Life Science Compliance Update

March 17, 2017

Op-Ed in The Hill on Allowing Medicare to Directly Negotiate Drug Prices


Dr. Rafael Fonseca, a Chair of the Department of Medicine at the Mayo Clinic in Arizona and Distinguished Mayo Investigator, recently wrote an editorial in The Hill, a Washington, DC, based newspaper focused on politics in Congress.

In the editorial, Dr. Fonseca opined that allowing Medicare to directly negotiate drug prices, as has been advocated by a variety of voices (both in and out of the industry), would actually hurt seniors’ access to new drugs.

Dr. Fonseca uses the Veterans Affairs (VA) as an example of what happens when government programs are allowed to negotiated their own drug prices. Currently, the VA pharmacy benefits program negotiates drug prices and pays far less for drugs than many other providers. In order to contain costs, however, the program does not cover many of the newest, most effective treatments.

According to the editorial, many of those drugs that are not covered are “newly approved drugs with no substitutes available.” According to an August 2016 report by Xcenda consultants, only three of the 25 most innovative drugs were available in the VA drug formulary. Compare that to 11 Medicare Part D plans that covered all 25. The majority of Medicare plans covered 21 of the 25 drugs. 

Dr. Fonseca believes that popularity and the “will” of the public will continue to force through “doing something” on prescription drug prices. He believes that there are “three essential things that we must understand about drug costs and how we can address the challenge,” before taking such a risk:

  1. Innovative treatments are expensive to develop. While the cost of some prescription drugs can be high, consider that it takes an average of more than $2.5 billion to bring a drug to market, according to the Tufts Center for the Study of Drug Development. By allowing the marketing of drugs earlier in the approval process, speeding up approvals for competing compounds, and reducing the costs to bring new treatments to market, the FDA could allow for more price competition without harming innovative and access to effective treatments.
  2. Innovative drugs offset other healthcare costs. Medicine has changed dramatically for the better, and mostly because of the new drugs clinicians have in their toolbox. A 2012 Congressional Budget Office study estimated that for every one percent increase in medication utilization, overall Medicare program costs fell by one-fifth of a percent.

Since 1991, the nation's cancer death rate has dropped by 25 percent, according to a recent report by the American Cancer Society. Some cancers, like chronic myelogenous leukemia, are no longer a death sentence; metastatic melanoma, previously a death sentence, can now sometimes be controlled such as was done for President Carter. Hepatitis C can be cured with a short course of pills; and today the life expectancy of HIV patients is about the same as the general population. It is important to remember that today's drug treatments are, often, enormous advances in disease treatment. 

3. Price controls will kill innovation. The United States is the engine of innovation in healthcare, producing roughly half of the world's new drug treatments in the past decade. But the current proposals could threaten patient access and the development of future treatments. Health care economists John A. Vernon and Joseph A. Golec found that price controls imposed in the EU between 1986 and 2004 not only reduced R&D spending, they also "resulted in about fifty fewer new drugs and about seventeen hundred fewer scientists employed in the EU." Rather than feasting on the goose that lays the golden eggs, we should be looking for ways to grow more geese.


There is no denying that Medicare and other government-funded programs are facing a serious funding crisis and that changes to the programs are long overdue. However, it is important to review history and not make the same mistakes that have already been made in attempting to resolve the issue. Instead, Dr. Fonseca believes that “Medicare beneficiaries should have more freedom to choose the coverage and services that best meet their individual needs and preferences.”

March 15, 2017

MedPAC Considers Revised Approaches to Part B Drug Payment


In mid-January, the Medicare Payment Advisory Commission (MedPAC) met and discussed a revised approach to clinician payment for Medicare Part B drugs. Under the new approach, the average sale price plus 6 percent (ASP + 6) payment methodology would be changed to include a variety of reforms including consolidated billing codes, an inflation limit for price increases and additional manufacturing reporting of ASP. The Commission also discussed a parallel policy which contemplates the start of a bidding program for Medicare Part B drugs.

Staff Presentation

MedPAC’s staff presented a policy approach to Part B drug reform that mirrors the approach to Part B physician payment reform under MACRA. There would be two tracks for Part B drug reimbursements: (1) an updated version of the current ASP +6 payment methodology or (2) and updated version of the Medicare’s competitive acquisition program (CAP) that MedPAC staff refers to as the Drug Value Program (DVP).

ASP + 6 Redesign

The improved ASP system would: feature new requirements for manufacturer reporting of ASP data; modify the add-on payment for drugs during the period prior to ASP data becoming available; implement an inflation cap on drug price increases similar to the Medicaid program; and utilize consolidated billings codes. Further, the current ASP + 6 add-on payment would be phased down over time to encourage DVP enrollment.

