How would the proposed drug pricing changes in the BBB affect different stakeholders? Beneficiaries? Manufacturers? Plan Sponsors? The federal government? This article explores potential implications for each of these stakeholders, and more.

The Build Back Better Act (BBB), passed by the U.S. House of Representatives on November 19, 2021,¹ includes arguably the largest changes to U.S. drug pricing in the history of the Medicare program. We previously wrote a brief summary and more detailed summary outlining the proposed changes in the House bill, which includes the following key provisions:

• Allowing the federal government to negotiate prices for a subset of drugs covered by Medicare Part B and Part D.
• Requiring pharmaceutical manufacturers to pay rebates to Medicare if drug prices increase faster than inflation.

The BBB faces some opposition in the Senate, and it is unclear if it will pass in its current form.² The Senate Finance Committee released an updated version of BBB on December 11, 2021,³ which includes the following key changes from the House version passed on November 19^th:

• Updated ceiling prices for drugs subject to price negotiation to the lesser of the minimum discounts previously outlined and average net price¹ in the year prior to selection,
• Allowance for plan sponsors to exclude drugs selected for negotiation from their formularies, and
• Revisions to the Part D base beneficiary premium to limit increases between 2023 and 2027.

The large changes for the Medicare program in the BBB – drug price negotiation and inflation rebates – raise many questions and considerations for stakeholders. We outline specific questions and potential implications for each stakeholder below.

Pharmaceutical manufacturers

Pharmaceutical manufacturers may have numerous decisions to make in response to the drug pricing provisions within the BBB. Specific manufacturers may make different decisions depending on their current portfolio, pipeline drugs (i.e., new medications expected to launch in upcoming years), and whether or not they qualify as “specified” or “specified small” for the Part D discount program phase-in. Below are some considerations manufacturers would need to think about if the BBB is passed.

New drug launch prices

Although the BBB places no explicit restrictions on the launch prices of new drugs, it creates incentives for manufacturers to keep subsequent price increases below inflation by imposing an “inflation rebate” when price increases exceed the rate of inflation. Additionally, drugs would have a shorter window before facing potential negotiation as non-biologic products can be eligible for negotiation after nine years, which is shorter than the typical patent exclusivity period.⁴ These provisions could put upward pressure on new drug launch prices.

Manufacturers may dedicate greater resources to understanding and projecting the product life cycle, which would become more nuanced due to potential price negotiation and inflation rebates limiting future increases. As lifecycle planning becomes more complex, manufacturers will need to evaluate key questions for pipeline products with greater scrutiny, such as:

• How would resources be allocated to pursuing novel therapies versus alternative indications due to the potentially shorter timeframe (relative to typical patent loss) of non-negotiated prices?
• How would certain efforts and development costs for pipeline drugs compare to expected revenue under the new timeline? Would these efforts be profitable within the shorter timeframe before negotiation? When (and would) a drug be selected for negotiation, given that it is limited to a subset of drugs? Could the Secretary of the U.S. Department of Health and Human Services (HHS) expand this program beyond its current timeframe and number of drugs?

Price concessions for current drugs

Manufacturers of drugs subject to negotiation in the BBB may reconsider their rebate contracting strategy. This could affect both rebates for negotiated drugs and other drugs in their portfolio, as manufacturers look to recuperate lost revenue. This may come from lowering rebates in other markets, for other drugs, or a combination of the two. Additionally, because drugs selected for negotiation are not subject to the Manufacturer Discount Program (MDP), manufacturers would experience a partial offset from no longer paying these retrospective discounts for Part D drugs. Manufacturers would also need to consider impacts to formulary placement, the Medicaid Drug Rebate Program (MDRP),⁵ and drugs expected to be negotiated in the future, as they make these decisions.

Price increases

Due to the inflation rebates, increasing prices at a rate higher than CPI-U² may not change net revenue to the manufacturer. However, higher list prices would increase beneficiary cost-sharing and may increase payer costs and could even increase the discounts paid by manufacturers for Part D drugs. In addition, manufacturers would need to consider the removal of the Average Manufacturer Price (AMP) cap on Medicaid rebates in 2025, which currently keeps rebates at or below 100% of the drug cost. Removing the AMP cap may materially increase inflationary Medicaid rebates if trends continue above CPI-U. These dynamics may deter manufacturers from increasing prices by more than CPI-U. As of November 2021, CPI-U is currently at its highest levels in nearly 40 years, with year-over-year changes of 6.8%.⁶ It is unclear how long this level of CPI inflation will continue, but any extended period of high CPI-U will reduce the impact of inflation rebates on drug prices.

