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Medicare Issues Interim Final Rule to Lower Payments to Hospitals and Physicians for Certain Drugs Starting January 1, 2021

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On November 20, 2020, the Centers for Medicare and Medicaid Services (CMS) issued an interim final rule with comment period (IFC) to implement a payment model that will significantly reduce Medicare reimbursement rates for high-cost drugs to most hospitals and physician offices beginning January 1, 2021. The Most Favored Nation (MFN) Model will phase-in payment rates for 50 high-cost drugs based on international prices over a seven-year period. CMS published the IFC in the Federal Register on November 27, 2020.

Estimates of the impact to reimbursement rates under the MFN Model vary widely, but payment rates to providers could decline significantly. Although CMS intends for manufacturers to lower drug prices in response to the Model, CMS acknowledges that reimbursement rates may not cover drug acquisition costs, requiring providers to negotiate lower prices with manufacturers. Providers could be left without access to drugs, if they are unable to lower prices, causing beneficiaries to seek care elsewhere or forego care.

It is not clear whether CMS will move forward with the MFN Model under the administration of President-Elect Biden, and it is anticipated that drug manufacturers could file lawsuits to stop the Model from going into effect.

MFN Model Background

The MFN Model will test changes in Medicare reimbursement rates as a demonstration project using CMS's authority under section 1115A of the Social Security Act, which allows the Centers for Medicare and Medicaid Services Innovation Center (CMMI) to test Medicare payment changes to reduce spending while preserving or enhancing the quality of care for Medicare beneficiaries. The MFN Model will begin January 1, 2021, continuing for seven years, and will test payment changes for approximately 50 Part B drugs that account for a high percentage of Medicare Part B drug spending. Medicare will tie reimbursement rates for selected drugs to international drug prices, which for most participants will result in significantly reduced payment rates. The MFN Model will not require manufacturers to reduce drug prices, but the hope is that manufacturers would respond by reducing prices to model participants.

Although implemented as a demonstration project, the scope of the MFN Model will be enormous, requiring most hospitals and physician offices in the country to participate. Participants will include providers and suppliers in all states and territories that receive separate fee-for-service (FFS) payments under Medicare Part B for drugs included in the model, including hospitals, ambulatory surgical centers and physician offices. Entities excluded from the Model will include children's hospitals, PPS-exempt cancer hospitals, critical access hospitals, Indian Health Service (HIS) facilities, rural health clinics and federally qualified health centers, among others. Also excluded from the Model will be acute care hospitals that are paid on a fully capitated or global budget basis under CMS Innovation Center waivers, including hospitals paid under the Maryland Total Cost of Care Model, provided that CMS adjusts existing waivers to incorporate savings under the MFN Model.

The IFC to implement the MFN Model is one of several long-awaited regulations the Trump Administration is promulgating before the end of the administration in January to carry out a key priority of addressing high drug prices. The publication of the IFC, which went into effect on November 27, 2020, follows prior steps taken by the Trump Administration to test changes to Medicare payments based on international prices. In October 2018, CMS issued an advance notice of proposed rulemaking (ANPRM) to solicit input on a potential International Pricing Index (IPI) Model that would tie Medicare reimbursement rates for drugs administered by hospitals and physician offices to international drug prices. After receiving comments on the ANPRM, CMS did not issue a proposed rule to implement the IPI Model and has now moved forward with issuing the IFC.

The MFN Model differs from the IPI Model in several ways. First, the IPI Model would have tested payment changes for providers in geographic areas accounting for half of Medicare Part B drug spending, whereas the MFN Model will test payment changes for providers in all parts of the country. Second, the IPI Model would have relied on vendors to negotiate drug prices with manufacturers, purchase drugs and bill Medicare. Providers would not have purchased drugs and would only have received Medicare payments to cover administration costs. The MFN Model retains the ability of providers to buy and bill for drugs and will require providers to negotiate discounted drug prices directly with manufacturers, with no role for vendors to negotiate prices.

Medicare Payment Rates Under the Model

Medicare currently pays hospitals and physician offices for separately paid drugs at the average sales price (ASP) + 6 percent, with an exception for drugs purchased by most hospitals under the 340B drug pricing program, for which Medicare pays at ASP – 22.5 percent. Under the MFN Model, Medicare will pay participants for selected drugs an alternative drug payment amount – the MFN Price – plus a flat add-on payment amount. The MFN Price will be based on the lowest GDP-adjusted price of non-U.S. countries that are members of the Organization for Economic Co-operation and Development (OECD) and have a GDP per capita of at least 60 percent of the U.S. GDP per capita.

CMS will phase in the MFN Price over the first four years of the model, blending it with ASP data. In the first year, the MFN Price will be based on 75 percent of a drug's ASP and 25 percent of the MFN Price, with the share based on the MFN Price increasing by 25 percent until 100 percent of payment is based on the MFN by the fourth year. CMS will accelerate the phase-in if U.S. drug prices increase faster than inflation and the MFN Price. CMS will not allow MFN Prices to exceed a drug's ASP. In addition, Medicare will pay for drugs billed by hospitals that were acquired through the 340B program at the lower of the MFN Price or the payment amount outside the model (currently ASP – 22.5 percent).

