Key Issues and Implications

The contemplated IPI model raises numerous significant legal, policy, and financial questions and issues, many of which have received little attention in commentators’ initial analysis of the plan. While it is beyond the scope of this Client Alert to address all of the many notable issues raised by the plan, the following are some of the key issues and implications:

• Most fundamentally, the model would base Medicare reimbursement upon prices set under foreign governments’ national health care systems—arguably importing foreign price controls into the U.S., rather than setting prices through competition.  It is stunning that a Republican Administration would propose such an idea; many Democrats may argue that prices should be similarly limited for other drugs, covered by other payors.
• CMS contemplates that Model Vendors would “negotiate” with manufacturers to acquire drugs at prices below the IPI reimbursement amounts, and apparently take a profit on the difference between the acquisition price and the CMS-determined reimbursement.  What legal obligations would determine the parameters of such negotiations?
  • For example, if manufacturers were unwilling to sell drugs to Model Vendors at prices below the IPI model reimbursement amount, would Model Vendors be obligated to purchase and provide the drugs to Model Participants at a loss?
  • Conversely, if Model Vendors can disadvantage or refuse to distribute a drug unless the manufacturer sells at a price acceptable to them, could they leverage their position as the Model Vendor to generate significant middleman profits either within or outside the IPI model?
  • May Model Vendors seek to leverage lower prices for Model Part B Drugs based on other, non-IPI distribution or payment relationships with manufacturers (e.g., Part D formularies or commercial distribution relationships with respect to non-Model Part B Drugs)?
• More generally, the economics and logistics of the IPI model for Model Vendors appear to be highly uncertain, raising questions about what entities would be willing to perform such a role and casting doubt upon the contemplated Spring 2020 start date.
• While the IPI model would apply to Model Participants in geographic areas representing approximately half of nationwide expenditures for Model Part B Drugs, CMS contemplates that the lower prices at which manufacturers would sell Model Part B Drugs to Model Vendors would reduce the average sales prices (ASPs) for those drugs. As a result, the model may reduce reimbursement to Part B providers outside of the model geographic areas. In light of this potential indirect effect on ASP, would manufacturers need to reduce their prices to those providers to prevent them from being “underwater,” effectively extending the IPI model pricing to the entire country?
• CMS estimates that the IPI model would result in $21.7 billion in drug price savings over the five-year period of the model, with 42 percent of that amount ($10.1 billion) attributable to Medicare Advantage, even though the ANPRM describes the model as applying only to Part B fee-for-service beneficiaries. Would Medicare Advantage plans with service areas in the model geographic areas have their federal reimbursement reduced due to the reduction in Part B fee-for-service outlays, and if so what effect would that have on Medicare Advantage provider contract payment amounts for Part B drugs?
• Does CMS really have authority to do all of this?  Among other issues, while section 1115A permits CMMI to waive various requirements of the Social Security Act to test innovative payment and service delivery models and limits judicial review, it does not appear to give CMS authority to impose new legal obligations upon manufacturers or others.

Background

Part B of the Medicare program covers limited categories of prescription drugs, most notably drugs administered “incident to a physician’s services” in an office or hospital outpatient setting. The Part B fee-for-service benefit reimburses hospitals, physician practices and certain other provides for most of these drugs an amount equal to 106 percent of the quarterly ASP for the products. However, since this reimbursement was subject to reduction under budgetary sequestration, reimbursement is currently approximately 104.3 percent of ASP.  While the ASP payment methodology originally sought to align payments to actual product acquisition costs rather than list prices, it has been criticized for failing to prevent manufacturers from increasing the prices of their Part B drugs.    

In the ANPRM, CMS asserts that this has resulted in the “Medicare program and its beneficiaries currently pay[ing] more for many high-cost drugs than in other countries,” citing a Department of Health and Human Services (HHS) study released on the date of the IPI model announcement.² That study found that the average prices charged by manufacturers to wholesalers and distributors are on average 1.8 times higher in the United States than in other countries. The Trump Administration has asserted that the higher prices paid in the United States are effectively subsidizing lower manufacturer prices to national governments in other developed countries. 

