On September 9, 2021, the Department of Health and Human Services ("HHS") released its widely anticipated "Comprehensive Plan for Addressing High Drug Prices." The HHS report supports far-reaching legislative and administrative actions. These include changes that would allow the government to negotiate drug prices, limit price increases to the rate of inflation, prohibit "pay-for-delay" agreements, expedite generic and biosimilar drug approvals, restructure cost sharing and reimbursements in Medicare, and tether Medicare payments to patient outcomes. HHS's proposed initiatives would have substantial impacts not only on drug prices, but also on innovation and antitrust policy relevant to the pharmaceutical industry.
The HHS report comes in response to President Biden's July 9, 2021 Executive Order on Promoting Competition in the American Economy, which sought to rein in drug prices and directed HHS to present a plan for doing so. In its report, HHS identifies three "guiding principles" for drug pricing reform: (1) making drug prices "more affordable and equitable," in particular through Medicare direct price negotiations with drug manufacturers and limits on price increases; (2) improving competition through market changes that promote biosimilars and generics and increase transparency; and (3) fostering innovation through research and aligning incentives to promote discovery of new treatments, not "market gaming."
To advance these principles, HHS calls for "bold legislative action" and identifies administrative steps underway or under consideration. Most of the initiatives discussed are not new. For example, without providing details or citing specific legislative proposals, HHS throws its support behind legislation to permit direct government drug price negotiations in Medicare Parts B and D and allow commercial and employer health plan access to those rates, cap price increases for Medicare based on the rate of inflation, revise the regulatory system to expedite the approval of generic and biosimilar drugs, and cap out-of-pocket spending under Medicare Part D.1 HHS also delves into competition issues by supporting legislation to address so-called "pay-for-delay" (also known as "reverse payment") patent litigation settlements, "product hopping," and "patent thickets." The contemplated and in-progress administrative initiatives discussed in the report include testing models for value-based payments in Medicare Part B, additional cost sharing support to low income subsidy beneficiaries in Medicare Part D for using generics and biosimilars, and total cost of care in various aspects of Medicare; collecting pricing, rebate, and other data from insurers and PBMs to improve price transparency; and working with states and Indian tribes to develop drug importation programs.2
As discussed in more detail below, the HHS report summarizes some of the latest Biden Administration thinking on legislative and agency policy regarding drug spending in the health care system. While HHS's stated goals are to "foster innovation, harness market forces, and improve the market environment" to reduce drug spending, much of the report takes aim at drug manufacturers, with a key focus on support for direct government price negotiations and limiting price increases—the "critical first step and the foundation for any reform" per the report—as well as eliminating certain manufacturer conduct that supposedly prevents or slows competition from less-expensive drugs.3 Manufacturers and others in the distribution and payment chain should continue to pay close attention to these developing legislative and administrative issues given their potential impact.
Legislative Proposals Aimed at Lowering Drug Prices and Increasing Competition:
The HHS report supports legislative proposals to permit the government to negotiate drug prices directly, limit drug price increases to the rate of inflation, institute caps on out-of-pocket spending under Medicare Part D, and prohibit "pay-for-delay" agreements, among others. Specifically, the report proposes:
- Direct government negotiation of drug prices. The report calls for legislation to permit HHS to negotiate drug prices in Medicare Parts B and D, with those negotiated prices being available to commercial plans (including the Marketplace) and employers who want to participate.4 Currently the law prohibits HHS from negotiating Part D drug prices, and instead leaves this task to commercial insurers that administer the program. HHS also is constrained in how it pays for Part B drugs. Direct price negotiation by Medicare has been at the center of drug price reform in Congress, and legislators have proposed competing provisions to facilitate government-led drug price negotiations, including those in H.R. 3, which the House passed and House Democrats reintroduced. Notably, the just released House budget reconciliation bill, entitled the Build Back Better Act ("BBB Act"), benchmarks Medicare price negotiations to prices in several countries and provides for excise tax penalties to ensure manufacturer cooperation. The HHS report does not endorse any specific legislation currently pending in Congress, however, and is silent on the mechanism for effective government-led drug price negotiations.5 The reports also is silent on the adverse impact on innovation expected from the proposed direct price negotiations.6
- Limiting price increases paid by Medicare to the rate of inflation. The report encourages Congress to address manufacturer price increases that exceed the rate of inflation, citing the Biden Administration's support for an excise tax to limit such behavior.7