The MFN Model will also test changes to the add-on payment issued to providers to cover overhead and other associated costs. Non-340B providers currently receive an add-on payment of 6 percent of ASP (before the impact of sequestration). 340B hospitals do not currently receive an add-on payment. Under the MFN Model, Medicare will pay participants a flat-fee add-on payment per dose starting at $148.73, to be increased each calendar quarter based on an inflationary adjustment. CMS calculated the add-on amount based on 6.1224 percent of selected drugs' ASPs for 2019, intended to allow participants to receive, on average, a 6 percent add-on per dose after sequestration.

Impact on Payment to Providers

Without considering how manufacturers will respond to the Model, CMS estimates that the MFN Price would be 16 percent off ASP in the first year of the Model, increasing to a 65 percent reduction in the seventh year. Because payment to non-340B providers is currently set at 100 percent of ASP (not including the add-on payment), the Model would result in payment cuts to providers ranging from 16 percent to 65 percent. However, the financial impact estimates included in the IFC assume that manufacturers will increase their international prices in response to the Model, which would dampen the impact on the MFN Price. The CMS Office of the Actuary (OACT) estimates that the MFN price will reduce Medicare reimbursement by 16 percent from current levels in the first year and then by 25 percent throughout the rest of the Model to ASP – 25 percent. The HHS Office of the Assistant Secretary for Planning and Evaluation (ASPE) makes different assumptions and estimates the Model will result in an 11.4 percent reduction in the first year, increasing to a 20.5 percent reduction by the fourth year and then falling to a 16.5 percent reduction by the end of the model.

CMS estimates the impact on 340B hospitals and non-340B providers differently, given that CMS currently pays most 340B hospitals a lower rate than non-340B providers. CMS does not expect 340B hospitals that are currently paid at reduced rates to face a payment reduction initially, as they are already paid less than the expected MPN Price in the first year. Under the OACT analysis, 340B hospitals currently paid at ASP – 22.5 percent would face a 3 percent reduction in current payment rates beginning in the second year and continuing throughout the Model. Under the ASPE Analysis, 340B hospitals would not face a payment reduction.

Impact on Provider and Beneficiary Drug Access

CMS acknowledges there is significant uncertainty in how drug manufacturers will respond to the MFN Model but recognizes that providers and beneficiaries may face challenges accessing drugs as a result. In light of the reduced reimbursement rates, CMS will expect providers to directly negotiate with manufacturers to obtain reduced drug prices. If manufacturers do not lower their prices, reimbursement may not cover drug acquisition costs, leaving providers unable to access drugs without taking a loss. If providers are not able to make purchases, beneficiaries may lose access to drugs. OACT estimates that, beginning in 2023, about 19 percent of beneficiaries will not have access to the selected drugs through Medicare. OACT estimates the Model will save Medicare $85.5 billion, but CMS indicates that "a portion of the savings is attributable to beneficiaries not accessing their drugs through the Medicare benefit, along with the associated lost utilization."

Both OACT and ASPE assume that non-340B providers will face greater challenges accessing drugs, as Medicare payments under the Model will be less than current drug prices for non-340B providers starting in the first year of the Model. OACT assumes that 340B hospitals will continue to access drugs, as 340B hospitals will face a smaller decline in reimbursement and the reduction will not begin until the second year of the Model. However, the Model may also create a need for 340B hospitals to negotiate deeper discounts with manufacturers to ensure that payment rates cover their acquisition costs.

CMS is including a financial hardship exception for participants that are "significantly affected" by the Model. To qualify, a participant must show that its Medicare revenues declined from the prior year by an amount that exceeds 25 percent of the participant's total Part A and Part B FFS allowed charges on a per-beneficiary basis for the prior year. CMS suggests that it may be more difficult for hospitals to meet this threshold, given that they have significant Part A revenues.

Implementation of Model and Next Steps

The Model is scheduled to begin January 1, 2021, giving providers little time to prepare for reduced reimbursement rates and a potential need to negotiate discounts with manufacturers. There is considerable uncertainty as to whether implementation of the Model will continue under the incoming Biden Administration, which will closely scrutinize this and other recently published regulations and consider its options. President-Elect Biden has expressed interest in addressing high drug prices, and the MFN Model could provide an opportunity to keep attention on the issue. On the other hand, new administrations of a different political party than the prior administration often take steps to prevent or reverse implementation of regulations issued by the prior administration. The ability to postpone the IFC may be limited, given that the Model will have already gone into effect before the new administration begins. However, questions about the appropriateness of bypassing the proposed rule phase could provide alternative options.

It is expected that drug manufacturers could challenge the legality of the IFC to stop implementation before January 1. There are questions as to whether CMMI has the authority to test payment changes that affect providers across the entire country, not just in certain geographic areas. There are also questions as to whether CMS can implement the Model through an IFC without having first published a proposed rule and soliciting feedback. Under the Administrative Procedure Act (APA), agencies may be exempt from the normal rulemaking process if the agency finds "for good cause" that going through the traditional notice and comment process would be "impracticable, unnecessary, or contrary to the public interest." CMS points to the economic consequences of high drug prices for beneficiaries and the impact of the COVID-19 pandemic as evidence of "good cause" to support the issuance of an IFC.

Although the IFC is effective upon publication in the Federal Register, CMS is soliciting comments, due January 26, 2021. Baker Donelson policy advisors and attorneys are available to assist with the drafting of comments.

If you have questions regarding the content of this alert, please contact Jeff Davis or any member of Baker Donelson's Health Law Group.

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