Utilization changes

For negotiated products, prices at the point-of-sale (POS) would be lower than in the current environment. This may result in lower cost-sharing per script for beneficiaries using negotiated products. This may further increase beneficiary utilization which may already increase due to lower cost-sharing with the Medicare Part D benefit redesign proposed by the BBB. Manufacturers of negotiated drugs may have lower revenue per script but may see greater utilization due to lower member cost-sharing which may offset some of this revenue loss.

Medicare Advantage organizations & pharmacy benefit managers

Medicare Advantage organizations (MAOs), Part D plan sponsors, and pharmacy benefit managers (PBMs) would face many questions and challenges in how they develop formularies, manage premium changes, and position plans, among other items. We discuss each of these items and considerations below.

Formulary management for negotiated drugs

Maximum fair prices (MFPs), which must be reflected at the POS, may make formulary development more complex. Part D plan sponsors would not be required to cover all negotiated drugs on the formulary. Some therapeutic classes may only have a single drug selected for negotiation, which may lead to unique dynamics as PBMs and MAOs make tiering and utilization management (UM) decisions. If non-negotiated products offer significant price concessions, these drugs could be preferred over the negotiated drugs if the higher rebates equate to lower plan sponsor costs and premiums. These dynamics may be mitigated with the revised Part D benefit design but may persist depending on the magnitude of the price concessions.

Part B cost-sharing administration

The BBB would require Part B beneficiary cost-sharing for drugs subject to inflation rebates to be calculated based on the drug price net of the inflation rebate. How would MAOs administer this cost-sharing at the POS? What new data feeds would be required to reflect the accurate cost-sharing? Would new methods of communication be required with providers? Would retroactive adjustments be needed?

Plan differentiation tactics

MAOs use formularies today to differentiate their plans from competitors and attract specific types of members. As more drugs are selected for negotiation, formularies may become increasingly uniform. This may drive plans to compete less on formulary and more on other aspects they can control, such as benefit design and supplemental benefits. This may also accelerate the shift in membership from standalone Prescription Drug Plans (PDPs) to Medicare Advantage Prescription Drug plans (MA-PDs) observed over the last several years for a variety of reasons. In particular, only MA-PDs can offer supplemental benefits, and innovation in benefit design and delivery may become more attractive to beneficiaries with greater standardization that may occur if the BBB is passed.

Changing PBM economics

Over time, PBMs have moved toward an administrative fee structure, as opposed to generating revenue on a percentage of rebates or price basis. With gross prices and rebates for negotiated drugs set to decrease, this trend may accelerate, causing PBMs to look for additional revenue streams. Potential avenues for additional revenue or value generation for PBMs include owning more of the distribution channels (e.g., specialty pharmacies), facilitating value-based contracts with manufacturers and administering copay maximizer / accumulator programs⁷ in the commercial market. PBMs are already pursuing these alternate revenue sources, and the BBB could further accelerate this change. Additionally, plan sponsors may perceive the value that PBMs provide as eroding over time if HHS is negotiating drugs directly with manufacturers instead of the PBM driving those negotiations.

Federal government

With the BBB, government agencies may have additional responsibilities to guide program administration both for short- and long-term changes. A few key aspects which may impact government responsibilities the most include the following.

Pharmacy supply chain value

Under the BBB, manufacturers would be required to offer, and pharmacies would be required to dispense, drugs at MFPs for Part D beneficiaries. However, between the manufacturer and pharmacy, there are intermediaries (e.g., wholesalers, PBMs) that facilitate the distribution of drugs and charge fees for their services. If additional fees are included in the price the pharmacy pays, this could result in a loss for the pharmacy for every script filled of a negotiated drug. In addition, plans may put an increased emphasis on receiving direct and indirect remuneration (DIR)⁸ from pharmacies if manufacturer rebates decrease.

