• Sustainability
  • DE&I
  • Pandemic
  • Finance
  • Legal
  • Technology
  • Regulatory
  • Global
  • Pricing
  • Strategy
  • R&D/Clinical Trials
  • Opinion
  • Executive Roundtable
  • Sales & Marketing
  • Executive Profiles
  • Leadership
  • Market Access
  • Patient Engagement
  • Supply Chain
  • Industry Trends

A Pricing Revolution: The Federal Offensive


Efforts to address prescription drug pricing have expanded. Rick Kelly reports.

In the first of two articles (based on the white paper, The Pricing Revolution: Pharma is bracing for the future) summarizing the broad range of government efforts to control drug pricing, Rick Kelly focuses on federal government efforts and their potential impact on pharma.

Challenges to drug pricing are now coming from all angles of the federal government. The Centers for Medicare & Medicaid (CMS), the President, and Congress have all proposed significant changes to policies and/or laws that could have revolutionary implications for pharmaceutical manufacturers. This article summarizes all of the federal government actions and proposals and their potential impact on pharma.

Federal policy changes

CMS has continued to implement and propose Medicare and Medicaid policy changes that can affect prescription drug prices, primarily by increasing payers’ negotiating power.

Implemented policy changes

While the changes to Medicare policies in the last year are not groundbreaking, CMS continues to refine policy to maintain pressure on drug pricing. The most significant change was a large increase in the Part D cost share that manufacturers are responsible for in 2020. On average, the annual increase for a Part D drug is $873, which is due to an increase in the threshold for transition from the donut hole to catastrophic coverage of $1,250, from $5,100 to $6,350.

Recently implemented Medicaid changes also have had minimal effect on drug prices:

  • Changes to Medical Loss Ratio (MLR) calculations – exclusion from MLR calculations of any amount retained by a PBM under spread pricing* and exclusion of all rebates and discounts, regardless of who pays them
  • Uniform requirements for drug utilization – increased use of consistent formulary choices across pharmacy programs for both Prescription Drug Lists (PDLs) and clinical protocols
  • Disclosure of drug product information for outpatient drugs – requirement that manufacturers disclose correct category classification for drugs with Medicaid rebate agreements or face penalties

Impact on pharma

The increase in a manufacturer’s share of Medicare Part D costs has the net effect of lowering Medicare costs and manufacturer’s revenue, making it a less profitable channel. To optimize brand value, pricing and contracting strategies will need to be evaluated across all channels.

Efforts to minimize spread pricing in Medicaid are designed to ensure that current lower net prices are delivered to patients, which could increase patient demand for lower-priced drugs.

An increased use of uniform PDLs would reduce potential opportunities for pharma to engage and keep/get ideal formulary placement. This is because all management would be handled by one entity (the state) which would increase the state’s bargaining power. Faced with this reality, manufacturers will have to evaluate and potentially change contracting strategies to maintain formulary status.

Proposed policy changes

There are a number of important Medicare proposals for 2021 and 2022 which, if approved and implemented, could affect many manufacturers. The most important proposals would:

  1. Allow Medicare beneficiaries with end-stage renal disease (ESRD) to enroll in Medicare Advantage (MA) plans to increase drug management of ESRD drugs (2021)
  2. Increase the use of generics and biosimilars in MA by including substitution and utilization rates in Star Ratings (2021)
  3. Improve Part D members’ access to specialty drugs with a second preferred specialty tier (2021)
  4. Implement a Real-Time Benefit Tool (RTBT) in Part D to increase transparency of formulary options and copays and encourage increased use of less expensive drugs (2022)

The most important of the proposed changes to Medicaid would address rules that have made it difficult for manufacturers to engage in value-based purchasing (VBP) with Medicaid and other payers. The proposals would allow manufacturers to:

  1. Report multiple “best prices” if the prices are tied to a VBP
  2. Revise average manufacturer price and best price beyond the current 3-year time limit to address changes due to the VBP results

Impact on pharma

The proposed Medicare changes are mostly aimed at specialty drugs, so they would affect the increasing number of manufacturers with those drugs in their portfolio. An increase in the use of biosimilars and tiering options would enhance the negotiating powers of Medicare plans resulting in a need for manufacturers to add to rebates or discounts. To manage revenue, manufacturers will need to reevaluate contracting strategies and negotiation objectives. Changes that make VBP agreements with Medicaid plans feasible may be welcomed by a select group of sophisticated manufacturers who have the ability and willingness to implement value-based agreements. However, since these agreements are complicated, involve a different level of risk, and require the infrastructure for successful implementation, the true impact of these changes would vary from company to company depending on their involvement.

