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Medicare Plans Could Gain Drug Pricing Leverage Under CMS Proposal

By Steven Porter  
   November 26, 2018

With a nod to commercial payers, the Trump administration proposed giving Medicare Part D plans greater flexibility to exclude certain 'protected class' drugs from their formularies.

For the sake of fostering competition among drug makers, the Centers for Medicare & Medicaid Services proposed Monday to give Medicare Part D plans greater leeway to decline to cover certain protected-class drugs beginning in 2020.

These plans have been required to cover all protected-class drugs, with few exceptions, giving them a weaker hand than their commercial counterparts in negotiations with drug manufacturers, and that has deprived seniors of the cost-reducing benefits of robust competition, according to the Trump administration.

In a blog post published with the proposal, Health and Human Services Secretary Alex Azar and CMS Administrator Seema Verma said the number of drugs listed in protected classes has increased 63% since the policy was established 12 years ago, with several protected-class drugs imposing big price hikes in recent years. The transitional policy "was never intended to be permanent," they wrote.

This uneven leverage is why the private market enjoys drug discounts of 20-30% while Part D plans get a 6% average discount for protected-class drugs, Azar and Verma wrote.

"The protected class policy is in need of an update to ensure that beneficiaries who depend on these drugs are getting the same discounts that other beneficiaries get," they wrote.

Under the proposal—which will be up for public comments for the next two months—plans would be required to keep a minimum of two drugs in their formularies for each of the six protected classes. Beyond that, they would have permission to restrict drugs in three new scenarios:

  1. Inflation-based price hike exclusion: Plans would be allowed to exclude protected-class drugs when the drug's price increases faster than the rate of inflation, based on the Consumer Price Index for all urban consumers, according to the CMS proposal. The agency acknowledged some concern that using CPI as a baseline could "just measure the existing increase in drug prices," undermining the purpose of the proposed exception, so the proposal seeks feedback on how best to measure an exclusion triggered by price hikes.
  2. Inadequate innovation exclusion: Plans would be allowed to exclude new protected-class drug formulations "that are not a significant innovation over the original product," Azar and Verma wrote in their blog post. The proposal notes that plans would be allowed to exclude a new formulation of an older drug, even if the older version is no longer on the market.
  3. Prior-authorization and step-therapy restrictions: Plans would be allowed to impose prior-authorization and step-therapy requirements on protected-class drugs, but such requirements would be subject to CMS review and approval on an annual basis. "Some say that allowing step therapy and prior authorization would restrict access to prescription drugs," Azar and Verma wrote. "However, these changes protect patient access, as the Part D program is embedded with strong patient protections." Those protections include an expedited appeals process through which physicians can recommend an exception.

Craig Garthwaite, PhD, MPP, a health economist at Northwestern University's Kellogg School of Management, said a proposal of this sort would rebalance the negotiating relationship between Part D plans and drug makers.

"This is what 'Medicare' negotiating looks like," Garthwaite wrote in a tweet. "Protected classes in Part D shift bargaining power to pharma firms. This is a type of proposal that shifts it back to insurers and PBMs. The result, however, is seniors won't be able to easily access all drugs. Tradeoffs abound."

Promoting Price Transparency

In addition to provisions designed to boost competition by empowering plans to negotiate, the proposal contains items designed to increase price transparency, again drawing inspiration from tools available in the commercial market. The proposal calls for each plan to adopt a solution that offers real-time price data to its beneficiaries by January 1, 2020.

Furthermore, the agency is thinking about a possible future proposal to require pharmacies to charge Part D beneficiaries a price that reflects the lowest-possible cost for their drugs, accounting for the deals struck between pharmacies and drug manufacturers.

Steven Porter is an associate content manager and Strategy editor for HealthLeaders, a Simplify Compliance brand.


Health plans would be required to cover at least two drugs per protected class. But they would gain new latitude to exclude additional drugs.

One of the proposed exceptions would allow plans to exclude drugs based on price hikes that exceed inflation.

The idea is to tamp down costs by giving plans a stronger arm in their negotiations with drug makers.

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