- Allowing HHS to negotiate additional rebates for Medicaid. The report supports proposals that would authorize HHS to negotiate Medicaid supplemental rebates on behalf of states that voluntarily choose to participate in such programs, in order to achieve greater leverage in those negotiations.8
- Ban on PBM spread pricing for Medicaid. The report favorably discusses proposals to ban PBM spread pricing in Medicaid contracts, where a PBM charges health plans more for a drug than the PBM pays to the pharmacies, resulting in a profit for the PBM.9
- Redesign cost sharing under Medicare Part D. The report backs a redesign of patient cost sharing. This would include a cap on out-of-pocket costs, shift in costs to Part D plans and manufacturers, and a decrease in Medicare liability in the catastrophic phase. Per the report, these changes would better share catastrophic costs and realign health plan and manufacturer incentives to negotiate prices and promote lower cost drug choices.10
- Expediting biosimilar and generic entry and spurring their use. The report calls for legislation to speed the entry of biosimilar and generic drugs, including shortening the period of exclusivity for biologics. Such legislation could include clarifying regulatory standards and processes to incentivize the rapid submission of interchangeable products and ensure compliance with all applicable exclusivity periods.11 HHS also suggests Congress adopt payment reforms in Medicare Part B to increase the use of biosimilars, including the adoption of a single payment limit applicable to a biological drug and its biosimilar. The report further notes that Congress could "make it more difficult" for drug producers to submit baseless petitions, also known as "sham citizen petitions," to slow Food and Drug Administration ("FDA") approval of generic and biosimilar products.12
Prohibition of "pay-for-delay" agreements, "product hopping," and "patent thickets." The report favors legislation targeting manufacturer conduct that supposedly prevents or slows competition from less-expensive drugs.13 On "pay-for-delay" patent settlement agreements, HHS's position seems in line with recent proposed legislation to prohibit such agreements, including changing the law under current Supreme Court precedent by proposing to designate as "anti-competitive" any agreement between brand and generic manufacturers where the ANDA holder agrees to forgo R&D activities, manufacturing, marketing, or sales in exchange for "economic compensation."14
The report also supports changing the structure of the 180-day exclusivity period for the first generic to "reduce the ability and incentive to delay the entry of other generic firms into the marketplace."15 Such proposals include specifying that the 180-day exclusivity period does not block approval of subsequent applications and expanding the circumstances under which the first-filing generic forfeits the 180-exclusivity period.16
Although discussed in less detail, HHS flags its support for legislation limiting "product hopping" and "patent thickets." FDA raised these and other concerns in a separate letter to the U.S. Patent and Trademark Office ("USPTO") cited in the HHS report. That letter suggests further engagement between FDA and USPTO to address these issues.17
- Investment in research to foster innovation. The report notes the need for investments in research to ensure new breakthrough drugs. As part of this commitment, HHS highlights the Biden Administration proposal to create the Advanced Research Projects Agency for Health ("ARPA-H"). ARPA-H would be tasked "with building high-risk, high-reward capabilities to drive biomedical breakthroughs, providing transformative solutions to patients," with an initial focus on cancer research and research related to other diseases, such as diabetes and Alzheimer's disease.18
Administrative Proposals to Reduce the Cost of Drugs and Improve Transparency
The report's administrative proposals seek to reduce the cost of drugs by testing different Medicare payment models and working with states and Indian tribes to establish effective drug importation programs. The report also identifies efforts to improve transparency linked to prices, rebates, and out-of-pocket spending in connection with prescription drugs. The listed proposals include:
- Models using value-based payments. The Centers for Medicare & Medicaid Services ("CMS") Innovation Center can consider payment models that link Medicare Part B payments for prescription drugs and biologics to the clinical value they provide to patients, such as improved patient outcomes, reductions in health disparities, patient affordability, and lower overall costs.19
- Cost-sharing to support use of biosimilars and generics. The CMS Innovation Center is considering payment models that provide additional cost-sharing support to Medicare Part D Low-Income Subsidy Beneficiaries for using biosimilars and generics. HHS notes that such models have the potential to increase the use and affordability of biosimilars and generics.20
- Total cost of care models. The CMS Innovation Center is considering models to test total cost of care in Medicare Parts B and D to determine whether such models produce changes in drug utilization, reductions in total spending, and improvements in patient outcomes.21