The Proposed IPI Model

A. Overview and Authority

The proposed IPI model would replace the traditional “buy-and-bill” model under which physicians and hospitals buy Part B drugs through wholesalers, administer them to patients, and then bill the Medicare program for them on a fee-for-service basis. Instead, CMS would contract with multiple IPI Model Vendors, each of which would in turn compete to become a Part B drug distribution supplier to Model Participants and would be responsible for “[n]egotiating with manufacturers for the vendor’s drug acquisition prices for included drugs.”³ When a Medicare patient requires a Part B drug, the Model Vendor will supply it to the Model Participant without charge for the drug, the Model Participant will administer the drug and bill for the drug administration service, and the Model Vendor will separately bill the Medicare program for the drug itself. Rather than paying the Model Vendor using an ASP-based rate, the Medicare program will pay the Model Vendor a reimbursement amount determined by CMS under the IPI model. While CMS’s description of how that rate would be determined is extremely unclear, it states that the new rates would “more closely [align] Medicare payment with international prices, which would be about a 30 percent reduction in Medicare spending for included Part B drugs over time....”⁴

Accordingly, a key “chicken or egg” issue under the proposed IPI model is whether, if the Medicare program simply cuts reimbursement rates paid to Model Vendors, manufacturers will sell their products at prices below those reimbursement rates. CMS requests comments on “the ability of ... model vendors to negotiate for drug prices that would be at or below the IPI Model payment,” and on what the responsibilities of Model Vendors should be, among numerous other issues.⁵ While Model Vendor negotiation of drug acquisition prices appears to be a key feature of the contemplated model and a major contemplated source of funding for Model Vendors, CMS has not described what would happen if Model Vendors and manufacturers cannot agree upon a price.⁶

CMS also states that the current ASP-based reimbursement system provides an incentive to providers to prescribe and administer higher-priced drugs, inasmuch as the current 4.3 percent of ASP amount is greater for a drug with a higher ASP.⁷ Accordingly, the IPI model seeks to remove this incentive by paying Model Providers only the current Medicare administration fee for administering the drug and a new “drug add-on payment” which is not tied to the cost of the drug used. CMS states that the drug add-on payments would, in aggregate, be six percent of the Model Part B Drugs’ ASPs, but that the drug add-on payment would be paid as “a set payment amount per encounter or per month (based upon beneficiary panel size) for an administered drug.”⁸ Further, CMS is “considering whether to set a unique payment amount for each class of drugs, physician specialty, or physician practice (or hospital).”⁹ It is not clear, however, what the add-on payment is intended to compensate for – perhaps distribution costs under Model Vendor relationships – since the Participants would no longer be purchasing the drugs. Accordingly, the details of the drug add-in payment are very unclear and CMS invites comment on these issues.

CMS proposes to implement the IPI model as a payment model to be tested under section 1115A of the Social Security Act, which authorizes the Secretary of HHS to waive certain requirements of the Medicare and Medicaid statutes in connection with evaluations of innovative payment and service delivery models. Notwithstanding the “demonstration” quality of the proposal, however, its scope may be quite significant, as CMS indicates it seeks to implement the IPI model within specified geographies that collectively comprise 50 percent of national spending for Model Part B Drugs. 

B. Drugs Subject to the Proposed IPI Model

The proposed IPI model would apply to separately reimbursable Part B single source drugs, biologics, and biosimilars that comprise a significant portion of Part B drug utilization and spending, for which Medicare Part B is the primary payor.¹⁰ CMS seeks comments regarding which drugs should be subject to the program, but indicates that it is considering those drugs listed in the HHS Study for which there may be available sources of international pricing data. Further, CMS has indicated that it is considering various exceptions, such as for drugs for which a unique J-code does not exist, radiopharmaceuticals, compounded drugs, and drugs in short supply.

C. Model Vendors; Impacts on Best Price, AMP and ASP

Unlike CMS’s historic CAP program which used a single specialty pharmacy vendor, the IPI proposal would entail contracting with three or more Model Vendors of national scope, selected by CMS under a competitive selection process.  Additionally, a much wider variety of entities – including wholesale distributors, specialty pharmacies, GPOs, payor entities, manufacturers, and provider entities – may be eligible to become a Model Vendor.

