The Pulse on Policy: Executive Order, December 2020

Authored by Nisha Desai, MPH, Account Director, Cyan Health

It’s a big day in Medicare.

On November 20, HHS and the Trump Administration finalized two contentious rulings impacting Medicare Parts B and D. Both of these rulings come after a flurry of executive orders focused on combating rising drug costs in the US. Now, let’s take a closer look…

Most Favored Nation Model (MFN)

Starting January 1, 2021, Medicare FFS will be implementing a new payment model—known as the Most Favored Nation (MFN) Model—to address the disparity between drug costs in the U.S. and other comparable countries. The fundamental concept behind this model is: Medicare should pay no more than the lowest price charged in other similar countries for high cost, physician-administered drugs. Of course, that is not currently the case. In fact, Medicare FFS pays at least twice as much as comparable OECD countries for top-selling prescription drugs in Part B.1    

When will this rule be effective? The MFN Model will be tested in all states and U.S. territories by the CMS Innovation Center for 7 performance years, from January 1, 2021 to December 30, 2027.  At the completion of year 4, CMS has stated that they will assess the impact of the model on quality of care and access to drugs.1

How does the model work? The MFN model payment will be comprised of two components: 1) a drug payment based on a price that reflects the lowest per capita GDP-adjusted price of any non-U.S. member country of the OECD that has a GDP per capita which is at least 60% of the U.S. GDP per capita and 2) a flat add-on amount per dose that will be the same for all model drugs. The first component of this model will be phased in over the first three years, using a blended rate between ASP and the MFN price. Here is the break-down of the blended rate1:

Performance YearBlend of ASP and MFN Price for an MFN Model Drug
Year 175% applicable ASP and 25% MFN price
Year 250% applicable ASP and 50% MFN price
Year 325% applicable ASP and 75% MFN price
Year 4100% MFN price
Year 5100% MFN price
Year 6100% MFN price
Year 7100% MFN price

What are examples of OECD countries? OECD countries include, but are not limited to Australia, Austria, Belgium, Canada, France, Italy, Spain, Switzerland, and the UK. The full list of countries, along with their GDP adjuster rate (a metric within the MFN Payment calculation), can be found on page 81 of the final rule published by CMS.1 (https://innovation.cms.gov/media/document/mfn-ifc-rule)

How is payment for Part B products currently established? In most cases, payments are based on ASP plus approximately 4% (originally 6% but lowered due to sequestration impact).3* ASP is calculated using the prices that manufacturers charge to certain U.S.-based purchasers. As a result, Medicare doesn’t benefit from discounts provided in other countries.1,2

Which drugs will be included? The drugs included in this payment model are those that make up the highest Medicare Part B spending. The top 50 Medicare Part B drugs, which account for about 73% of Part B drug spending, will be included. These drugs span a variety of specialties including, but not limited to neurology, rheumatology, oncology, and ophthalmology. The full list of drugs can be found on page 50 of the rule published by CMS: https://innovation.cms.gov/media/document/mfn-ifc-rule.  CMS will add drugs to this list on a yearly basis based on fluctuations in spending, but will not remove any drugs in the initial top 50.1

What type of cost savings are anticipated? The CMS Office of the Actuary (OACT) estimates savings of roughly $85.5 billion, net of the associated change in the Part B premium and spending in the seven-year period.2  It is important to note that the OACT also estimates that all beneficiaries will save a total of $28.5 billion from a reduction in the Medicare Part B premium as a result of the MFN Model in the seven-year period.1

Eliminating Rebates in Medicare Part D

The second rule—applicable to Medicare Part D—focuses on addressing rising drug list prices in the U.S. by requiring that rebates on prescription drugs benefit the patient at the point-of-sale rather than PBM/plan sponsors.4

What will this rule change? The rule removes the current safe harbor protection on price reductions that occur with the sale or purchase of Part D drugs from manufacturers to plan sponsors under Part D—whether it occurs directly or through a PBM. In its place, a new safe harbor will be established that provides protection from anti-kickback laws for upfront discounts if following criteria are met:4

In addition, a second safe harbor is also proposed which would focus on protecting fees paid by manufacturers to PBMs. The full rule can be found here: https://www.hhs.gov/sites/default/files/rebate-rule-discount-and-pbm-service-fee-final-rule.pdf.4

When will it be effective? The rule is targeted for implementation beginning January 1, 2022; however, delays are possible due to expected legal challenges.4

Drug pricing has historically been an issue with bipartisan support—instilling more confidence that both of these rulings could continue despite a change in administration.

*Drug reimbursement is subject to sequestration, which reduces the portion of the payment paid by Medicare by 2%. As a result, the payment rate is effectively ASP + 4.3%.3

Sources: 1. Centers for Medicare and Medicaid Services. https://innovation.cms.gov/media/document/mfn-ifc-rule. Published November 20,2020. 2. ASPE. https://aspe.hhs.gov/system/files/pdf/264421/Part-B%20Drugs-International-Issue-Brief.pdf. Published November 20, 2020. 3. Health Affairs. https://www.healthaffairs.org/do/10.1377/hpb20171008.000171/full/. Published August 10, 2017. 4. Department of Health and Human Services. https://www.hhs.gov/sites/default/files/rebate-rule-discount-and-pbm-service-fee-final-rule.pdf/. Published November 20, 2020.