There may need to be regulatory intervention to ensure pharmacies avoid losses when they dispense products at MFPs. One avenue for this could be a chargeback system where pharmacies would invoice manufacturers to receive the difference between purchase price and MFP for these claims in order to recoup potential losses. Given the complexities which inevitably arise for all pharmacies interacting with many manufacturers, there may need to be additional regulatory guidance from the federal government in order to ensure value is appropriately passed through the supply chain.

Negotiated drug selection

Under the BBB, HHS would have the ability to select from any qualifying single source brand in the top 50 of Part D or B expenditures for price negotiation. Within this selection space, HHS would be able to select 10 drugs in 2025, grading up to 20 per year in 2028. Note insulins can always be selected regardless of the aforementioned eligibility. It is unclear at this time what criteria HHS would use to guide selection, but below we outline several ways HHS could determine this, alone or in combination.

• Greatest total decrease to government Part D costs
• Greatest number of beneficiaries who would have cost share savings
• Greatest decrease to member premium
• Drugs with the highest potential minimum discounts (e.g., long monopolies)
• Drugs with the smallest list to net price differential today

Operationalizing price negotiation and inflation rebates

The BBB does not specify how the price negotiation and inflation rebate programs would be operationalized, instead leaving these aspects to regulatory agencies and the private market. Here are some thoughts on each:

• Price negotiation: While actual negotiation would likely to be carried out by the respective manufacturers and HHS, the implementation and due diligence to ensure MFPs are reflected at the POS may fall elsewhere in the government (e.g., CMS), or be left to a third-party vendor contracted by the federal government. Additionally, pharmacies and providers would need timely and accurate information regarding MFPs to charge patients the correct cost sharing at the POS. There would also need to be channels for penalty payments for non-participation and for penalties associated with charging prices higher than MFP.
• Inflation rebates: For operationalizing inflation rebates, the government may look to mirror the cash flows of the inflationary component of the MDRP, given the similarities between these two programs. As in Medicaid, where the rebate flows directly to the agencies administering the Medicaid programs, rebates could be charged directly to manufacturers by CMS. However, given the lack of specifics in the BBB about how inflation rebates will work, a third-party aggregator or other entity may be used in a deviation from how Medicaid operates today. In addition, Part B beneficiary cost-sharing would be net of the inflation rebates, layering an additional level of complexity to communicate to MAOs and providers.

Given the complexity and number of stakeholders in the Part D program, as well as the MFPs’ impact on Medicaid Best Price (discussed in detail in the Medicaid Market section below), drug selection for negotiation would play a key role in changing stakeholder costs.

Commercial market

While the commercial health insurance market is not directly subject to the drug price negotiation provisions of the BBB, there are still some possible impacts. In medical contracting, plan sponsors often tie reimbursement to a fixed percentage (e.g., 110%) of the Medicare fee schedule. With MFPs for each negotiated drug publicly available, there could be a push by commercial payers to tie reimbursement to the published prices. Publishing prices could also put manufacturers at a disadvantage in negotiating, as it effectively puts their “number” out first. Conversely, overall lower payments to manufacturers could put downward pressure on price concessions offered to the commercial market.

Manufacturers would be subject to the inflation rebate provision for the commercial market. Specifically, the total units in the inflation rebate calculations would include commercial utilization. This may cause drug price trends to abate in the commercial market for existing drugs.

Medicaid market

The Medicaid market is not directly impacted by provisions of the BBB. However, like the commercial market, there are indirect impacts which may change Medicaid net costs and rebates through the MDRP. These rebates may be impacted in two ways:

• Best price may change: Unlike current Part D prices, which are excluded from the best price calculations, MFPs would impact best price. The base portion of the Medicaid drug rebates for brands is calculated as the maximum of 23.1% of AMP or the difference between AMP and best price. If negotiated prices are lower than the current best price, Medicaid rebates would increase.
• Inflationary rebate growth may slow: The MDRP includes an inflationary component, which calculates rebates for price increases in excess of CPI-U since the drug’s approval date. This is similar to the inflation rebate provision detailed in the BBB. If manufacturers reduce list price increases, inflationary rebates in Medicaid may decrease in the long-term relative to current expectations.