DVP Program

The DVP program would be created from lessons learned from the CAP program and would give the Secretary authority to use private vendors to negotiate prices and offer providers shared savings opportunities. The DVP would: be voluntary; include multiple vendors; and allow providers to share in savings that Medicare received on the drug’s purchase price. The DVP will be different from the CAP because vendors would be able to utilize a formulary with an exceptions and appeals process. Further, drug prices would not be able to exceed ASP.

Commissioner Discussion

ASP Redesign

Commissioners were largely supportive of the ASP redesign, though several expressed reservations about specific components of the proposals. Commissioner Amy Bricker (Express Scripts) noted that manufacturers should not be offered Part B reimbursement if they did not report ASP prices. Commissioner Paul Ginsburg (The Brookings Institution) noted that the Commission needed to consider the effects of the sequester, while Commissioner Kathy Buto pointed to possible complications with respect to the inflation limit surrounding beneficiary cost sharing implications.

Some Commissioners expressed “severe reservation” about grouping drugs together under a billing code due to concerns over “practical challenges” for how the drugs would be classified and intense stakeholder pushback. Commissioner Bricker, however, felt that there should be no exceptions for the consolidated billing as there will always be winners and losers in any market. Most, if not all, of the commissioners seemed to agree that biosimilars could be grouped with their reference because the FDA decided that the drugs were not meaningfully different.

DVP Program

With respect to the DVP, Commissioner Jack Hoadley stated it would make sense to have only a few vendors so that they would be able to consolidate buying power and negotiate good prices. Commissioner Brian DeBusk, on the other hand, commended staff for leaving flexibility in the DVP program design to encourage a variety of entities to bid on being a vendor. Overall, the Commissioners were largely supportive of the DVP. They agreed that it essentially amounted to an early form of government negotiation for prescription drugs. Commissioner Pat Wang believes that the DVP is “very much worth trying to detail out.”

March 14, 2017

CMS Releases Report on Drug Rebates


The Centers for Medicare and Medicaid Services (CMS) has released a new report highlighting the growth in rebates from drug manufacturers to pharmacy benefit managers (PBMs) and insurers. However, the report notes that these rebates don’t necessarily amount to savings for beneficiaries and Medicare. Rebates paid by manufactures are referred to as “Direct and Indirect Remuneration” (DIR) by CMS, and such rebates are allegedly increasingly allowing for private Part D insurers to keep costs down, but are less impactful for keeping beneficiary cost sharing low and for holding down Medicare spending in the catastrophic phase of the benefit.

The report highlights the problem of a pricing scheme where manufacturers introduce drugs at a high list price (“point-of-sale”), with the expectation that the initial price will somehow be negotiated downward, “the cost of rebates and other price concessions received after the point-of-sale, is built into the list price charged at the point-of-sale.” Since beneficiary cost sharing is based on the list price, and because Medicare absorbs most costs in the catastrophic benefit, high list prices contribute to high spending for both beneficiaries and the program.

CMS notes that between 2010 and 2015, total DIR grew roughly twenty-two percent per year, while per-member per-month (PMPM) DIR grew about fourteen percent per year. During the same time period, total Part D gross drug costs grew about twelve percent per year and PMPM Part D gross drug costs grew slightly less than five percent per year.

The report details how the combination of higher drug prices and higher DIR can impact the benefit in the following ways:

Beneficiary Cost-Sharing

CMS believes that DIR may hold down total program expenses (and beneficiary premiums), but it does not reduce the cost of drugs for beneficiaries at the point-of-sale. Generally, this results in higher beneficiary cost-sharing obligations as cost-sharing is often assessed as a percentage of the list price;

Medicare Subsidy Payments

Medicare pays the Part D cost-sharing obligations on behalf of low income beneficiaries that are also eligible for Medicaid, roughly twelve million beneficiaries in 2015. As the burden on beneficiary cost-sharing grows, Medicare’s costs for these beneficiaries also grow. Additionally, CMS states that, “higher beneficiary cost-sharing also results in the quicker progression of Part D enrollees through the Part D drug benefit phases and potentially leads to higher costs in the catastrophic phase, where Medicare liability is generally around eighty percent;”


Plan Liability

As illustrated by Figure 3 in the report, higher levels of DIR also have the impact of moderating the financial liability of Part D plans, which counteracts the overall growth of Part D drug spending. High cost-high DIR arrangements ease the financial burden created by Part D plans by essentially shifting costs to the catastrophic phase of the benefit, where plan liability is limited.


The report more or less implies that rebates contribute to Part D spending growth because the current structure of the Part D benefit incentivizes plans to negotiate high rebates to keep their costs down, which in turn leaves Medicare and its beneficiaries on the hook for high spending due to high drug prices.


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