Model Vendors would negotiate with manufacturers to purchase and take title to Model Part B Drugs for program purposes. The ANPRM indicates that CMS expects prices to Model Vendors to affect the Medicaid best price and (with respect to “5-I” drugs) average manufacturer price, and may therefore also affect manufacturer discounts under the section 340B program. 

More significantly, however, the ANPRM also states that “Manufacturer sales through the IPI model would be included in current ASP reporting.”¹¹ In a set of questions and answers on the IPI model posted to its website, CMS noted that “as payments within the model are reduced, the average sales price Medicare pays will drop, reducing what patients outside the model owe.”¹² Given that Part B reimbursement to providers outside of the IPI model would continue to be 104.3 percent of this reduced ASP, there is a significant potential for such providers to be “underwater” (i.e., receiving less reimbursement than their cost for the drug), which could produce significant pressure for manufacturers to lower their prices to prevent this situation.  In short, the prices provided to Model Vendors could potentially have the effect of setting the price for Model Part B Drugs nationwide. 

Notably, the proposal contemplates significant flexibility with respect to distribution models throughout the supply chain. Thus, for example, a Model Vendor might not need to take physical possession of Model Part B Drugs from manufacturers, and could instead contract with a manufacturer or third party distributor to warehouse and drop-ship its inventory. Similarly, with respect to physician and hospital relationships, the proposal contemplates that Model Vendors could employ on-site product consignment stocking and inventory management programs so that product could be readily available to doctors and hospitals, rather than being furnished only in response to patient-specific physician orders. 

Model Vendors would compete with one another to provide Model Part B Drugs to Model Participants within the IPI model areas. Given that Model Participants would not pay for the Model Part B Drugs provided, the primary basis for this competition would apparently be service offerings. CMS is considering allowing Model Vendors to charge Model Participants for “delivery fees and other vendor costs”, and to the extent it does, CMS “envision[s] that model vendors would compete, in part, for physicians and hospitals based upon low fees.”¹³ CMS states that “model vendors would be prohibited from paying rebates or volume-based incentive payments to physicians and hospitals.”¹⁴ Model Participants could potentially use multiple Model Vendors. 

D. Provider Participation

The proposed model would be mandatory for physicians and hospital outpatient departments within the model geographic areas. CMS is also contemplating, and seeking comments on, the application of the model to durable medical equipment (DME) suppliers, surgery centers, and other suppliers that may bill for Part B drugs.  CMS seeks comments regarding whether participants or CMS should be responsible for paying Model Vendors for distribution costs.

E. IPI Payment Amounts

As noted, the IPI model seeks to more closely align Medicare payments with prices to national governments in other developed countries. To do so, on a quarterly basis, CMS would calculate an IPI “Target Price” for each Model Part B Drug, which would determine the reimbursement amount to the Model Vendor.¹⁵ First, CMS would use either available data, or may require manufacturers to report data, to calculate an average international price for each Model Part B Drug. CMS proposes to calculate the average international price based on pricing data from Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, and the United Kingdom.  Second, CMS would calculate an IPI equal to the “ratio of Medicare spending under ASP versus Medicare spending under the international prices holding the volume and mix of drugs constant....” ¹⁶ Third, “CMS would also establish the model Target Price for each drug by multiplying the IPI by a factor that achieves the model goal of more closely aligning Medicare payment with international prices, which would be about a 30 percent reduction in Medicare spending for included Part B drugs over time, and then multiplying that revised index ... by the international price for each included drug.”¹⁷

Notably, the foregoing methodology does not specify an actual formula for determining the Target Price of any Model Part B Drug. Instead, it contemplates a mysterious “factor” that CMS would use to establish a Target Price somewhere between ASP and the international price. CMS does not say whether this “factor” would be the same for all drugs. CMS states that under the model “the U.S. will continue to pay 126 percent of what other countries pay;” this apparently refers to a 30 percent reduction from the 180 percent ratio described in the HHS Study (1.8 x 0.7 = 1.26).