Note that these two impacts are conceptually offsetting, with the potential growth of base rebates but decrease of inflationary rebates. It is unclear at this time whether this would result in a net increase or decrease in overall Medicaid market costs. The degree of impact would be highly dependent on manufacturer and state Medicaid agency responses.

Beneficiaries

As described in our benefit redesign article, the BBB would reduce costs for beneficiaries, on average. With the implementation of drug price negotiation by CMS, non-low-income utilizers of the specific drugs that are subject to negotiation could see flat or lower prices at the POS and be insulated from price increases going forward. As this applies to the highest spend drugs and all insulins, a significant percentage of beneficiaries may see price relief at the POS. How would pharmaceutical manufacturers react to the revenue reduction they would experience due to this provision? Would manufacturers pull back on rebates on non-negotiated drugs, therefore increasing premiums for beneficiaries? Additionally, how would manufacturer price decisions relative to CPI-U (i.e., whether to increase prices and pay inflation rebates) affect beneficiary cost-sharing?

In addition, these changes could affect beneficiary access to medications. Manufacturers could reduce financial support used to decrease beneficiary copays in the commercial market. Manufacturers could also release medications less frequently or pursue fewer indications. From this perspective, these changes could limit beneficiary access to new and existing medications.

Providers

Change in the Part B drug prices would affect providers as well. Manufacturers are required to make MFPs available to providers or would be subject to penalties. There may be a similarity to the 340B Drug Pricing Program,¹⁰ where certain providers are able to purchase Part B drugs at a significant discount. This program has generated meaningful margin for hospitals that can purchase drugs under the 340B program at a discount and charge higher costs to plan sponsors. With the MFPs, would there be a similar margin dynamic to the 340B program? Or would providers experience pressure from health plans or regulatory entities to pass-through the MFPs to beneficiaries and plan sponsors?

Next steps

Some members of the Senate have publicly opposed the BBB, leaving its future in doubt.¹¹ With the U.S. House Committee on Oversight and Reform publishing its “Drug Pricing Investigation” report on December 10, 2021,¹² the Part D redesign, drug price negotiation, inflation rebate provisions may have enough momentum to be pursued, even if the BBB isn’t passed.

If finalized, the BBB would drive arguably the most significant changes in drug pricing in the history of the Medicare program. These changes have countless implications for all industry stakeholders to consider, with certain changes coming as soon as 2023.

¹ The full text is available from: https://rules.house.gov/sites/democrats.rules.house.gov/files/BILLS-117HR5376RH-RCP117-18.pdf.

² See article below for reference: https://thehill.com/homenews/senate/586504-manchin-undercuts-biden-leaving-his-agenda-in-limbo.

³ The full text is available from: https://www.finance.senate.gov/imo/media/doc/12.11.21%20Finance%20Text.pdf.

⁴ Retrieved from: https://www.commonwealthfund.org/publications/journal-article/2017/sep/determinants-market-exclusivity-prescription-drugs-united.

⁵ See resource on MDRP here for reference: https://www.medicaid.gov/medicaid/prescription-drugs/medicaid-drug-rebate-program/index.html.

⁶ See press release for CPI-U change here: https://www.bls.gov/news.release/cpi.nr0.htm .

⁷ See this resource for more detail: https://theactuarymagazine.org/manufacturer-coupons-and-patient-assistance-programs/.

⁸ See this resource for more detail: https://www.milliman.com/-/media/Milliman/importedfiles/uploadedFiles/insight/2018/medicare-part-d-dir.ashx.

⁹ See Figure 1 here for more detail: https://www.kff.org/medicaid/issue-brief/understanding-the-medicaid-prescription-drug-rebate-program/.

¹⁰ For more details, see the 340B website at the link below: https://www.hrsa.gov/opa/index.html.

¹¹ See article below for reference: https://thehill.com/homenews/senate/586504-manchin-undercuts-biden-leaving-his-agenda-in-limbo.

¹² See report here for reference: https://oversight.house.gov/sites/democrats.oversight.house.gov/files/DRUG%20PRICING%20REPORT%20WITH%20APPENDIX%20v3.pdf.