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On Aug. 29, the Centers for Medicare &amp; Medicaid Services (“CMS”) issued <a href="https://www.cms.gov/files/document/fact-sheet-medicare-selected-drug-negotiation-list-ipay-2026.pdf">the inaugural list</a> of drugs selected for price setting under the Inflation Reduction Act of 2022 (IRA).<a href="#_ftn1" id="_ftnref1">[1]</a> Those selected drugs are Eliquis, Jardiance, Xarelto, Januvia, Farxiga, Entresto, Enbrel, Imbruvica, Stelara, and Fiasp.

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The IRA established an unprecedented system of drug price controls, under which “maximum fair prices” (MFPs) will be set. Categorical discounts ranging from 25 percent to 60 percent of the average sales price are mandated by the statute. The categories are defined by the products’ time on market.

The IRA requires that “the Secretary shall develop and use a consistent methodology ... that aims to achieve the lowest maximum fair price for each selected drug.”<a href="#_ftn2" id="_ftnref2">[2]</a> Thus, MFPs are likely to be set below the categorical discounts. The most recent CMS guidance on pricing methodology was issued on June 30.<a href="#_ftn3" id="_ftnref3">[3]</a>

Eight lawsuits challenging the constitutionality of the IRA’s drug-pricing provisions have been brought by members of the pharmaceutical industry and trade organizations. Although some motions for preliminary injunction or summary judgment have been made, the lawsuits have yet to be resolved.

For this round of price “negotiations,” each primary manufacturer (PM) of a selected drug must meet extremely short deadlines. The PMs must enter agreements with CMS by Oct. 1 and submit voluminous information by Oct. 2. They must be prepared to accept CMS’ initial offer price (IOP) or enter the price-setting process by March 2, 2024, after only one month to review the IOP.

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PMs of drugs likely to be selected for the next rounds must start preparing immediately. Waiting for selection is not a viable strategy.

To successfully argue for an MFP set no lower than the applicable categorical discount, PMs must assert evidence-driven positions on numerous product effectiveness, historical pricing, marketing and financial issues.

Evidence-backed positions on those issues will put PMs in a strong posture to obtain an MFP that is set no lower than the applicable categorical discount. Also, PMs may include evidence to establish a record for potential constitutional challenges to the price-setting process and decision.

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Short deadlines for extensive work. For the current pricing round, the PMs must meet certain deadlines. By Oct. 1, each PM must sign an agreement to enter the process of pricing “negotiations.” By Oct. 2, PMs must submit certain data regarding their selected drug(s). PMs will receive CMS’ IOP by Feb. 1, 2024. By March 2, 2024 – just one month later – they must be ready to accept that price as the MFP or commence the so-called negotiations. Such negotiations will conclude by Aug. 1, 2024. CMS will publish MFPs by Sept. 1, 2024. Those MFPs will become effective on Jan. 1, 2026. A detailed <a href="https://www.cms.gov/files/document/medicare-drug-price-negotiation-program-next-steps-implementation-2026.pdf">list of deadlines</a> is available.

The deadlines are extremely short for the work needed to meet them. For example, one month after drug selection, PMs must make submissions specified in IRA sections 1193(a)(4)(A) and 1194(e).<a href="#_ftn4" id="_ftnref4">[4]</a> Those submissions of Pricing Facts/Opinions<a href="#_ftn5" id="_ftnref5">[5]</a> are to include:

“Information on non-FAMP price” and “information that the Secretary requires to carry out the negotiation.”<a href="#_ftn6" id="_ftnref6">[6]</a>

“Manufacturer-specific data” including research and development costs; current unit costs of production and distribution; prior federal financial support; data on pending and approved patent applications; FDA-recognized exclusivities, applications and approvals; and U.S. market data, revenue and sales volume data.<a href="#_ftn7" id="_ftnref7">[7]</a>

“Evidence about alternative treatments,” including evidence concerning therapeutic advance; approved prescribing information; comparative effectiveness, generally and in specific populations; and unmet medical need.<a href="#_ftn8" id="_ftnref8">[8]</a>

CMS will allow further submission in one meeting with each PM to be held after Oct. 2; however, the further submission is only to provide context for the Pricing Facts/Opinions submitted by that date.<a href="#_ftn9" id="_ftnref9">[9]</a>&nbsp;

Compiling those submissions is an extremely heavy lift, considering that they will form much of the basis for the IOP and will define much of the record available to support the PM’s pricing arguments and potential claims of constitutional violations. This is especially true for developing evidence pertaining to therapeutic alternatives and comparative efficacy (called “clinical benefit” by CMS). In our experience, developing such types of evidence can take many months, and longer if new empirical work is required.

Given the scope of those and other deadline-driven deliverables, manufacturers with drugs at risk of being selected for IRA pricing must begin work long before CMS selects their drugs.

Successfully building a record to support pricing arguments and claims of constitutional violation.