The IPI Target Price would be phased in over the five-year demonstration (80 percent ASP rate and 20 percent Target Price in the first year, then 60/40 in the second year, 40/60 in the third, 20/80 in the fourth and 100 percent Target Price in the fifth year). To the extent ASP-based reimbursement would be less than reimbursement under the IPI model, the ASP reimbursement would apply. CMS requests comment on how to apply the IPI model to newly-introduced drugs, noting that there could be a time lag or other issues associated with capturing international sales information. CMS states that it could still calculate a model payment amount by applying a “standard factor,” for example, by “assum[ing] the same ratio for the new drug as the IPI, which would be the average volume-weighted payment amount across all Part B drugs included in the model.”¹⁸ Such a “default” discount would arguably incentivize manufacturers to set their list prices higher—something the Administration has said it is trying to avoid. 

F. Patient Impacts

The IPI model contemplates that Model Participants would continue to be responsible for collecting patient cost-sharing amounts on Model Part B Drugs, although CMS is still considering how to administer these collections — potentially through deductions from other Medicare payments owed to Model Participants with possible adjustments to take into account bad debt.¹⁹ CMS expects patient cost-sharing to be lower, since Medicare Part B applies a 20 percent coinsurance on overall payment amounts. 

G. Medicare Advantage Impact

CMS describes the IPI model as applying only to beneficiaries who are enrolled in Medicare Part B for whom fee-for-service Medicare is the primary payor.20 Moreover, nowhere in the ANPRM does CMS describe any application of the IPI model to Model Part B Drugs administered under Medicare Advantage plans. 

However, strikingly, the ANPRM table detailing the potential financial impact of the model on Medicare spending indicates approximately 42 percent of the savings are attributable to Medicare Advantage. Specifically, in detailing “drug price” savings over five years (2020-2025), CMS shows $13.8 billion in savings for “FFS impact” and $23.9 billion in “Gross impact (FFS+MA)” — i.e., Medicare Advantage is responsible for $10.1 billion of the $23.9 billion in savings, or approximately 42 percent.21 Similarly, the “total impact” (after taking into account the physician add-on payment) shows Medicare Advantage accounting for $9.2 billion of $21.7 billion in savings, also approximately 42 percent.²²

CMS states in the ANPRM that “Medicare Advantage spending would be reduced proportionately to the reduction in FFS spending.”²³ Presumably this results from the fact that CMS payments to Medicare Advantage plans are based upon fee-for-service Medicare spending in the relevant service areas. While CMS therefore appears to contemplate that payments to Medicare Advantage plans would be significantly reduced due to the IPI model, Medicare Advantage plans (and their providers) would not necessarily have access to the reduced prices for Model Part B Drugs under the model. As a result, Medicare Advantage plans could be faced with a reimbursement reduction without a corresponding reduction in the amounts they must spend for Model Part B Drugs.  

Discussion/Considerations for Submission of Comments

The ANPRM will undoubtedly be characterized as a political document given its release shortly prior to the midterm elections and its proposed implementation schedule, and it has already drawn strong substantive criticism from industry. But almost as certainly, an IPI model following the rough outlines described in the ANPRM would carry significant potential for disrupting existing distribution relationships, pricing behavior, and patient treatment practices. For example, it could concentrate tremendous distribution and price negotiation power for Part B products within a small handful of entities, and those entities might well be able to leverage that power in non-Part B markets and relationships, potentially raising antitrust or other competition issues. Accordingly, potentially affected stakeholders – physicians with significant Part B drug use, hospitals, manufacturers, GPOs, wholesale distributors, specialty and other pharmacies – should consider the proposal carefully in developing comments for submission in response to the ANPRM, including the issues that follow.   

First, the legal basis and authority for any proposed rule should be closely scrutinized. Although judicial review of Medicare waivers under section 1115A is limited by statute, the nature and scope of the proposed program must, of course, be within the scope of the “innovative payment and service delivery models” which HHS is authorized to “test” under the statute.  Here, the scope of the program – potentially encompassing 50 percent of Medicare Part B spending on Model Part D Drugs, with collateral effects outside of the model itself – is significant. Moreover, a research proposal to evaluate the potential program savings associated with lower reimbursement amounts mandated by CMS is unremarkable. Further, while section 1115A authorizes HHS to waive various requirements under the Social Security Act, it does not authorize CMS to relax other potentially applicable laws, such as the antitrust laws. 

