Maximum Fair Price and Implications for Payers

The Lynchpin of Medicare Price Negotiations under the Inflation Reduction Act (IRA)

The Issue at a Glance

Maximum fair price (MFP) serves as the foundation of Medicare’s drug price negotiation program. It is the highest price that a Medicare Part D plan sponsor or beneficiary can pay for a drug selected for negotiation. The public will not find out the results of the negotiations between the government and manufacturers until September 2024, while not effective until 2026, but there are ways that Part D plans can begin thinking about MFP and its broader implications, including coverage requirements for the selected drugs. Negotiated prices, and the requirement that Part D plans will cover the selected drug, will take effect January 1, 2026. A drug will remain “selected” and subject to the negotiated price until the year that begins nine months after a generic or biosimilar version of the selected drug is approved and marketed in the U.S.

We anticipate that the negotiation process will impact not just the selected drugs and Part D plan sponsors, but also manufacturers’ non-selected drugs, generic and biosimilar competitors to the selected drugs, and commercial plans.

maximum fair price

WHAT IS THE “MAXIMUM FAIR PRICE”?

In short, maximum fair price (MFP) is the price of a prescription drug that has been selected for negotiation. It represents the highest price that a Medicare Part D plan sponsor or beneficiary can pay for a selected drug[1] and is the result of the months-long negotiation process between the federal government and the manufacturer. While Part D plan sponsors are free to negotiate rebates that bring net costs below the MFP, the MFP is the “price” of the drug that will be publicly published and the payment benchmark for the drug’s negotiated price at the pharmacy counter.

Table: Centers for Medicare and Medicaid Services. Fact Sheet: Medicare Drug Price Negotiation Program: Selected Drugs for Initial Price Applicability Year 2026. (Link)[1] The IRA limits the “negotiated price” of a selected drug to the MFP, plus a dispensing fee.

HOW IS THE MFP DETERMINED?

Even though the MFP is the result of a negotiation process, IRA establishes a ceiling above which negotiations may not exceed. The ceiling price is calculated as the lesser of the following: 1) enrollment-weighted average net cost for the drug under Part D in 2022[2] or 2) a percentage of the selected drug’s average manufacturer price for non-federal purchasers (non-FAMP) for the calendar year 2021[3] (for drugs selected for negotiation in 2026). The longer a selected drug has been on the market, the lower the ceiling: the ceiling for “short-monopoly drugs”[4] will be capped at 75% of non-FAMP, and the ceiling for “long-monopoly drugs”[5] will be capped at 40% of non-FAMP.

Additionally, the IRA directs HHS to use several negotiation factors in determining MFP. This includes research and development costs for the selected drug and the extent to which the primary manufacturer has recouped those costs, current unit costs of production and distribution of the selected drug, prior Federal financial support for novel therapeutic discovery and development with respect to the selected drug, data on pending and approved patent application, exclusivities recognized by the FDA and applications and approvals for the selected drug, and market data and revenue and sales volume data for the selected drug in the U.S. CMS is also directed to consider evidence about therapeutic alternatives for the selected drug when preparing an initial offer to manufacturers.

CMS sent offers to manufacturers of the initial ten selected drugs on February 1, 2024. Manufacturers had 30 days to submit counteroffers. In early March, HHS announced that manufacturers of all 10 selected drugs had submitted counteroffers.[6] CMS has until April 1, 2024, to act on the counteroffers; if the counteroffer is declined, up to three meetings between the manufacturer and CMS may take place before a final offer from HHS is made by July 15, 2024. Manufacturers have until July 31, 2024, to accept the final offer.

