CMS considers foreign drug prices to hold down Medicare Part B spending

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An early-stage regulatory proposal put forth by the Trump administration would seek to set reimbursement prices for pharmaceutical products based on what a selection of foreign countries pay for those same drugs.

While the preliminary impacts of the proposal – if enacted – on Medicare Part B would be small compared to overall pharmaceutical spend in the US, the impact on a handful of companies would be substantial, and the model could become a precursor to controlling costs in other government programs like Medicaid, according to an analysis by PwC’s Health Research Institute (HRI).

The International Pricing Index (IPI) proposal, released on Oct. 30, 2018 as an advanced notice of proposed rulemaking, is part of a broader attempt by the Trump administration to reign in drug pricing, in part by inducing greater competition in the US. The proposal would base reimbursement of drugs in the Medicare Part B program on prices paid for the same drugs in 14 countries including Canada, Japan and 12 European countries.

Report highlights

  • CMS officials estimate using target prices based on foreign competition could reap substantial savings for Medicare Part B – and about 30 percent on a per-drug basis. Between 2020 and 2025, they expect to generate net savings of $17.9 billion for Part B, as well as $1.8 billion in reduced Medicaid spending due to impacts on the dual-eligible population.
  • According to an HRI analysis of data from HHS’s Office of the Assistant Secretary for Planning and Evaluation (ASPE), if the US adopted volume-weighted international pricing, five companies would be expected to lose revenue of $500 million per year or more – the difference between their international and domestic prices. Another six companies have between $100 and $500 million in annual revenue at stake.
  • Because prices under the IPI model would be tied to countries that have pricing regulators, which limit price increases, the IPI model could also limit pricing growth under Part B and reduce long-term spending. Twenty-seven percent of drugs covered by Medicare Part B saw greater than 10 percent annual average growth in the cost per dose between 2012 and 2016, according to an HRI analysis of CMS data. Another 40 percent saw some form of increase.
  • The changes under the IPI model would subject 29 of the top 50 drugs under Medicare Part B to competition, according to an analysis of 2016 Medicare drug data and 2018 patent data by HRI. Those drugs accounted for $14.4 billion in spending in 2016, and the vast majority are biological medicines. 
Most of Medicare Part B's spending is protected by patents
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Subjecting even a few Part B drugs to international competition could reap major savings
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Implication highlights

Companies should assess their commercial launch strategies. The IPI proposal could alter the launch timing dynamic for some companies, who might choose to heavily delay entry ex-US, launch different versions of their products elsewhere, or raise rates abroad. Biopharmaceutical companies generally seek to enter as many markets as possible, as quickly as possible, with the US often forming the first in a chain of countries. More than 66 percent of pharmaceutical companies launch first in the US compared to the EU.

Companies should assess the potential impacts of the proposal on their revenues. Companies may need to settle on a potential range of revenue rather than a specific number. CMS says it plans to multiply the average international price by “a factor” to achieve price reductions of “about” 30 percent, but has thus far declined to define either the methodology behind that factor or whether certain drugs may be treated differently. Some drug products may experience major reductions in price under the model, such as for drugs which are on-patent in the US, but have generic or biosimilar competition in a foreign country. ASPE data show that compared to international products, top-spending Medicare Part B drugs were 1.8 times as expensive on average, and three drugs more than four times as expensive.

Think about operational needs. Companies may need to build out new operational capabilities in order to support the data reporting HHS wants under its model since most companies don’t have unified global drug pricing data reporting systems. This is also not as simple as it may initially seem. Many drugs are approved in other countries based on different indications, dose amounts, or even chemical or biological properties. The specifics about how to interpret and report this data will be challenging. Another key challenge: Maintaining confidentiality of contract terms so that competitors can’t reverse-engineer companies’ contracts to under-bid them in foreign markets.
 

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Philip Sclafani

Principal, PwC US

Karla Anderson

Principal, PwC US

Erinn Hutchinson

Principal, PwC US

Katherine Buckley

Partner, PwC US

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