Second, the distribution relationships contemplated may raise issues under applicable fraud and abuse standards, including the federal anti-kickback statute and the Stark physician self-referral law. For example, Model Vendors’ ability to leverage Part B discounts from manufacturers based on their control or influence over other federal program purchases, and their ability to provide consignment-based distribution programs to provider participants, may each implicate the anti-kickback statute. Similarly, with respect to Stark, it is unclear whether, in the absence of a waiver, a physician’s distribution relationship with a Model Vendor would constitute a financial relationship, whether the Model Vendor distribution would constitute a referral for designated health services, or whether the in-office ancillary services exception that has traditionally protected Part B drug administration would continue to apply.  While CMS could potentially waive violations under section 1115A, it would presumably want to establish criteria for those waivers to be available.

Third, interested parties should consider commenting on both the general approach and specific terms of the proposal. From a “big picture” perspective, the IPI proposal effectively represents imposition of price controls on drugs provided in the U.S. based upon determinations made by foreign governments under their national health systems—a huge shift in approach for a Republican Administration to propose, and seemingly at odds with the Administration’s statements that prices should be determined through competition.  Similarly, it raises significant questions about potential concentration of distribution power, economic feasibility for Model Vendors, and potential impacts on access to and quality of patient care. Beyond that, CMS specifically seeks input on virtually every detailed aspect of the ANPRM, including numerous potential variations not discussed above.  We would expect a wide divergence of views among potentially affected stakeholders. 

Finally, while interested parties may well be skeptical about the political timing of the proposal and whether it will ever actually be implemented, some consideration should be given to whether, and how, a given organization will “participate” in the program should it be implemented.  As noted, the Model Vendor will ultimately be at risk for drug costs in an environment where its ability to secure discounts may be uncertain. Thus, there may be a variety of other ways for distribution companies to maintain their relationships or to “participate” in the program in a manner which entails lower risks, including by merely acting as a contractual vendor to a Model Vendor for distribution, billing, or other services.

If your organization is considering submitting comments on the ANPRM, or otherwise has questions about the model or possible strategic responses to it, please feel free to contact one of the points of contact below.

1. 83 Fed. Reg. 54546 (Oct. 30, 2018), available at gpo.gov (herein, the “ANPRM”).
2. HHS Office of the Assistant Secretary for Planning and Evaluation (ASPE), “Comparison of U.S. and International Prices for Top Medicare Part B Drugs by Total Expenditure,” October 25, 2018, available at aspe.hhs.gov (herein, the “HHS Study”).
3. ANPRM at 54551.
4. ANPRM at 54556.
5. ANPRM at 54552.
6. CMS does state that a problem with the CAP model, which failed, was that “[t]here was no guarantee for the CAP vendors that the CAP payments would cover their drug acquisition and operating costs.”  ANPRM at 54549.
7. Of course, this amount only represents profit to the provider if they are able to acquire the given drug at ASP.  In reality a given provider may pay more or less than ASP for any given drug.
8. ANPRM at 54553.
9. ANPRM at 54553-4.  CMS does not discuss the impact on the drug add-on payment of the fact that ASP would be likely to fall under the model. Moreover, the ANPRM does not suggest potential rationales for differentiating the add-amount based on physician specialties or drug classes.
10. In the later years of the model, CMS would consider including multiple source drugs.  ANPRM at 54555. The ANPRM does not address whether the model would apply to self-administered Part B drugs.
11. ANPRM at 54556.
12. “Answering Your Questions about the IPI Drug Pricing Model, October 30, 2018, available at hhs.gov, accessed on Nov. 6, 2018.
13. ANPRM at 54551.
14. Id.
15. Reimbursement in the first four years would be a blend between ASP reimbursement and the Target Price, as detailed below.  In the fifth year, the reimbursement amount would be the Target Price.
16. ANPRM at 54556.
17. Id.
18. ANPRM at 54557.
19. ANPRM at 54532-3.
20. ANPRM at 54552.
21. ANPRM at 54560.
22. Id. The table also shows each of these savings numbers “net of premium offset”; e.g., the “total impact” net of premium offset is $16.3 billion.
23. ANPRM at 54561.

Client Alert 2018-224