthcare organizations will have to calculate the financial impact of the new ruling(s) and the benefit to patients in the form of lower co-pays. They also will have to determine what operational changes may need to be made to their supply chain, pricing structure or other revenue cycle services. And, this will entirely depend on access to accurate data and an understanding of their payer structure for drugs and biologicals. 

What Is the MFN Model?

Skipping the normal rulemaking process, which allows for public comment, the Centers for Medicare and Medicaid Services (CMS) issued an “interim final rule” typically reserved only for rules that need to be enacted quickly. This rule creates a new mandatory payment model for separately payable Part B drugs that ties reimbursement to prices other countries (i.e., most favored nations) pay for the same drugs. The rule applies only to traditional fee-for-service Medicare beneficiaries; it does not apply to those who have private insurance. The administration is pushing the rule to lower traditional Medicare drug spending.

The rule, which was set to take effect Jan. 1, proposes to restrict costs for the top-50 physician-administered Medicare Part B drugs, which account for almost 80 percent of Part B spending, to no more than the lowest price drug manufacturers receive in other similar countries. Specifically, it would have replaced the existing average sales price (ASP) plus 6 percent formula with a new formula based on international pricing information from an index of 22 different countries. The new formula applies to Medicare-participating physicians, nonphysician practitioners, supplier groups (such as group practices), hospital outpatient departments (including 340B-covered entities, ambulatory surgical centers and other providers) and suppliers that receive separate Medicare Part B fee-for-service payment for the model’s included drugs. Excluded from the new formula are cancer hospitals, children’s hospitals, critical access hospitals, rural health centers, federally qualified health centers, Indian Health Service facilities, and providers in the Maryland Total Cost of Care model that has an annual global budget for healthcare spending. Additionally, participants can request exemption based on financial hardship.

Under the rule, CMS will pay for the 50 costliest Medicare Part B drugs, 38 of which are oncology-related, “at comparable amount to the lowest adjusted price paid by any country in the Organization for Economic Co-operation and Development that has a gross domestic product (GDP) per capita that is at least 60 percent of the U.S. GDP per capita.” After a price is established, the model will phase pricing in with the applicable ASP by 25 percent per year for performance years one through three and reach 100 percent by performance years four through seven. The goal is to give providers “time to adjust to the model payment amounts and formulas.” Complicating this fluctuation, CMS will replace the 6 percent add-on payment with a flat fee add-on payment regardless of product cost calculated quarterly at 6.1 percent of the 2019 historical spending on all MFN drugs and adjusted every year based on inflation. The per-dose add-on payment for the first quarter of 2021 will be $148.73. If a drug is in short supply, the price will revert to ASP.

Implications of the MFN Model 

Manufacturers’ prices remain the same and won’t be lowered to compensate for the MFN price. The goal is to involve group purchasing organizations to determine any anticipated decreases in contracted costs effective the new start date that parallels decreased reimbursement for MFN model drugs for traditional Medicare beneficiaries. Therefore, providers may have to develop mechanisms such as rebates or discounts with manufacturers. Success will depend on providers negotiating drug prices down to meet reduced reimbursement levels, but it’s unclear whether or by how much manufacturers will actually lower prices they charge healthcare providers. If unsuccessful, providers will have to choose whether to offer the drugs at a financial loss. Beneficiaries will pay lower coinsurance for these high-cost Part B drugs, and they will not pay coinsurance on the add-on payment. 

The pharmaceutical and finance teams will bear responsibility for determining the impact on facility/system income. This begins with categorizing the MFN drug list by which ones will affect each area of the facility/system, eliminating those that are not relevant, and determining usage of the remaining relevant drugs by traditional fee-for-service Medicare patients, as well as any covered by commercial payers that use Medicare as their payment. And, this will require a thorough understanding of the terms of each commercial payer agreement. For instance, it will need to be determined whether, in managed care contracting, there are third-party payer contracts with statements that pay for outpatient drugs covered by Medicare or that use Medicare payment rates as a basis for the contract. 

Another crucial determination will be how much lost income will result from payer reimbursement directly to the facility, as well as how much lost income will result from co-pay amounts for add-on fees. And, consideration must be given to lost income from using MFN versus ASP (Note: 340B facilities paid the lower of MFN versus ASP minus 22.5 percent). Waste billing will also be affected, so lost income from this must be considered as well. 

Even though many sites use billed charges when creating proformas, these are irrelevant when comparing MFN versus ASP. Rather, to determine the true impact, a comparison of actual Medicare (and commercial) payments versus MFN payments must be made. 

The pharmaceutical and finance teams must also consider payment reductions in the 340B program. The same basic understanding of which patients are covered by which payers (commercial or government) using which drugs in which site of care need to be applied to analyzing the impact of payment reductions for 340B drugs used to treat 340B-eligible Medicare patients when treated in a 340B-eligible outpatient prospective payment system (OPPS) setting. Additionally, only certain drugs, in this case those with status indicator (SI) K, are affected. Therefore, analysis should begin with accessing the list of SI K drugs from CMS Addendum B, and then determining which ones are used in the facility’s OPPS setting. Pass-through drugs (SI G) are exempt from this payment reduction. 

In the final analysis, every one of these changes depends on knowing who the payer is for every patient and having clean accurate data, as well as access to files that hold the information on targeted drugs.