The Centers for Medicare and Medicaid Services (CMS) has proposed a new rule that includes a change to the definition of a “line extension” drug. It would greatly expand the list of medicines subject to a higher Medicaid rebate penalty.
This will place additional rebate burdens on manufacturers that improve existing medicines– functioning like an increased fee or tax on medical innovators.
It is not uncommon for manufacturers to devote significant time and resources to substantially improve existing drugs – such as fixed-dose combination products to treat HIV, more targeted drugs used in cancer, and today innovators are attempting to repurpose countless drugs to treat COVID-19. This proposal will undermine these efforts.
How Do Medicaid Rebates Work?
Pharmaceutical manufacturers are required to participate in Medicaid as a condition of Medicare drug coverage. Each manufacturer must sign an agreement with the HHS Secretary to pay Medicaid rebates on every drug administered to a Medicaid beneficiary in exchange for guaranteed coverage of the manufacturer’s drug by a state Medicaid program.
For branded medicines, these rebates are typically calculated through a two-step process. First, Medicaid is entitled to a “basic rebate” which is the greater of 23.1 percent of the Average Manufacturer Price (AMP) or the difference between AMP and “best price.” In general, AMP is calculated as the average manufacturer price offered to retail community pharmacies and wholesalers, and excludes certain rebates and discounts offered to providers and health plans, among others.
In addition,, the manufacturer is required to provide an inflation penalty rebate calculated based on the extent to which the drug’s price increases exceed the Consumer Price Index for all Urban Consumers (CPI-U).
Obamacare established an alternative, inflationary rebate formula for “line extension” drugs – historically viewed as brand name medicines that had minor modifications to existing products such as a change in the color or shape of a tablet. This alternative formula requires the ensures the line extension rebate cannot “escape” from the original branded drug’s AMP and increased the rebate amount owed. This was intended to penalize drugs that were just “slight alterations” to existing drugs. Manufacturers must pay the greater of the standard Medicaid rebate or the Obamacare alternative line extension rebate every quarter.
What Does the New Rule do?
CMS is now proposing to broaden the definition of line extension drugs to encompass medicines never contemplated by Congress to be penalized in this way. This will expand the line extension designation to include innovative drugs that treat previously unmet needs and new populations.
As a result, a significant number of medicines will now be hit with a higher rebate.
This new definition is broad and describes line extension medicines as those that share at least one active ingredient with the parent drug but have been modified with a new dosage or strength, modified to have extended release, or is a combination drug of two or more medicines or a combination of medicines and medical devices.
How Does The New Rule Harm Innovation?
The CMS rule would discourage new innovations to existing medicines at a time when scientists are working around the clock in the search for COVID -19 treatments. As noted in a CNBC article, many doctors believe the quickest, most effective way to mitigate COVID is through repurposing existing drugs to treat the virus. Even before knowing whether they will be successful, there are already over 800 clinical trials underway to see if previously FDA approved medicines could be used in in the fight against COVID, including antivirals, cancer medicines, and respiratory inhalers.
This is not uncommon – in many cases, manufacturers will enhance or modify existing drugs to create efficiencies that deliver substantial value to patients that improve quality of life, are more convenient or efficient to administer to aid with adherence, or come with fewer side effects. These new innovations come from years of development and millions or billions of dollars spent. They are not intended to game the system but to improve the way we treat patients.
For example, the anti-viral drug remdesivir is currently being repurposed as an inhalable version with the hopes that it can treat Coronavirus. The drug is currently injected and there is a hope that the inhalable version can be a more effective treatment.
However, it is not as simple as changing the delivery system. Significant testing is required as noted by the New York Times:
“Still, there is no guarantee that inhaled remdesivir will be an improvement over its injectable form, or even that it will be up to par. Dr. Narasimhan noted that it will be crucial to monitor how well, and how quickly, the drug is absorbed by the parts of the body that need it most. Trials will most likely require researchers to tinker with factors like dose, especially in patients with damaged lungs.”
There are also plans to combine remdesivir with other drugs that modulate the immune system in the hopes of treating later stages of COVID-19.
These innovations have the potential to improve the way we treat Coronavirus, just as past innovations to existing medicines have improved the way we treat other diseases. We should not be discouraging this innovation, as the new CMS rule proposes to do by punishing substantial improvements to medicines through expansion of the line extension designation.