Executive orders

In July and September 2020, President Trump issued a series of four executive orders aimed at reducing drug prices. The four executive orders propose the following:

  1. Increasing access to affordable insulin and other lifesaving medications. This would require the 1,000 Federally Qualified Health Centers (FQHC) to pass on 340b-level prices on insulins and epinephrine to more patients
  2. Lowering prices by eliminating drug rebates. This would end rebates to Medicare Part D plans and PBMs and encourage shifting of discounts to beneficiaries at the point of sale. Interestingly, the order includes a requirement that it would only be implemented if there is a confirmation that the proposed action would not increase federal spending
  3. Increasing drug importation into the United States from other countries. This would allow states to develop safe importation plans for certain prescription drugs, authorize the reimportation of insulin products for emergency medical care, and establish a process for safe personal importation from preauthorized pharmacies
  4. Tying Medicare drug prices to those of other developed countries. This would require Medicare to buy certain Part B and Part D drugs at the lowest price at which the manufacturer sells them to any other developed nation. Regulations will need to be developed and implemented, which could take months

Impact on pharma

While the number of FQHCs is relatively small, this order, if implemented, could open the door for states or the federal government to push for more drugs to be added to the program and made available at FQHCs.

Eliminating rebates as a means of competition within Medicare would make discounts the primary pricing tactic. However, drug companies are not required to convert their rebates to price discounts and will likely only convert a portion. This might cause an increase in drug prices to consumers.

If importation rules were to apply to any drug, regardless of its original source, manufacturers would need to reassess their global pricing strategies to maximize revenue. In spite of those efforts, the importation of lower-priced drugs would result in negative pressure on revenue and profit.

If the use of reference prices from other countries was applied to a broad portfolio of drugs, pharma companies would need to adjust their entire pricing model. One approach could be balancing US and ex-US prices in a way that maximizes profit.

Federal legislation

With drug prices a significant concern of the American public, a number of Senators and members of the House have introduced legislation with a wide range of potential effects on drug prices.

Three bills were introduced into Congress in the last year that address the approval of generics or biosimilars.

  1. The Hatch-Waxman Integrity Act of 2019 would support brand-name manufacturers by preventing new drug or biosimilar applicants from challenging a drug patent using the Patent Trial and Appeal Board, which has a lower standard of review and looser procedural rules than traditional federal court proceedings
  2. The Blocking Act would increase the number of generics on the market by preventing a generic drug manufacturer with the first approved generic from delaying the start of their 180-day exclusivity period – a strategy often used to delay the entry of a second generic
  3. The Creates Act would allow a biosimilar or generic manufacturer to sue a brand-name drug company that refuses to make samples of a product available for testing

Two similar federal legislations with comprehensive changes to Medicare, and some to Medicaid, have been introduced in the last year—one in the Senate and one in the House. The Senate bill, titled, “The Prescription Drug Pricing Reduction Act of 2020,” is Republican-sponsored and the House bill, titled, the “Elijah E. Cummings Lower Drug Costs Now Act,” is Democrat-sponsored. Both bills include common measures that would:

  1. Require drug manufacturers to issue rebates to CMS for certain drugs covered under Medicare if the average manufacturer price increases faster than inflation
  2. Reduce the annual out-of-pocket spending threshold and eliminating beneficiary cost-sharing above this threshold

In addition to the measures the bills have in common, the Democrat bill would:

  1. Require HHS to negotiate prices for certain drugs
  2. Require that prescription drug plans allow certain beneficiaries to make coinsurance payments in periodic installments, in accordance with CMS requirements
  3. Expand eligibility for certain premium and cost-sharing subsidies for low-income beneficiaries under the Medicare prescription drug benefit

In addition to the measures the bills have in common, the Republican bill would:

  1. Address the cost of wastage by requiring drug manufacturers to issue rebates to CMS, based on information from providers regarding discarded amounts of single-dose drugs covered by Medicare
  2. Increase the maximum rebate that is payable by drug manufacturers under the Medicaid Drug Rebate Program

Impact on pharma

If passed, these pieces of legislation would produce dramatic changes within the drug market. The federal government would have greater leverage to negotiate lower prices (or higher rebates), significantly reducing manufacturers’ revenue.


Taken together, these actions and proposals constitute a pricing revolution that threatens to significantly undermine pharma’s profitability. And these actions don’t even include parallel efforts at the state level. (We will address those in our next article.) Of course, conventional wisdom asserts that every threat is an opportunity. If pharma is going to develop proactive strategies to address these potential challenges – and maximize opportunities within the evolving environment – the time is now.

Bottom line: With the pricing revolution in full force, the moment has come to brace for impact.

Rick Kelly, RPH, MHA, Cyan Health.

Click here for a copy of the white paper, “The Pricing Revolution: Pharma is bracing for the future.”

*Spread pricing is a tactic employed by PBMs whereby they use the higher, pre-discount price as a basis for the cost charged to pharmacies, allowing the PBMs to keep the discounts provided by health plans.

Related Videos
Related Content