Next Steps

  • September 1, 2024: Maximum fair price for initial 10 selected drugs released
  • February 1, 2025: Next 10 drugs eligible for negotiation in 2027 announced
  • January 1, 2026: Maximum fair price for first 10 selected drugs takes effect

[2] Based on prescription drug event (PDE) data.
[3] For future selection years, the IRA directs HHS to use the lesser of the drug’s inflation-adjusted 2021 non-FAMP or the drug’s non-FAMP from the year prior to the selected drug publication date (e.g., 2024 for 2027 selected drugs).
[4] A small molecule drug approved after January 1, 2010, and before September 1, 2016, or a biologic approved after January 1, 2010, and before September 1, 2012.
[5] A small molecule drug or biologic approved on or before January 1, 2010.
[6] Department of Health and Human Services. Biden-Harris Administration Receives Counteroffers from Drug Companies as Part of Ongoing Negotiations to Lower Drug Prices (March 4, 2024) (Link).

OPERATIONAL CHALLENGES SURROUNDING MFP

In addition to the negotiation process itself, there are several operational challenges facing MFP implementation:

  • Establishing a Single MFP for Each Molecule. CMS has interpreted the IRA to require negotiation of a “single price” for each selected drug, regardless of dosage forms and strengths. In guidance to manufacturers, CMS has said that the agency will base the single price on the cost of the selected drug per 30-day equivalent supply, weighted across dosage forms and strengths. Once a single MFP has been agreed upon, CMS will compute and apply the MFP across different dosage forms and strengths of a selected drug.
    While CMS has made example calculations available to manufacturers and the public, it remains to be seen how this process could impact the final MFP of selected drugs available in various dosage forms and strengths in practice.
  • Providing Access to MFP. Because Part D plan sponsors may not establish a negotiated price above the MFP (not including a dispensing fee), the IRA requires manufacturers to provide the selected drug to both wholesalers and pharmacies, including mail service pharmacies and other dispensers who dispense medications to Medicare beneficiaries with Part D, at MFP. Manufacturers may do this in one of two ways:
  1. Prospectively ensuring that the price paid by the dispensing entity when acquiring the drug is no greater than the MFP; or
  2. Provide retrospective reimbursement for the difference between the entity’s acquisition cost and the MFP.

This requirement has raised concerns about access to selected drugs in certain pharmacy types (e.g., independent pharmacies) that may have difficulty accessing selected drugs at MFP, or otherwise reconciling retrospective reimbursement with overhead costs.

Any beneficiary using Part D coverage is entitled to the MFP, including Medicare Advantage-Prescription Drug plans (MA-PDs) and Employer Group Waiver Plans (EGWPs). Beneficiaries in employer plans that receive the Retiree Drug Subsidy are not entitled to MFP access. CMS intends to engage with a Medicare Transaction Facilitator (MTF) to facilitate the exchange of data between pharmaceutical supply chain entities to support the verification of an MFP-eligible individual dispensed a selected drug.

HOW CAN PLANS PREPARE FOR MFP?

PART D PLAN SPONSORS
Part D plan sponsors need to be thinking about MFP in several different ways:

