Blog: Drug Costs Targeted in Administration’s Fiscal Year 2019 Budget

by Cooley LLP

Yesterday, the Administration released its Fiscal Year 2019 (FY19) Budget blueprint. The $4.4 trillion Budget blueprint includes several proposals directed at lowering the cost of prescription drugs. These proposals are presented across the Budget volumes that reflect the Administration’s policy and fiscal priorities. Since many of these proposals require  Congressional action, if they lack alignment with Congressional realities implementation will be challenging.

The Budget requests $68 billion in FY19 for the Department of Health and Human Services (HHS), which includes funding for the Food and Drug Administration (FDA), Centers for Medicare & Medicaid Services (CMS), National Institutes of Health (NIH) and other agencies. The FY19 request is about $18 billion below the funding that was enacted by Congress for fiscal year 2018.

There are several proposals designed to address “the problem of high drug prices.” The Budget seeks to create a “comprehensive” approach using “targeted” changes to Medicare and increased competition, particularly for generic drugs. These proposals are some of the most concrete policy articulated by the Administration. Some key proposals are detailed below:

A five-part plan to “modernize” the Medicare Part D drug benefit by:

  • Increasing Medicare Part D plan formulary flexibility: This proposal “changes Medicare Part D plan formulary standards to require a minimum of one drug per category or class rather than two. It also expands plans’ ability to use utilization management tools for specialty drugs and drugs in protected classes.”
  • Eliminating cost-sharing on generic drugs for low-income beneficiaries: This proposal “reduces cost sharing for generics to $0. This includes biosimilars and preferred multiple source drugs.”
  • Requiring Medicare Part D plans to apply a substantial portion of rebates at the point of sale: This proposal “requires Part D sponsors to apply at least one-third of total rebates and price concessions at the point of sale.”
  • Excluding manufacturer discounts from the calculation of beneficiary out-of-pocket costs in the Medicare Part D coverage gap (aka the “donut hole”): This proposal “restructures the coverage gap discount program to exclude manufacturer discounts from the calculation of true out-of-pocket costs.” The Administration believes health plans are incentivized to encourage beneficiaries to use brand drugs, which can cost more, in order to accelerate them through the donut hole and into the catastrophic phase, where Medicare is liable for 80 percent of spending. Interestingly, the recently passed Bipartisan Budget Act of 2018 (BBA), made two significant changes to the donut hole that could impact the proposal’s budgetary savings. First, the BBA will close the donut hole one year earlier (2019) than currently planned in Obamacare. Second, the BBA increases the percentage that a drug manufacturer must discount the cost of prescription drugs from 50 percent under current law to 70 percent.
  • Establishing a beneficiary out-of-pocket maximum in the Medicare Part D catastrophic Phase: This proposal increases Part D plan sponsors’ risk in the catastrophic phase (which begins in 2018 when a beneficiary spends $5000 out-of-pocket) by “increasing plan liability over four years from 15 percent to 80 percent, and simultaneously decreasing Medicare’s reinsurance liability from 80 to 20 percent. Additionally, beneficiary coinsurance would decrease from 5 to 0 percent.”

Other significant proposals related to drug pricing include:

  • Reforming exclusivity for first generics to prevent the “parking” of exclusivity by generic drug manufactures who are first-to-file. Under the FDCA, the applicant that is first to file is granted a 180-day period of exclusivity. The Budget proposal would allow FDA to tentatively approve a subsequent generic drug applicant that has been blocked solely by a first applicant’s 180 day exclusivity, where the first applicant has not yet received final approval because of deficiencies in its application.
  • Authority for a new Medicaid demonstration program that will allow five states to develop individual drug formularies and “negotiate prices directly with manufactures.”
  • Establishing an inflation limit for reimbursement of Part B drugs. Effective January 1, 2019, this proposal “limits growth of the Average Sales Price (ASP) portion of Part B drug payments to the Consumer Price Index for all Urban Consumers. This means that each quarter when CMS establishes the ASP +6 percent payment amounts, CMS would pay the lesser of the following: (1) the actual ASP +6 percent; or (2) the inflation-adjusted ASP +6 percent.” The basis for evaluating price growth would be the initial ASP for 1Q17 for drugs that had an ASP prior to the date of enactment.
  • Authorization for the Secretary of HHS to consolidate certain drugs covered under Part B in to Part D when there a savings to be gained from price competition. HHS will have to create criteria to make this determination.
  • Modifying hospital payments received under the 340B drug discount program, to require at least one percent of patient care to be “uncompensated care” in order to be eligible for reduced payments.
  • Permanently authorizing a current pilot on retroactive Medicare Part D coverage for low-income beneficiaries. This proposal permanently authorizes a current demonstration (set to end in 2019) that “allows CMS to contract with a single plan to provide Part D coverage to low-income beneficiaries while their eligibility is processed.” The plan is paid using a methodology that attempts to align payments closer to costs incurred by beneficiaries.

More information on these proposals can be found the HHS Budget in Brief and the Office of Management and Budget’s Major Savings and Reforms.

HHS Secretary Alex Azar will be on Capitol Hill this week to discuss these and other proposals impacting the Department and its agencies. He is scheduled to testify before the House Ways and Means Committee on Wednesday, February 14th at 10 AM EST and the Senate Finance Committee on Thursday, February 15th at 9 AM EST.

These requests in the Administration’s Budget reflect its priorities and will require Congressional action. Like many proposals in previous Budgets, the fact that Congressional and Administration policy positions are not aligned makes the chance for many of them becoming law as quite low. However, with the 2018 midterm elections on the horizon, many in Congress will seize on these proposals as a call to action. Further, if the Administration’s proposals generate budgetary savings, they become much more attractive to policymakers looking for ways to offset the cost of other legislative proposals. We will be paying close attention as the Congressional appropriation season begins in earnest

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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