- Improve transparency related to drug prices. The report notes that CMS will use two data streams from insurers and PBMs to improve transparency tied to prices, rebates, and out-of-pocket spending in connection with prescription drugs. These data streams will be available to CMS pursuant to the 2020 COVID-19 Relief Package, which requires health plans to report certain information concerning their highest-spend drugs and the impact manufacturer rebates have on premiums, and implementation of the Affordable Care Act provisions that require Marketplace plans (or their PBMs) to provide certain drug, rebate, and spread pricing information.22
- Promote transparency and efficiency for generic and biosimilar approvals. The report supports the continued implementation of the FDA's Biosimilars Action Plan as well as the Drug Competition Action Plan. These efforts hope to clarify the approval framework for generic and biosimilar drugs and make the process more transparent and efficient.23 HHS further notes that FDA will continue to work with the Federal Trade Commission to address efforts to impede biosimilar or generic competition, including "false, misleading, or otherwise deceptive statements about the safety or effectiveness of generic drug and biosimilar products."24
- Drug importation. The report summarizes FDA's efforts to work with states and Indian tribes to develop drug importation programs under Section 804 of the Food, Drug, and Cosmetic Act. Congress established this statutory pathway for the FDA to allow the importation of certain prescription drugs from Canada to reduce the cost of these drugs without imposing additional risks on public health and safety.25
Implications and Insights
The HHS report reflects some of the latest thinking on drug pricing from the Biden Administration and serves as a strong reminder of the wide-ranging changes under consideration. Most notable are the legislative proposals directly affecting manufacturer pricing (drug price negotiation in Medicare, access to those prices outside of Medicare, and limits on price increases), which the report bills as the "critical first step and foundation for any reform." Such changes, if passed, seriously risks reducing investment in drug discovery and approval and thus a reduction in innovation. Further, any such legislation will present a number of challenges for drug manufacturers, who will have to evaluate and implement pricing and take steps to manage compliance and minimize risk, depending on the details and implementation timelines in any final legislation.
The broader array of proposals in the HHS report similarly present many implementation and compliance issues for drug manufacturers. For example, any one of the legislative proposals directed at marketplace conduct, such as "pay for delay," "product hopping," and "patent thickets," could have a significant impact on antitrust compliance or patent enforcement. Collectively, the bills could trigger substantial changes and uncertainty for the industry, especially with respect to patent settlements and new product introductions. These changes would be on top of recent state-level activity on drug pricing, which already has increased the compliance burdens and challenges facing drug manufacturers, as well as others in the drug supply distribution and payment chain.26
White & Case's Global Competition/Antitrust Group and the White & Case Pharmaceuticals & Healthcare Industry Group are tracking these developments in competition and drug policy closely, with a specific focus on potential investigations and litigation.
1 Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services, Comprehensive Plan for Addressing High Drug Prices: A Report in Response to the Executive Order on Competition in the American Economy 12-16 (2021).
2 Id. at 16-23.
3 Id. at 14.
4 Id. at 12-13.
5 The report references a white paper on principles for drug pricing reform authored by Senator Ron Wyden (D-OR), Chairman of the Senate Finance Committee. Although that white paper lays out several proposals, which include permitting Medicare to negotiate drug prices with pharmaceutical companies, restructuring Medicare Part D benefits, and requiring rebates on drug price increases above the rate of inflation, it does not provide benchmarks or guidance on what a "fair" price should be in any negotiation. United States Senate Committee on Finance, Chairman Ron Wyden, Principles for Drug Pricing Reform (2021).
6 For example, CBO's recently recalibrated analysis estimates H.R. 3 would result in the loss of 59 new drugs over the next three decades. Other evaluations suggest a much larger effect on innovation. See, e.g., Kirsten Axelsen and Raijini Jayasuriya, Government Scorekeepers Likely Underestimate the Impact of Lower Drug Costs Now Act (H.R.3) on Investment in Innovative Medicines: Brief (April 2021).
7 Office of the Assistant Secretary for Planning and Evaluation, supra note 1, at 8 and14.
8 Id. at 13.
9 Id. at 13-14.
10 Id. at 13-14.
11 Id. at 14.
12 Id. at 16.
13 Id. at 15.
14 See Michael Gallagher et al., Federal Lawmakers Turn Their Sights to Drug Pricing, Introducing a Package of Bills Seeking Changes to Antitrust and Patent Law, White & Case (May 25, 2021).
15 Office of the Assistant Secretary for Planning and Evaluation, supra note 1, at 15.
17 Id. at 23.
18 Id. at 12.
19 Id. at 17.
21 Id. at 18.
22 Id. at 18-19.
23 See Consolidated Appropriations Act, 2021, H.R. 133, 116th Cong. div. BB § 204 (2020) (enacted).
24 Office of the Assistant Secretary for Planning and Evaluation, supra note 1, at 19-20.
25 Id. at 21.
26 Michael Gallagher and Kevin C. Adam, States Remain the Drivers of New Drug Pricing Legislation As Washington Weighs In, White & Case (Aug. 23, 2021).
Constantin Nuernberger (Law Clerk, White & Case, New York) co-authored this publication.