Selected Drugs

  • Net costs. No one is sure how negotiations will end in Summer 2024. Because of how the ceiling price is calculated – using non-FAMP as one of the benchmarks, which does not include any rebates that manufacturers are already offering Part D plans – it is conceivable that the statutory ceiling might not necessarily be radically lower than the current net costs of these drugs to Part D plans. If a negotiated price ends up close to the statutory ceiling, and the statutory ceiling is not substantially lower than current net costs for the drug, then there might not be much of a financial impact for Part D plans.
    Selected drug manufacturers will not be liable for manufacturer rebates owed on a beneficiary’s behalf. Instead, CMS will pay a subsidy to plan sponsors equal to 10% of MFP while the beneficiary is in the initial coverage limit and 40% of MFP while the beneficiary is in catastrophic coverage.
  • Formulary design. The IRA requires Part D plans to cover all selected drugs, at all dosage forms and strengths. When more than one selected drug is available in the same therapeutic class, plan sponsors should consider formulary design approaches that meet CMS requirements while also delivering financial value for enrollees. In guidance to plan sponsors, CMS has declined to set hard rules surrounding what constitutes “coverage” but has warned that the agency will examine formularies that place selected drugs on non-preferred tiers and reserves the right to request justifications from plan sponsors on formulary placement of selected drugs. It isn’t clear if CMS would allow a plan that wishes to prefer one selected drug over another (perhaps due to additional rebates negotiated with that manufacturer) to place both selected drugs on two brand tiers, or if the agency would expect a plan to place the preferred selected drug on a lower cost-sharing tier and place the non-preferred selected drug on a preferred brand tier.
  • Generic/Biosimilar Competition. At least four molecules selected for negotiation in 2026 could face generic or biosimilar competition before the negotiated prices take effect.[7] If a generic or biosimilar launches before the close of the negotiation period (July 31, 2024), then negotiations will cease, and no negotiated price will take effect (CMS will also not be able to replace the drug on the list of selected drugs). If a generic or biosimilar launches between August 1, 2024, and March 31, 2025, the negotiated price still becomes public in September 2024, but will not take effect in 2026. Any launches that occur April 1, 2025, or later mean that the negotiated price will become effective and remain in effect until the year that begins nine months after the generic launches (January 1, 2027, for an April 1, 2025, launch date). It is unclear how the existence and potential application of MFP could influence the pricing and marketing decisions of generic and biosimilar manufacturers. It is also notable that in some cases there are multiple dates surrounding patent expirations and ability for generic or biosimilar to be in market (e.g., Farxiga has a drug patent expiration in 2025, however has a formulation patent through 2028 or Januvia with a 2025 patent expiration with a salt formulation through 2027).
    With respect to the coverage requirement of selected drugs, CMS has not explicitly indicated how the agency will approach reviewing formularies if there is a generic or biosimilar version of a selected drug available at a lower net cost than a selected drug.
  • Beneficiary Access. Because of the requirement that pharmacies have access to MFP, there is concern that beneficiary access to selected drugs at the pharmacy could be limited by a pharmacy’s willingness to stock or dispense the selected drugs to beneficiaries. Manufacturers and wholesalers have the option of offering the MFP to pharmacies upfront at acquisition, (this would require inventory management for the stock purchased at MFP for Part D beneficiaries and another purchased at market price for non-Part D beneficiaries), or via retrospective rebate. At the moment, it is unclear how the market will move in implementing the requirement. Smaller, independent pharmacies may be disadvantaged when acquiring selected drugs, which could lead to access issues throughout a plan’s pharmacy network.
  • Pharmacy Costs. CMS is allowing pharmacies to negotiate higher dispensing fees to cover the additional overhead costs of managing the separate stock of MFP products, and to compensate for the time spent counseling patients about the Medicare Prescription Payment Plan, see prior white paper on this topic at https://payerally.com/medicare-prescription-payment-plan/. Plan sponsors should be prepared to address higher dispensing fees in 2025 and 2026.

Non-Selected Drugs

  • Cost Shifting. It is possible, perhaps likely, that manufacturers of selected drugs will attempt to recoup revenue lost due to negotiation via reduced rebates for non-selected drugs in their portfolio.
  • Formulary Design. For non-selected drugs in the same therapeutic class as selected drugs, Part D plan sponsors will need to consider any changes to formulary design to accommodate IRA coverage requirements and any potential loss of rebates that could be associated with those moves.

[7] Entresto, NovoLog, Stelara, and Xarelto.

COMMERCIAL PLAN SPONSORS

Selected Drugs. Commercial plan sponsors must consider whether manufacturers of selected drugs will also attempt to recoup lost revenue from the Medicare Part D market to the commercial market. This will be limited by the relative commercial market penetration of a selected drug and the current rebating strategy that commercial plans and manufacturers are using with respect to those drugs. However, it is possible that commercial plan sponsors could see net costs for selected drugs increase.

Generic/Biosimilar Competition. Because manufacturers do not launch generic or biosimilar competition in specific markets only, any decisions on market availability and pricing with respect to generic and biosimilar competition for selected drugs will also impact availability and pricing in the commercial sector.

LOOKING AHEAD

What other considerations should plan sponsors think about?

