As if medical billing and coding wasn’t challenging enough, 2023 brings a new layer of complexity: the establishment of unique HCPCS codes for generic drugs. Specifically, the new codes affect generics approved under the FDA’s 505(b)(2) new drug application (NDA) and biologics license application (BLA) pathways.
In its Q3 2022 HCPCS Coding Cycle documentation, CMS issued 36 new HCPCS Level II codes to identify these products, effective Jan. 1, 2023. The agency also declared its intention to review additional 505(b)(2) drugs and release new codes on a quarterly basis. As generics approved via this pathway are not rated as therapeutically equivalent to their reference drug, they are considered single source drugs. Each will now carry a unique HCPCS Level II billing and payment code, also known as a J code.
While this approach may eventually lead to greater coding transparency, in the short term it is certain to cause confusion in the marketplace. As many of these drugs were previously billed under not otherwise specified (NOS) codes, reimbursement may have been based on a comparable established code, a blended rate or manual determination, depending upon the payer’s policies.
To guarantee correct reimbursement, pharma companies will need to ensure that payers and providers have adopted the new code for their product. This is especially critical given the lack of checks and balances in the system; of the 68% of payers that require national drug codes (NDCs) on claims, only 54% validate these NDCs, and even less (36%) validate that the HCPC unit was accurately converted.
Before we explore the ramifications of this policy change, let’s take a closer look at the rationale for the 505(b)(2) regulatory pathway and the implications for coding.
Benefits of the 505(b)(2) Pathway
To gain approval for a generic drug, manufacturers have traditionally submitted an Abbreviated New Drug Application (ANDA) to the FDA, which allows for approval if the generic is identical to a branded drug in its active ingredient, dosage form and strength, and route of administration. By citing the data provided within the reference listed drug’s NDA, manufacturers can avoid the time and expense of duplicative clinical trials. Of course, the FDA does not approve ANDAs until the manufacturer’s patent for the branded drug expires.
The third FDA drug approval pathway, the 505(b)(2) NDA, functions similarly as the ANDA, but without the requirement for therapeutic equivalence. Manufacturers can gain approval for a product that is very similar to a brand-name drug but does not have the exact same chemical composition. By referencing an approved drug, pharma companies can shorten the approval timeline, omit wide-scale trials, and bring a new formulation with a different dosage form, strength or delivery mechanism to market.
The popularity of this pathway has steadily increased over the last two decades, with manufacturers choosing this route for orphan drugs, drug-device combinations, drug efficacy study implementation drugs, and both branded and non-branded generics. In 2020, approximately 60% of approved NDAs were submitted via the 505(b)(2) pathway.
Over time, the question of how 505(b)(2) drugs should be coded under the medical benefit has become more pressing. As these drugs are not therapeutically equivalent to branded drugs, providers cannot necessarily transition patients with ease; likewise, payers cannot adjust reimbursement based off the existence of a lower-cost generic.
The Risk of Underpayment
In addition to issuing new J codes, CMS is also removing most NOS codes. For any given chemical compound, providers will need to choose from a handful of unique HCPCS codes that distinguish the original trade product from multiple generics and various 505(b)(2) products that might differ by dosage, vial size, strength or formulation.
Identifying and tracking the correct codes will present an ongoing challenge for providers, as coding information is not necessarily found on a drug’s labels, and the product’s approval pathway is not transparent. In addition, HCPCS code descriptions are vague, typically identifying only the mode and chemical (such as “injection, vancomycin hydrochloride”).
While the new HCPCS code descriptions will now include the manufacturer’s name, this detail won’t necessarily help physicians determine the right code. Some manufacturers have two product lines for the same generic drug, one submitted via ANDA and one via 505(b)(2), with only minor differences between the two formulations. Providers will need to be careful to select the correct J code for the drug they are administering. If a provider pairs an NDC with the wrong J code on a claim form, the claim could be denied. Payers will also need to update their systems to ensure that the correct NDC crosswalks back to the correct J code.
As many J-code drugs are quite expensive, there can be a huge cost differential per unit based on the chosen code. Many of the drugs with newly issued codes will also have a Medicare allowable reimbursement rate, which is a capped rate based on the average sales price (ASP). Even outside of NDC requirements, choosing the wrong HCPCS code on a claim can have a significant impact on providers’ bottom line. Without a system in place to confirm coding accuracy, providers could end up being reimbursed much less than they paid for dispensed products.
The Role of Education and Crosswalk Tools
Given the potential for confusion, manufacturers of products receiving one of these new HCPCS codes will need to embark on an education campaign. Pharma companies should ensure that both providers and payers have adopted the new code and are using it exclusively for their product. Billing under the prior code or an incorrect code may result in either claim denials or inaccurate reimbursement, which could eventually force providers to select alternative products—resulting in reduced utilization for manufacturers and impaired access for patients.
Left to their own devices, providers will not have an easy way to identify the correct new J codes. In time, each of these 505(b)(2) products will accrue an average sales price, determined using net revenue data and the number of total units sold. At that point, providers could potentially use publicly available ASP/NDC crosswalks for coding assistance. However, as these crosswalks are intended to support only drugs covered by Medicare Part B, they do not include a comprehensive list of all available drugs.
For payers, this sea change presents a valuable opportunity to alleviate provider abrasion—while ensuring tighter management of pharmacy claims under the medical benefit. By proactively recognizing the need for crosswalk assistance and supplying coding validation tools, payers can improve reimbursement accuracy and garner goodwill among their provider networks.As the industry shifts to accommodate the new coding, it’s important to remember that these 36 HCPCS codes are only the beginning. CMS is setting a precedent for how 505(b)(2) drugs will be handled in the future, which could have additional implications for market access and commercialization. As pharma companies use this pathway to bring new drugs to market, they can apply for a specific J code in advance, which will help them plan and execute billing education to ensure seamless access. For their part, payers that acknowledge the significance of these new codes by taking steps to mitigate reimbursement risks will better able to manage pharmacy spend on these drugs.
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