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Impact of Medicare Part D on the Fate of Orphan Products. Donald W. Moran. May 23, 2005. T HE M ORAN C OMPANY. Impact of Medicare Part D. My assignment today:

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Impact of Medicare Part D on the Fate of Orphan Products

Donald W. Moran

May 23, 2005

THE MORAN COMPANY

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Impact of Medicare Part D

  • My assignment today:
    • Identify key features of Part D structure that will affect pharmaceutical and biotech industries, with particular emphasis on implications for orphan products.
    • Assess uncertainties in a few critical areas.
    • Offer a prognosis for resolution of these uncertainties.

THE MORAN COMPANY

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Impact of Medicare Part D

  • Overall, the implications are profound:
    • By next year, something approaching 40 million Medicare beneficiaries will move from wherever they were into a new financing channel.
    • A significant share of the existing “cash and carry” traffic at the local pharmacy will go away.
    • There will be a significant increase in the share of product subject to negotiated price concessions.
    • Net effect will vary product-by-product.

THE MORAN COMPANY

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Impact of Medicare Part D

  • One product space where the immediate impact won’t be significant is in current “Part B” drugs:
  • In general, these will remain in Part B, and be subject to emerging coverage and payment policies there.
  • A significant number of current and pending orphan products are or will be Part B drugs, and hence will remain subject to the shifting landscape of payment policies set in motion under §303 of the MMA.
  • Having said that, there are uncertainties at the boundary between B & D.

THE MORAN COMPANY

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Impact of Medicare Part D

  • Uncertainties arise from the following facts:
  • Many products previously manufactured solely in injectible/infusible form are now available increasingly as self-injectibles – or even in oral form.
  • MMA, however, did not amend the requirement that B coverage is limited to drugs that are “not usually self-administered.”
  • CMS adopted patient-centric rule for sorting out coverage under B versus D.
  • Prospect that products could be covered under both programs for different patients.

THE MORAN COMPANY

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Impact of Medicare Part D

  • In these circumstances:
  • If self-administered forms become significant, growing D coverage volume could induce carriers to determine that the product fails the “not usually self-administered test.”
  • In that case, the injectible/infusible form could lose Part B coverage for all patients.
  • While these scenarios may not be generally frequent, they are potentially important in the world of orphan products.

THE MORAN COMPANY

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Impact of Medicare Part D

  • Unresolved questions:
  • What happens, in such cases, to reimbursement for patients for whom office- (or hospital-) based administration is considered medically necessary?
  • Will Federal policy condone “brown bagging” the product back in from the community pharmacy, with coverage under Part D?
  • Can manufacturers forestall loss of B coverage by distinctive labeling of different product forms?
  • CMS regulatory efforts to date have not reached these questions.

THE MORAN COMPANY

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Impact of Medicare Part D

  • For orphan products (present or future) that make it over to the Part D side:
  • There’s a general presumption that if a script is submitted in a community pharmacy setting, it will be covered.
  • Exactly how it is covered, however, may turn out to matter a lot – and will vary from drug plan to drug plan.

THE MORAN COMPANY

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Impact of Medicare Part D

  • Like existing commercial plans, Medicare drug plans will have formularies:
  • Some sponsors (particularly HMOs) may have true “closed formularies,” under which coverage for non-formulary products is zero.
  • Most others can be expected to have “semi-closed” formularies, in which formulary placement is enforced by differential cost sharing tiers.
  • Statute and rules offer PDPs wide latitude to innovate.

THE MORAN COMPANY

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Impact of Medicare Part D

  • CMS will scrutinize formularies for “non-discrimination”:
  • A “safe harbor” therapeutic class structure – with very broad classes – was adopted by rule; there is no explicit protection for orphan drugs.
  • CMS has said that it will look more deeply to determine whether formulary exclusions threaten access for discrete classes of patients.
  • “Orphan” designation, per se, however, has not been given explicit standing in either the statute or the regulations of formularies.

THE MORAN COMPANY

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Impact of Medicare Part D

  • It is important to emphasize that:
  • CMS scrutiny regarding “non-discrimination” against orphan drug users, even if stringent, need not necessarily go beyond the product label.
  • It would be fully consistent with their rules to require plans to cover a product for on-label uses, while still permitting it to be excluded from the formulary – or subjected to non-preferred cost sharing tiers -- for off-label use.
  • In this regime, use for “off label orphan indications” may have no standing.

THE MORAN COMPANY

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Impact of Medicare Part D

  • One area where orphans are explicitly mentioned is pharmacy access:
  • CMS notes that some products, such as those for orphan diseases, may only be available in specialty pharmacies.
  • Plan networks will not be required to include these pharmacies, but will be required to offer access under “out of network” provisions.

THE MORAN COMPANY

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Impact of Medicare Part D

  • Out of network access will be complicated:
  • Almost certainly requires paper claims (since out of network pharmacy will by definition not be tied into the relevant systems).
  • Also requires beneficiary to pay any difference in cost sharing between the dispensing pharmacy’s usual and customary costs and normal plan pharmacy reimbursement.
  • Plans are permitted to establish restrictions on this access, and the access may not be routine.
  • In some instances, this issue could prove quite significant.

THE MORAN COMPANY

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Impact of Medicare Part D

  • In my experience, implications of cost sharing rules are under-appreciated:
  • Most audiences concerned about high-cost products expressed concern throughout the genesis of the program about the “donut hole” in coverage.
  • These concerns were addressed by assurances that plan sponsors could offer “actuarially-equivalent” coverage that smoothed out the cost sharing.

THE MORAN COMPANY

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Impact of Medicare Part D

  • Yet it’s generally not appreciated that:
  • “Smoothing” will require an average copayment well in excess of the 25% cost sharing applicable to the first coverage tranche in the standard benefit package in order for the overall plan to be actuarially equivalent to the standard design.
  • Particularly true if plans want to offer sweetened cost sharing for preferred choices (e.g., generics).
  • Cost sharing for non-preferred options could, therefore, be quite high.

THE MORAN COMPANY

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Impact of Medicare Part D

  • This was telegraphed in the recent controversy over the “specialty tier” exemption:
  • In general, CMS will permit beneficiaries to request an “exception” for reduction in cost sharing of non-preferred drugs if medically necessary.
  • The final rule, however, permits plan sponsors to have a “specialty tier” exempt from this cost sharing exceptions process.
  • Industry has correctly identified access concerns.
  • If plans want to do “smoothing,” however, they have to have some way to hit actuarial equivalence.

THE MORAN COMPANY

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Impact of Medicare Part D

  • All this suggests focus on obscure “TrOOP Rules”:
  • Both statute and regulations require beneficiaries to spend $3,600 (2006) out of their own pocket before catastrophic coverage kicks in. (Low income subsidies are available).
  • Question is whether manufacturer-sponsored foundations can provide financial assistance with copays while still allowing beneficiaries to reach catastrophic benefit.
  • For high cost products, a lot is potentially riding on this decision.

THE MORAN COMPANY

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Impact of Medicare Part D

  • Summing up from the manufacturer’s perspective:
  • Even for Part B drugs, the “B/D interface” issue may already be influencing pipeline decision-making.
  • For Part D products, formulary placement may be critical (particularly for “off label orphan” indications.)
  • For this reason, beneficiary plan enrollment decisions may influence coverage of specific products.
  • Once in plans, cost sharing considerations will be critical.

THE MORAN COMPANY