Now that Medicare can negotiate the price of prescription drugs it purchases, the Biden administration needs to figure out how it will hash out deals with drugmakers. Experts tell AIS Health, a division of MMIT, that implementation of the long-sought negotiation program will come with plenty of challenges and pitfalls.
The administration will have to issue new regulations, hire hundreds of staff, determine which drug prices will be negotiated first and design the criteria that will select drugs for negotiation in the future.
“I see three major decisions, in the short term, related to negotiation,” Matt Kazan, managing director at Avalere Health, tells AIS Health. “There is the definition of drugs that will be eligible for negotiation. The actual selection of the [first] 10, and then the rules of the road of the negotiation process itself. All three of those major decisions have to happen basically before this October 1, 2023, deadline — and maybe even sooner.”
How Will CMS Select Which Drugs to Negotiate?
Those decisions could even have a meaningful impact on the bottom lines of drugmakers that don’t have drugs up for negotiation. That’s because the Inflation Reduction Act (IRA), the legislation that created the bargaining process, requires HHS to negotiate the most expensive drugs first. But that’s not as simple as it sounds, according to Ryan Urgo, managing director at Avalere.
“Our view is that, once you’re on the list, [HHS] will work their way from the highest spend down to the lowest,” Urgo explains. “But there has been confusion about how top spending by drug will be calculated — which determines, of course, which drugs make that list compared to others. If you’re basing it off of gross [price], that would produce one list. If you’re calculating it off of net spending after rebates, that would create a different-looking list.”
Urgo explains that drugmakers may try to jockey for position in the negotiation queue depending on what criteria HHS selects: a drugmaker could lower its unit cost in an attempt to delay bargaining for a year or two. Even with a lower cost, a company may calculate that they will earn more on the drug than they would after negotiation. And there is a zero-sum quality to these sorts of pricing games, Urgo points out.
“By saving yourself from that spot, who are you giving it to elsewhere? Somebody else then fills that void,” Urgo says. “One manufacturer’s pricing actions would then potentially create exposure for another.”
Meanwhile, the bargaining process itself has plenty of unanswered questions.
“Negotiation, by far, is the most ambiguous of the IRA from the drug pricing policies,” explains Urgo. “Many of the policies are actually pretty prescriptive. The actual negotiation process leaves a lot to be desired. And manufacturers, right now, are wondering what this process is going to look like. Because MFP — maximum fair price — appears to just be table stakes to start the negotiation. The key question is, how far down will that price go during this negotiation process? All we know is that HHS is going to be requesting R&D data and other market data to inform the negotiation, but they don’t specify how they’re going to use that negotiation. They also don’t specify any floor.”
Maximum fair price — the number that Urgo considers the starting point of negotiations — is “a straightforward calculation,” he says. “It’s a percentage off of the manufacturer’s nonfederal AMP, average manufacturer price.” The great unknown, Urgo says, “is how much additional price concession could be added to that, based on the back-and-forth deliberations between the companies and HHS.”
Urgo says HHS needs to balance savings with the possibility that drugmakers may “chill research and development into these conditions, or these manufacturers contemplate not selling in the Medicare program any longer.”
Rulemaking Will Happen Quickly
Kazan says that, unusually, “Congress in various places throughout the IRA provided the flexibility for the administration to not go through normal notice and comment” periods for regulatory decisions, and instead “use what the language calls program guidance and other pathways in which to make these regulatory decisions. That’s in recognition of the very tight effective dates and deadlines that the legislation establishes. So I think it’s an open question as to (1) how CMS is going to solicit and take in feedback, and (2) how are stakeholders going to engage with the agency to influence, or let their opinion be known, about the various decisions that CMS needs to make.”
Finally, HHS will have to hire staff to negotiate drug pricing deals with manufacturers. Kazan says that those new hires will require specialized skills.
They could come “from a lot of different sorts of sources,” Kazan says. “Folks that have worked in academia, economists, a lot of data expertise, I suspect. Certainly policy folks who are going to have to answer some of these other questions. Maybe folks with a background in negotiation itself as an exercise. Congress gave them a lot of money — I suspect it will take a lot of people to do these new activities that CMS doesn’t do today.”
The actual people hired to do the work will matter a lot, Kazan points out, because “a lot of this is subjective.…The price that they land at is not just a math equation. It is a series of decisions made by people. So the expertise and ideology and vantage point of those people will be tremendously important.”
This story was reprinted from AIS Health’s biweekly publication RADAR on Drug Benefits.