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President Obama’s FY 2015 Budget Request Takes Aim at Pharmaceutical Industry

IP Blog | Innovation Partners | March 18, 2014

President Obama sent his budget request for Fiscal Year 2015 to Congress on March 4th with additional details transmitted on March 11th. His request contained numerous legislative proposals which would extract tens of billions of dollars from the pharmaceutical industry under the Medicare and Medicaid programs.

The Medicare provisions which the President called for would produce savings of $96.284 billion from 2015 to 2019 and $407.241 billion for the ten year period 2015 through 2024. Over 30 percent of the ten year savings would be secured from the pharmaceutical industry — this despite the fact that Medicare spending on pharmaceuticals only accounts for approximately 14 percent of Medicare outlays.

Provisions in the Medicare package which impact drug manufacturers include:

  • Modifies reimbursement for Part B drugs from 106 percent of ASP to 103 percent of ASP starting in 2015 [Projected savings of $6.8 billion over 10 years]
  • Permits Medicare to obtain Medicaid rebates for brand and generic drugs for beneficiaries who receive the Part D Low-Income Subsidy beginning in 2016 [Projected savings of $177.3 billion over 10 years]
  • Accelerates brand name manufacturer discounts to 75 percent in plan year 2016 to close the “donut hole” faster; the phase-out for generic drugs would continue unchanged through 2020 [Projected savings of $7.9 billion over 10 years]
  • “Strengthens” IPAB by lowering the target rate applicable for 2018 and after from GDP per capita growth plus 1 percentage point to GDP per capita growth plus 0.5 percentage points, thereby triggering earlier IPAB’s mandatory cost-cutting powers. [Projected savings of $12.9 billion over 10 years]
  • Establishes quality bonus payments for Part D plans similar to those for the Medicare Advantage quality bonus program [Provision is budget neutral]
  • Increases income-related premiums under Medicare Part B and Part D [Projected savings of $52.8 billion over 10 years]
  • Beginning in 2016, increases generic utilization by lowering copayments for generic drugs and increasing brand copayments to twice the level under current law [Projected savings of $8.5 billion over 10 years]
  • Authorizes the FTC to stop companies from entering into “pay for delay” settlements [Projected savings of $9.1 billion over 10 years]
  • Reduces the exclusivity period for biosimilars from 12 years to 7 years [Projected savings of $4 billion over 10 years]
  • Provides the HHS Secretary with authority to suspend coverage and payment for drugs prescribed by providers who have been engaged in misprescribing or overprescribing drugs with abuse potential [Provision is budget neutral].

The President’s package of Medicaid legislative proposals are projected to produce savings of $4.521 billion in 2015 and include the following provisions affecting the pharmaceutical industry.

  • Changes to Medicaid Drug Rebate Program.  The budget request proposes several changes to the Medicaid Drug Rebate Program including clarifying the definition of branded drugs, collecting an additional rebate for generic drugs whose prices grow faster than inflation, and clarifying the inclusion of certain prenatal vitamins and fluorides in the rebate program. The President’s proposal would also “correct a technical error in the Affordable Care Act alternative rebate for new drug formulations, limit to 12 quarters the time frame for which manufacturers can dispute drug rebate amounts, and exclude authorized generic drugs from AMP calculations for determining brand name rebates”. The proposal would also adjust Medicaid drug pricing by calculating the Federal Upper Limits based only on generic drug prices. [Estimated $8.6 billion in savings over 10 years].
  • Program Integrity Provisions for Medicaid Drug Coverage. The budget request calls for four “improvements” to program integrity for Medicaid drug coverage. (1) Manufacturers would be required to make drug rebates equal to the entire amount that the state has paid for the drugs in cases where the state improperly reported non-drug products to CMS as covered outpatient drugs or reported drugs that the FDA has found to be less effective under the Drug Efficacy Study Implementation as if they were found to be less than effective. [Estimated savings of $10 million over 10 years]. (2) The proposal allows more regular audits and surveys of drug manufactures to ensure compliance with requirements of Medicaid drug rebate agreements. [This provision has no budget impact]. (3) Drugs would be required to be electronically listed with the FDA in order for them to be covered by Medicaid.  [There is no budget impact]. (4) The proposal would increase penalties collected from drug manufacturers that knowingly report false information under their drug rebate agreements for the calculation of rebates. [This provision has no budget impact].
  • Access to and Transparency of Medicaid Drug Pricing Data. The budget proposal would fully fund a nationwide retail pharmacy survey of prices paid by cash-paying, third party insured, and Medicaid covered consumers. The funds would also cover the collection of the actual invoice prices from retail community pharmacies to permit states to set payment rates to pharmacies. CMS would also be given the authority to collect wholesale acquisition costs for all Medicaid-covered drugs. [The cost of this provision would be $30 million over ten years].
  • Retroactive Part D Coverage of Newly Eligible Low-Income Beneficiaries. This proposal would permit CMS to contract with a single plan to provide Part D coverage to low-income beneficiaries while their eligibility is processed.  The plan would be paid using a methodology which produces payments closer to the actual costs incurred by beneficiaries.  A demonstration project for this methodology is set to expire in December 2014. [There is no budget impact].

As a practical matter, the President’s budget proposal has no chance of being passed by Congress. The House of Representatives is controlled by Republicans and they wasted no time attacking the budget plan. Indeed, the Chairman of the House Budget Committee, Paul Ryan (R-WI) branded the President’s proposal “a campaign brochure” and not a “serious document”.  The White House undoubtedly recognizes the political reality that the budget will not be enacted; it nevertheless views the budget request as an important document which reflects the President’s priorities and affords Democrats a basis for contrasting their party’s priorities with those of the Republicans in the upcoming mid-term elections.

Does this mean that there is no risk that any of these proposals will be taken up and passed by Congress? No! Congress is working hard to enact legislation to replace permanently the defective Sustainable Growth Rate methodology for the physician fee schedule. Doing so would cost an estimated $150 billion over ten years and it is possible that some of the proposals described above may emerge as potential “pay fors” for the “doc fix”.

About the Author

George Olsen bio photoGeorge G. Olsen, Esq. became a principal at the law firm of Williams & Jensen, PLLC in January of 1978 and was elected President of the firm in 2004. For nearly 35 years, Mr. Olsen’s primary concentration has been health law, representing pharmaceutical and biotechnology companies, health insurance and managed care organizations, hospitals and other health care providers, as well as businesses affected by federal health care law. Mr. Olsen has expertise in legislation, regulations, and policy matters in the health care sector and has been involved with virtually every major health care legislative initiative over the last three decades.

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