What Pharma Wants to Know About the Medicare Drug Price Negotiation Program

August 17

By MMIT

Since the passing of the Inflation Reduction Act (IRA) last fall, pharma companies have been bracing for the impact of its provisions. The main healthcare-related IRA policies are the out-of-pocket spending cap, the Medicare Drug Price Negotiation Program, and the penalty for increasing drug prices faster than inflation.

To get a better sense of what a post-IRA future might look like, we asked two MMIT experts to weigh in on the questions our clients are asking. In this blog, we’ll focus on the most controversial of the new policies, the Medicare Drug Price Negotiation Program. This program authorizes the government to negotiate drug prices for selected single-source, brand-name drugs without a therapeutically equivalent generic or biosimilar alternative.

Q: How will the program impact manufacturers of chosen drugs?

Steve Callahan, Director of Advisory and Insights, MMIT: In September 2023, CMS will announce the first 10 Part D drugs selected for the negotiation process. Eligibility for the program is based on a drug’s time on the market as well as gross spend during the previous year. Manufacturers of these drugs will be under pressure to quickly provide CMS with real-world evidence and comparative effectiveness research (CER) to justify their pricing.

The negotiation process will have a varying impact for each manufacturer, depending in large part on the drug’s competitive landscape. Negotiations will begin at a certain pricing level based on two factors: the number of years the drug has been on the market coupled with the price of the drug’s competitors. Overall, the financial impact of arbitration will probably be the largest for drugs in categories which are not heavily contracted today, like oncology.

Nathan Howe, Senior Clinical Specialist, MMIT: I think there’s going to be a lot of variability, which will likely scale with the size of the manufacturer. The key word is negotiation. CMS will directly negotiate with the manufacturers, which allows them to prove the value and cost of their drug. There are so many factors involved in the pricing negotiations, including the cost of R&D for the drug, the cost of production and distribution, whether the company has received federal financial support—not to mention the company’s portfolio and market data on revenue and sales volume.

Smaller manufacturers that only have a few products will likely fare better, as their profit to R&D ratio will look quite different as compared to larger manufacturers. The pricing negotiations should allow smaller companies to receive higher prices based on overall size and the depth of their portfolio. Larger manufacturers with huge sales and portfolios, who are likely to have minimal production/distribution costs as a result of multiple production plants, will probably be hit harder.

Q: How will the program impact the industry at large?

Steve Callahan: The Medicare Drug Price Negotiation Program has been a source of a lot of industry pushback, sparking lawsuits from Pharmaceutical Research and Manufacturers of America (PhRMA), Merck, and Bristol-Myers Squibb. While these lawsuits are focused on whether the IRA violates constitutional law, there are still consequences of this provision.

One consideration is the amount of post-launch research drugs receive, particularly in oncology and immunology indications. The enactment of post-launch price controls could impact manufacturer decisions on whether to continue with improvements on their existing drugs.

Drugs are routinely studied for other indications, earlier lines of treatment, and combination therapies, often resulting in label expansions years after launch. Now, manufacturers are no longer incentivized to release multiple iterations of a drug over time, as the time clock to negotiation begins on the first day of the first indication. As a result, manufacturers developing a drug with diverse utility will need to put in a lot of upfront investment to gain approval for as many indications as possible.

Nathan Howe: While I agree with Steve that these concerns are valid, I also think the program could ultimately have a positive impact on the industry. Today, it’s common for manufacturers to bring out equivalent drugs with only minor improvements, like a more efficient dosing schedule. The IRA will force pharma companies to reevaluate their market strategies. Companies able to effectively bring therapies to market that represent a genuine therapeutic advancement will be able to negotiate higher prices.

Ideally, the long-term impact of the IRA will be to spur improved R&D and a better pipeline, as companies will be inspired to prioritize innovation. Will a potential new drug offer better outcomes and/or a better safety profile? Will it extend patients’ lives, or markedly improve quality of life? Manufacturers will need to focus on making these therapeutic breakthroughs rather than reformulating their existing drugs.

Q: How might the program impact oral drug development?

Steve Callahan: Many experts are criticizing the program’s differential treatment of small-molecule vs. large-molecule drugs. Oral drugs are subject to price controls 9 years after launch, whereas biologics are not eligible for the program until they’ve been on the market for 13 years.

This distinction between treatment types has caused some confusion, as it is not supported by a scientific rationale. Both small- and large-molecule drugs are designed to optimize interaction with their chosen targets, the size and nature of which determine the type of treatment. The program’s decree that small-molecule drugs should face price controls four years earlier is seen as an arbitrary penalization.
As a result, many experts fear that manufacturers might decrease their investments in small-molecule drug development. In a recent PhRMA survey on the impact of IRA price provisions, 63% of respondents said they expect to shift their R&D investment focus away from small-molecule medicines.

Nathan Howe: While CMS has not shared their rationale behind the small-molecule/biologic distinction, the decision to treat the categories differently was not arbitrary. CMS is very research-based. Most likely, the decision was related to the overall costs and development timeline for small-molecule therapies versus biologics. Manufacturers of small-molecule drugs are able to recoup their costs faster.

In the next few years, it would not be surprising to see some pharma companies scrap some of the small-molecule drugs in their pipeline. Many companies have already divested a lot of their R&D into biologics and gene therapies, so the IRA will likely amplify that trend. Of course, there will always be companies who invest in small-molecule therapies, especially in areas where there’s not a lot of competition. Oral drugs tend to have better access and are generally preferred by patients.

The Drug Price Negotiation Program might also be less likely to target smaller-molecule oral products, unless the costs are above and beyond what’s reasonable. To my mind, CMS is far more likely to target expensive, popular biologic products in order to bring about higher overall savings for Medicare and Medicare patients.

Q: How will the program impact the breadth and depth of Medicare formularies?

Nathan Howe: The initial impact on formularies may be negligible. Only 10 Part D drugs will be selected for price negotiations that take effect in 2026, followed by 15 drugs with price changes effective in 2027 and 2028. Once a drug is selected and its price negotiated, all Medicare formularies will be required to include it. That is one of the benefits to manufacturers. While the formulary inclusion rule doesn’t completely negate the establishment of a negotiated price, it should help offset the revenue loss.

Some of the lower-end formularies, which might only have one option in a class, will be forced to include a second option if the drug is selected for negotiation. Of course, these drugs are chosen from the top 50 part D drugs, so they will most likely already be on the vast majority of formularies anyway.

However, later down the road—we’re talking 2029 and on—the impact on formularies may be much more noticeable. By then, drugs that would normally be too expensive to appear on more than 20-30% of formularies might be included in the Drug Price Negotiation program, which would subsequently greatly increase access. Part D plans are required to cover all selected drugs that have negotiated a maximum fair price.

To see how automated CER can help you prepare for pricing negotiation, learn more about Panalgo’s IHD Analytics platform.