Medicare drug price negotiation guidance: The good, the bad and the ugly

On March 15, 2023, the Centers for Medicare and Medicaid Services (CMS) released its much-anticipated initial guidance about how it intends to implement the drug negotiation provisions of the Inflation Reduction Act (IRA). Because the implementation of these provisions is certain to have significant impact on pharma, we dove in to understand how the price negotiations will work.

As we noted following the passage of the IRA, Congress left many details of the law’s implementation up to the executive branch. One particular risk we identified was that the Department of Health and Human Services (HHS) could select prices significantly below the so-called maximum fair price (MFP) defined in statute and that manufacturers would have little recourse. CMS’s guidance provided a first glimpse at how those prices would be determined.

At a high level, the guidance has four core sections:

1. Defining which drugs will qualify for negotiation
   
2. Describing the operational negotiation process between CMS and drugmakers
   
3. Explaining the price determination approach and considerations
   
4. Articulating drugmaker compliance expectations
   

Here we summarize the good, the bad and the ugly of each section.

When the IRA passed, it was unclear what discretion HHS might exercise in any given year when selecting drugs for negotiation. Further, Congress provided for up to two years of delayed negotiations when HHS considered biosimilar entry highly likely, but it did not define what exactly that meant. In this section of the guidance, CMS shared its plans for identifying the drugs that will be subject to the first negotiations.

The good:

• CMS has provided significant clarity about exactly which drugs will be selected, helping drugmakers with their planning. Rather than using its discretion from a list of negotiation-eligible drugs, it will select the drugs with the highest gross expenditures based on current Part D utilization data.
  
• CMS has also made its considerations for “high likelihood” of biosimilar entry clear. Would-be biosimilar manufacturers will need to demonstrate a genuine intent to gain regulatory authorization, and they will need strong evidence of both plans and capabilities to commercialize.
  
• CMS will treat combination therapies as distinct from monotherapies for negotiation qualification purposes.
  
• While not committing to any course of action, CMS acknowledged a need to address the disincentives inherent in the orphan drug exemption going away for any asset that develops more than one indication: “CMS is considering whether there are additional actions CMS can take in its implementation of the (Medicare Drug Price) Negotiation Program to best support orphan drug development.” 
  

The bad:

• While the statute contemplated eligibility for negotiation nine years post-New Drug Application (NDA) or 13 years post-Biologics License Application (BLA), CMS has indicated that it will group all NDAs or BLAs together for a single drug or biological product and will negotiate all products marketed across NDAs and BLAs based on the earliest such approval. Specifically, CMS says: “For drug products, all dosage forms and strengths of the drug with the same active moiety and the same holder of a New Drug Application (NDA), inclusive of products that are marketed pursuant to different NDAs.” The language is nearly identical for BLAs. This appears to contradict the plain reading of the statute and brings significant risk for drugs that have had multiple NDAs or BLAs approved at different times.
  

The ugly:

• While “initial guidance” documents of this type are generally subject to public comment and refinement, CMS has declared that in the interest of time, most of the drug qualification criteria guidance is considered final and not subject to review or modification.
  

The IRA laid out a general process and timeline but provided few specifics about how the negotiation would work operationally. CMS provided some further detail in its guidance.

The good:

• CMS laid out a clear process and timeline for drugmaker actions. It also indicated plans to make templates available in advance to ease the information-gathering and submission burden.
  
• Many of the elements of information requested seem reasonable and are also partially inclusive of data often ignored by the pharmaceutical industry’s most aggressive critics. For example, CMS will consider some of the R&D costs associated with drugs that failed to enter the market when looking at the extent to which drugmakers have recouped their investments.
  

The bad:

• The detailed requirements are rather onerous, and brands selected for the first round of negotiations will have limited time to comply with the U.S. government’s demands, particularly for information that isn’t generally requested by other price negotiation bodies.
  

The ugly:

• CMS expressed an intent to bind drugmakers to confidentiality in the price negotiations. The public will see very little information about exactly how negotiated prices are determined, and confidentiality requirements will limit the extent to which the government can be held accountable for consistent and fair price determination decisions.
  

This was likely the most anticipated part of CMS’s guidance. With so little detail provided by Congress beyond specifying a ceiling price, the executive branch was left to develop a price determination approach on its own. While pricing bodies outside the U.S. have spent decades refining such processes, CMS only had a few months to throw something together before the first negotiations commence.

The good:

• CMS intends to start primarily with a comparative effectiveness assessment relative to net prices for identified therapeutic alternatives. This is a reasonable and more neutral ground for drugmakers than other options at the government’s disposal.
  
• CMS appears open to broader characterizations of a drug’s value relative to the flawed and very narrow views of entities like the Institute for Clinical and Economic Review.
  
• CMS has provided detailed guidance about exactly how it intends to propagate a single negotiated price to an array of potentially different prices across dosages and formulations. The guidance here appears reasonable as well.
  

The bad:

• On multiple occasions throughout the guidance document, CMS asserts its core objective as coming up with the “lowest maximum fair price.” HHS has explicitly defined program success based on how much they bring prices down, which hardly sets the stage for a balanced assessment of drug value. The summary fact sheet accompanying the detailed guidance makes this quite clear.
  
• CMS continues to only specify that Medicare Part D plans shall include each negotiated product on formulary, but it has not defined what that means. Further, CMS mentions that the agreement would not restrict the manufacturers from offering a price lower than MFP. For example, it is unclear if Part D plans could place a negotiated drug in a disadvantaged tier or enact step edits or prior authorizations. Without such clarity, it seems likely that pharmacy benefit managers or Part D plans will be able to continue to extract additional rebates for more favorable access. 
  

The ugly:

• CMS has chosen to adopt a “qualitative approach” rather than a rules-based quantitative approach to determining price. The agency has so much wiggle room that there is no more clarity about the exact prices it will demand for drugs now than there was when the IRA was first enacted. One of the biggest concerns for drugmakers about the IRA language was that it specified a ceiling price but no floor—and no way to determine where between $0 and the ceiling the government might land. For all the detail provided by CMS about its assessment approach, this fundamental dynamic is unchanged.
  

The IRA specifies that drugmakers must make negotiated prices available to eligible patients. In this section, CMS spelled out its compliance expectations.

The good:

• CMS is showing flexibility and openness in how MFP availability will be put into place in the pharmacy channel. The chargeback process envisioned seems reasonable and implementable, though significant work must be done to ensure such a mechanism works across the full universe of pharmacies and other dispensers and their assorted buying patterns.

The bad:

• Some of the most challenging process questions about patient access to government-negotiated prices reside in the medical benefit. CMS was silent on this topic in its initial guidance and kicked the can down the road until future guidance on Medicare Part B negotiations is developed.

The ugly:

• CMS recognizes that there are several stakeholders in the supply chain between a drugmaker and an MFP-eligible patient, and yet they place the onus for compliance squarely on the manufacturer. This will be administratively burdensome at best. At worst, it will be logistically impossible. Without the proper data sharing in place to identify MFP-eligible patients, this may create another revenue leakage problem for pharma similar to the 340B program.

As with the IRA itself, the story is not a balanced one for pharma. There is decidedly more bad (and ugly) than good. Still, those who understand the critical details will be best prepared to navigate the challenges presented by this new process.