United States: Medicare And Medicaid Drug Policy Provisions In The Obama Administration's Proposed FY 2017 Budget

Last Updated: February 12 2016
Article by Debra A. McCurdy

The Obama Administration's proposed fiscal year (FY) 2017 budget, released on February 9, 2016, includes a number of legislative proposals that would revise Medicare and Medicaid policies to achieve budget savings and make other program reforms. The largest pool of Medicare savings would result from various Medicare prescription drug proposals, including the following (all savings over the 10-year period of FYs 2017-2026):

  • Provide Medicaid-level drug rebates for brand name and generic drugs provided to Medicare beneficiaries who receive Part D low-income subsidies, beginning in 2018 ($121.3 billion);
  • Accelerate manufacturer Medicare Part D "coverage gap" discounts from 50% to 75% beginning in plan year 2018 ($10.2 billion).
  • Reduce payment for physician-administered Medicare Part B drugs from 106% to 103% of average sales price (ASP) starting in 2017. If a physician's cost for purchasing the drug exceeds 103% of ASP, the drug manufacturer would be required to provide a rebate to ensure that the provider's net cost to acquire the drug equals 103% of ASP minus an overhead fee to be determined by the Secretary. The Secretary would be authorized to pay a portion of the entire amount above ASP as a flat fee rather than a percentage in a budget-neutral manner ($7.8 billion).
  • Extend Medicare Secondary Payer reporting requirements to group health plans offering prescription drug coverage ($480 million).
  • Authorize the Secretary to negotiate Part D prices for high-cost drugs and biologics with manufacturers. The final price would be indexed to the Consumer Price Index, and plan sponsors would be permitted to negotiate additional discounts off this price (no budget impact).
  • Authorize CMS to reimburse Part D plans based on their quality star ratings. Specifically, plans with quality ratings of four stars or higher would have a larger portion of their bid subsidized by Medicare, while plans with lower ratings would receive a smaller subsidy. The change, which would be implemented on a budget-neutral basis, would not impact risk corridor payments, reinsurance, low-income subsidies, or other Part D payments (no budget impact).
  • Allow CMS to contract with pharmaceutical manufacturers on a quarterly, rather than an annual, basis for the Part D coverage gap discount program, such that the agreement will be deemed in effect for a given quarter if entered into by the first day of the preceding quarter (no budget impact).
  • Authorize the Secretary to require Medicare beneficiaries identified as having a high-risk of overutilization based upon drug utilization reviews to use certain prescribers and/or pharmacies to obtain controlled substance prescriptions under Part D (no budget impact).
  • Revise Part D subsidy formulas for drugs covered in the catastrophic phase of the Part D benefit to increase the portion of costs for which Part D sponsors are at risk from 15% to 75%, over a six year period (no budget impact).
  • Create a "coverage with evidence development" process under Medicare Part D for certain identified high-cost drugs, to require manufacturers to undertake additional clinical trials and data collection to support use in the Medicare population and for any relevant subpopulations identified by CMS. Part D plans will be able to use this evidence to improve clinical treatment guidelines and in negotiations with manufacturers, to help ensure that the coverage and use of new high-cost drugs are based on evidence of effectiveness for specific populations (no budget impact).
  • Increase the availability of generic drugs and biologics by authorizing the Federal Trade Commission (FTC) to stop companies from entering into "pay for delay" agreements ($12.3 billion and $1.4 billion in Medicaid savings).
  • Reduce the length of exclusivity on brand name biologics from 12 years to 7 years, and prohibit additional years of exclusivity due to minor formulation changes. Additionally, Part B reimbursement for innovator and biosimilar products would be based upon the weighted average sales price of the reference biological product and all of its biosimilars ($6.9 billion and $130 million in Medicaid savings).
  • Direct the HHS Secretary to issue regulations to require drug manufacturers to publicly disclose production costs, including research and development investments, and discounts to various payers, for specific high-cost drugs identified by the Secretary (no budget impact).
  • Encourage the use of generic drugs by Part D low-income subsidy beneficiaries by lowering copayments for generic drugs and increasing copayments for branded drugs, subject to certain exceptions ($9.6 billion).

With regard to Medicaid drug reimbursement policy, the Administration proposes to:

  • Create a voluntary Federal-State Medicaid negotiating pool for high-cost drugs that would allow CMS and participating state Medicaid programs to partner with a private-sector contractor to negotiate supplemental rebates from drug manufacturers ($5.8 billion).
  • Lower Medicaid drug costs by clarifying the definition of brand drugs; excluding authorized generic drugs from calculations to determine brand‐name rebates; correcting a technical error to the Affordable Care Act rebate for new drug formulations; exempting abuse deterrent formulations from the definition of "line extension"; limiting to 12 quarters the timeframe for which manufacturers can dispute drug rebate amounts; clarifying the inclusion of certain prenatal vitamins and fluorides in the rebate program; exempting emergency drug supply programs from the Medicaid rebate calculations; and calculating Medicaid Federal Upper Limits based only on generic drug prices ($5.6 billion).
  • Require manufacturers to pay Medicaid rebates equal to the entire amount that the state has paid for the drugs in cases where the manufacturer improperly reported non-drug products as covered outpatient drugs or improperly reported drugs as being effective when the Food and Drug Administration (FDA) has identified the drugs as less than effective. The budget also would allow more regular audits and surveys of manufacturers to ensure compliance with Medicaid drug rebate agreement requirements; require drugs to be electronically listed with the FDA to receive Medicaid coverage; increase penalties for reporting false information for the calculation of Medicaid rebates; and authorizes CMS to collect wholesale acquisition costs for all Medicaid-covered drugs to ensure accurate reporting of average manufacturer price (no budget impact).

Note that the legislative proposals would require Congressional approval.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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