Reference Pricing in Part D: Will Manufacturers Play Ball?

One interesting aspect of President Trump’s move towards implementing international reference pricing into the Medicare program is the inclusion of Part D, the outpatient pharmacy benefit, in the reforms. Previous reform efforts (detailed in yesterday’s blog post) have focused on prescription drugs covered under the medical benefit, or Part B, and have spared Part D. This is primarily due to differences in the designs of the benefit: unlike Part B, which is a traditional, fee-for-service benefit, Part D is a hybrid public-private venture.

The program is designed to leverage the ability of private plan sponsors to negotiate competitive prices from pharmaceutical manufacturers. Plans that are more successful at this can offer lower premiums, lower cost-sharing, and/or a more generous formulary and can be expected to perform well relative to less-successful competitors. In fact, the Social Security Act explicitly prohibits the federal government from interfering in these negotiations between plan sponsors and manufacturers.

Enter President Trump’s Executive Order, which directs the Centers for Medicare and Medicaid Services (CMS) to issue regulations that would introduce international reference pricing into the Part D benefit.  Two questions come to mind: what are the potential savings in Part D and what kind of impact would an international reference price have on pharmaceutical manufacturers?

Question #1: Are ex-U.S. countries better at negotiating net prices than Part D plan sponsors? To answer that, we need to know what international prices look like in comparison to the final net costs of prescription drugs covered today under Part D. While it is relatively straightforward to compare costs under Part B to international prices, it is a lot more complicated to compare costs under Part D, because net prices are determined by confidential rebates negotiated between plan sponsor (or the plan sponsor’s pharmacy benefit manager) and manufacturer. In other words, the magnitude of potential savings isn’t clear.

Question #2: What negative trade-offs are we looking at as a possible result of international reference pricing? In theory, the international reference price could function like a Medicaid price under the Medicaid Drug Rebate Program. Today, manufacturers are required to offer statutory rebates in exchange for Medicaid coverage. States are able to – and have been successful at – negotiating additional rebates on top of the statutory rebates in exchange for waived or relaxed utilization management. So there is a proof of concept that manufacturers will accept a government-mandated price and are willing to go below that price, at least in some instances.

The big difference between Medicaid and a theoretical international reference price is that the Medicaid rebates are pegged to a price – average manufacturer price, or AMP – ultimately controlled by the manufacturer. An international reference price would introduce a new variable: the entities in ex-U.S. countries responsible for establishing prices for prescription drugs sold in their countries. And it is unclear how that changes the calculus for manufacturers.

In an ideal world (or at least a more-ideal world from the U.S. perspective), manufacturers would shoulder the hard work of increasing the prices that ex-U.S. countries are willing to pay for their products, and ideally meet somewhere in the middle. Under this scenario, ex-U.S. countries pay more so the U.S. can pay less. Manufacturers take a loss, but not as large of a loss as they would under a plan where the U.S. pays rates close to today’s international prices.

But there are few (if any) countries that feel they have a successful handle on health care spending, so it seems unlikely that anyone would be chomping at the bit to take a budget hit to help out Uncle Sam, at least without getting something in return. Do the launches of new products get more contentious than they already are, with the stakes higher? It would require a lot of work on the part of manufacturers. The companies would need to negotiate with ex-U.S. countries more aggressively and may need to be willing to walk away entirely.

The presence of statutory rebates in Medicaid also demonstrates that applying price controls to one market segment doesn’t necessarily kill innovation. But studies have demonstrated that there have been multiple negative externalities absorbed by the market as a result of the Medicaid rebate program. What happens if we introduce a second set of government-mandated price caps? Could international reference pricing be the policy that tips the scales to a point where there are noticeable negative impacts on the pharmaceutical market?

And what happens before any of this takes effect – if it takes effect? Manufacturers are making pricing decisions today for products that will launch in the future. The more uncertainty there is regarding future payment policy, the more likely a manufacturer will hedge their bets by pricing a product as high as the market will bear now. This offers protection in the future against a host of potential policies: international reference pricing, inflation caps/penalties or anything else Congress or a president may come up with. But it also compounds the problem we are trying to solve in the first place: unsustainable increases in prescription drug spending.

Tomorrow, I plan to look into the potential impact of this on plan sponsors and the Part D benefit as a whole.