Healthcare reform in the US has made substantive changes to the Medicaid Drug Rebate Program in recent years, including the increase of rebate percentages for covered drugs and the incorporation of Medicaid Managed Care Organization (MCO) programmes. As of November 2015, a benchmark change was implemented, particularly noteworthy not so much for its contents, but for the events influencing its speedy ratification.
The passage of Section 602 in the Bipartisan Budget Act of 2015 (BBA) imposes the same inflation penalties for generics as those placed on branded drugs. It’s important to note that, because generics have historically been a cheaper alternative to branded drugs, the prices in some cases decreasing over time, it was originally determined that a similar cost-control measure was not necessary. In reality, the omission of a similar inflation penalty for generics has allowed drug prices in that market to rise primarily unchecked. Predictably, a large proportion of generics have progressed considerably above the rate of inflation in the past several years.
While this legislation had been proposed and largely ignored in the Senate a year earlier, headlines featuring exorbitant price increases of generic drugs helped to garner support. Reaching its zenith with the case of Daraprim and Turing Pharmaceuticals, public outrage surrounding allegations of price gouging helped to expedite government action.
While this legislation will not prevent large price increases outright, the influence driving it – an increasingly informed and vocal public via social media – is likely to shape the future of pharmaceutical pricing practices.
In response, companies must become more aware of and sensitive to community sentiment surrounding drug pricing. Failure to develop a proactive plan to explain pricing decisions could negatively impact a company’s public image and, eventually, their bottom line.
Anticipating cost-control measures
In preparing for this legislation, manufacturers should first consider re-evaluating their overall pricing strategies, gauge long-term ramifications and determine how inflation penalties on generic medications could affect a drug’s profitability. The timing and nature of concessions associated with product launches will have a significant influence on baseline product pricing, and could subsequently affect the profitability of the product throughout its life cycle.
Given their efficacy in the branded drug market, imposing inflation penalties for generic drugs appears to be a viable method of price control. A 2011 study by the Office of the Inspector General observed that the financial burden posed by the rising costs of branded drugs was mitigated by the provision of rebates from pharmaceutical manufacturers.
The US case of Daraprim and Turing … helped to expedite US government action
Lessons learned
Generally, reforms in pharmaceutical revenue management are slow to take effect. By contrast, the swift passage of Section 602 highlights the effect that public perception can have on the speed at which these changes occur.
Significant price hikes in the pharmaceutical industry are not a new phenomenon, nor does this legislation effectively prevent them from happening. Depending on the business model, Medicaid may be a smaller component of a manufacturer’s revenue stream.
It seems clear, however, that as the public becomes increasingly more informed and more vocal through the prevalence of social media, the practices of a pharmaceutical company are subject to more scrutiny, as well.
Taken as a lesson, the passage of Section 602 shows that pharmaceutical manufacturers need to be acutely aware of anticipated community sentiment in response to drug pricing, and be prepared to back up their actions to maintain their reputation in the industry and with the public. More importantly, they need to have a proactive plan to explain pricing actions.
Next steps for generic drug pharmaceutical companies
Revenue management executives at pharmaceutical manufacturers will want to take specific next steps in response to this legislation before Section 602 comes into effect.
Today
Per the legislation, generic drugs will have to pay an additional rebate on top of the basic rebate. Like branded drugs, the incremental fee is defined as the difference between the current quarter AMP and the Baseline AMP adjusted for inflation. The designation of the baseline quarter for AMP and CPI-U is contingent upon the market entry date of the product. Drugs brought to market prior to 1 April 2013 will use the third quarter of 2014, while drugs introduced after this date will use the fifth full calendar quarter after the market entry date.
The first consideration for generic drug manufacturers will be which products fall on either side of the 1 April 2013 threshold, based on their market entry dates. After this point, the corresponding values for Baseline AMP and CPI-U should be retrieved so that data can be prepared for the amendment’s effective date, and sample calculations executed. Finally, manufacturers will want to determine whether the results of these calculations necessitate a restatement for AMP, particularly since either Baseline AMP (3Q 2014 or 5th full quarter) is currently within the three-year window for restatements.
[As] per the US legislation, generic drugs will have to pay an additional rebate on top of the basic rebate
Tomorrow
Most pharmaceutical manufacturers employ a Revenue Management System (RMS) designed to operate under specific parameters, given the current governmental landscape. Generic drug manufacturers will need to determine the ease in which a change to the Medicaid URA formula in these systems can occur. For many platforms, this adjustment may constitute a simple formula modification, while others may require a more involved reconfiguration.
In all cases, it will be necessary to proactively test the functionality of the altered rebate calculation to ensure that the system-generated values match expected results. Otherwise, companies are likely to find themselves in a position where Government Pricing and Medicaid formulas are adversely affected upon Section 602’s effective date without any recourse but manual calculation. Given the prominence of AMP in pharmaceutical pricing and calculation, this could prove to be a real burden.
In the future
While the far-reaching implications of this legislation will not be known for some time, it does raise important questions for manufacturers. Generic drug makers will want to consider reviewing their forecasting models, accrual workbooks and price reporting. Many will likely require updates to be compliant with this legislation. Additionally, prospective gross-to-net calculations will have to factor in inflation-based rebates as a mitigating influence on bottom-line revenue. As a result, this may well impact contracting strategies for generics.
From a broader perspective, manufacturers will need to re-evaluate their overall pricing strategies, because the long-term ramifications of inflation penalties on generic medications could significantly affect the profitability of these drugs. Manufacturers will also have to consider the timing of generic product launches, acquisitions, withdrawals, price changes and discounts based on their interaction with the new inflation penalty standards.
Further downstream, other prices that are derived from Medicaid URA’s will also need to be examined. The 340B ceiling price, which is used to determine rebate amounts for entities covered under the 340B pricing programme, is calculated as the current quarter Medicaid URA subtracted from the current quarter AMP. As a result, 340B prices for generic drugs may be lowered as Medicaid URAs become higher.
Finally, given the confluence of all these changes with the looming AMP Final Rule, pharmaceutical manufacturers will want to ensure that plans for addressing this legislation consider the most comprehensive path forward in order to keep the investment of time and resources as efficient as possible.