Potential Patient Confusion
Because of their release ahead of a Presidential election, it is likely that the prices will be announced to great fanfare. However, they will not take effect until January 1, 2026. This could mean that Medicare beneficiaries taking selected drugs are confused when shopping for 2025 Part D plans (which will occur after the negotiated price announcement). Part D plan sponsors should be prepared to handle customer service calls about any difference in price for 2025.

Commercial plan sponsors should also consider how the negotiated prices could resonate with the public. If the negotiated prices deviate substantially from prices in the commercial sector, patients could be confused about costs at the pharmacy counter, especially if they are subject to coinsurance and high deductibles.

Potential Medicare Beneficiary Disappointment
The IRA is seen as President Biden’s signature domestic accomplishment of his first term, and the President and members of Congress have been promoting the law’s impending impact on Medicare beneficiaries. However, due to the general uncertainty around the final MFPs, rules that require Part D plans to favor coverage of selected drugs over other alternative therapies in the same therapeutic class, and the broader redesign of the Medicare Part D benefit may lead beneficiaries to be disappointed overall with the results in 2026.

The anticipated cost savings associated with the IRA are predicated on the idea that the government will be able to negotiate an MFP that is meaningfully lower than the net prices currently negotiated by Part D plan sponsors for the selected drugs. Part D plan sponsors will stand to lose whatever existing rebate revenues (or a large percentage of them) they currently negotiate from the manufacturers of selected drugs to the government and will need to make up the lost revenue somehow to keep premiums down without substantially altering the overall benefit.[8] While beneficiaries taking the selected drugs may realize savings in the form of reduced cost-sharing (since the IRA requires the negotiated price to be based on MFP), beneficiaries that take therapeutic alternatives to the selected drugs may experience increases in cost sharing since plans will be required to offer preferential placement of selected drugs. Finally, because the overall redesign of the Part D benefit will cap annual out-of-pocket costs for all beneficiaries at $2,000 beginning in 2025, it is also possible that beneficiaries may not feel as if they are realizing significant savings thanks to MFP and negotiation.

Cost-Shifting Among Drugs and Between Lines of Business
It is likely that manufacturers of selected drugs will seek to shift costs to non-selected drugs and to non-Medicare lines of business. It is also likely that the combination of price negotiation and the inflation penalty rebates will continue to encourage manufacturers to launch new products at higher prices to capitalize on a shorter monopoly period.

Changes to Manufacturer Pipelines
Brand Name Manufacturers. Because the IRA offers an additional four years of exemption from negotiation to biologic products than small molecule drugs, it is not unreasonable to assume that manufacturers will invest more research and development in biologic therapies than small molecule therapies to the extent practicable. Several manufacturers have already hinted at that dynamic to investors, and there is legislation under consideration in Congress that would equalize the length of time that products are exempt from negotiation to 11 years for both types of products. However, since biologics tend to have higher overall costs relative to small molecule products, to the extent that negotiation offers another incentive for manufacturers to focus their research and development on those products, overall costs will continue to rise.

Generic/Biosimilar Manufacturers. Because the introduction of the MFP changes the economic decision regarding whether to challenge a patient or enter a market, it is likely that negotiation will also influence future investment decisions of generic and biosimilar manufacturers. One potential outcome is that a brand-name manufacturer may determine that it is preferable to compete against a generic/biosimilar than be subject to negotiation (the IRA excludes a drug with generic/biosimilar competition from negotiation). Moving forward, patient settlement agreements between brand-name and generic/biosimilar manufacturers may allow competition to come to market earlier to avoid negotiation. On the other hand, a lower price ceiling for the innovator or reference product may discourage generic/biosimilar investment in alternatives. Requirements that Part D plans cover selected drugs, possibly even at the expense of generic or biosimilar alternatives, may also reduce incentives to market alternatives. This would have downstream effects on broader market access to these less expensive alternatives, placing upward pressure on overall spending.

[8] The IRA also limits increases in the base beneficiary premium to 6% each year in the first five years of implementation. This will place pressure on Part D plans to generate savings via increased rebate revenue on non-selected drugs, increased cost-sharing, or narrower formularies. Actuarial equivalence requirements still apply to cost-sharing for enhanced alternative plans.

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