Although the IRA describes the pricing system as one of voluntary negotiation, such is far from the case. Participation in the pricing program is virtually compelled. This is because an onerous excise tax will be imposed on PMs that continue to sell drugs covered by Medicare Parts B or D but fail to participate in the program.<a id="_ftnref10" href="#_ftn10">[10]</a> Given that a substantial portion of the overall sales of selected drugs will be through Medicare Parts B or D, withdrawal from those programs will not be a viable option. Thus, the “negotiations” will not be true negotiations because the PM will not be able to walk away. As a result, each pricing round will be a compulsory exercise in setting MFPs by fiat.

Importantly, the IRA prohibits judicial review of CMS’ pricing decisions. That prohibition leaves open review only by the Supreme Court on constitutional grounds.

Yet PMs must try to protect the value of their selected drugs. The CMS June 30 Guidance states that the agency will consider PM-submitted and other Pricing Facts/Opinions in determining the IOP for each selected drug. The IOP is CMS’ initial offer to the PM. When presented to a PM, the IOP will be accompanied by “justification.” If the IOP is not accepted, the price “negotiation” process will begin. During that process, PMs will present a counteroffer and arguments that it should be accepted.

CMS states that it will set the IOP via the following steps:

Identification of therapeutic alternative(s).

Determination of the initial offer starting point using net prices or average sales prices of therapeutic alternatives.

Determination of the preliminary price by adjusting the initial offer starting point using clinical benefit comparison with therapeutic alternatives in accordance with factors set forth in IRA § 1194(e)(2).

Determination of the IOP by adjusting the preliminary price in accordance with factors set forth in IRA § 1194(e)(1).

Each step will involve myriad decision points that will be addressed on the basis of PM-submitted and other Pricing Facts/Opinions. Those points are discussed in sections 60.3.1-60.3.4 of the CMS June 30 Guidance. Any reasonable review of those sections must conclude that the CMS decision-making process is vague in the extreme. Given that those same decision points will be at issue in MFP negotiations, each PM may well have opportunity to develop arguments that the MFPs for their selected drugs were set in an arbitrary and capricious manner.

Many examples of vagueness can be raised. One is that the term clinical benefit is not used in the IRA and not defined in CMS guidance. That term is critical to development of the preliminary price, which is critical to setting the IOP and ultimately the MFP.

Another example is the entire process by which CMS will apply the mandatory pricing factors set forth in IRA § 1194(e)(2). Those factors address issues such as therapeutic advance, comparative effectiveness and unmet medical need. Such issues are essential to effective and fair value-based pricing; however, CMS’ description of the process by which it will consider those factors covers a huge list of what Pricing Facts/Opinions will be considered. Unfortunately, the description of how those facts will be considered is nebulous at best.

CMS describes a multitude of data, information and evidence sources along with promises of assessing a long list of vetting considerations without stating – in meaningful detail – how those assessments will be made. It is unclear how, especially in the time allotted, one agency can consider sources ranging from the purely observational (e.g., “caregiver perspective”) to the robustly controlled (e.g., randomized clinical trials) by vetting each source using criteria such as “the source” (a vague term), “rigor of the study methodology,” “peer review,” “study limitations,” and “degree of certainty of conclusions” (another vague term) among many others. Arbitrary exercise of discretion and cherry picking by CMS are valid concerns.

Given those concerns and the fact that CMS will have developed its opinions before presenting the IOP, PMs must submit Pricing Facts/Opinions sufficient to provide a strong record that a rejected IOP must be increased. Also, compelling evidence will be essential to supporting any constitutional claims that arise from CMS’ decisions.

Issues to be considered in specific pricing matters. The IRA's drug-pricing system raises many issues that will be crucial to the outcomes of specific pricing matters. The following are a few of those issues:

Strategies for negotiating the MFP for a selected drug where two or more currently selected drugs are therapeutic alternatives. Such may be the case for several currently selected drugs.

Strategies for addressing impact on the value of a drug that is not currently a selected drug but is a therapeutic alternative to a currently selected drug.

How application of CMS’ “qualifying single source drug” (QSSD) definition may affect the pricing of pipeline drugs formulated with the same active moiety as a selected drug.

How the QSSD definition may be applied to subsequent generations of selected complex drugs that are formulated with different physicochemical forms of the same active moiety but are not bioequivalent at sites of action.

Although we cannot cover those issues in this client alert, our Drug Pricing Team stands ready to help. With a track record of successfully advocating comparative efficacy issues for drug company clients, BakerHostetler’s Drug Pricing Team is especially well prepared to help develop those positions and the evidence to support them. Also, our team members have broad experience in price-setting, drug price compliance and negotiations with CMS.

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<a href="#_ftnref1" id="_ftn1">[1]</a> Inflation Reduction Act of 2022, H.R. 5376, 117th Cong. (2022) [hereinafter IRA].

<a href="#_ftnref2" id="_ftn2">[2]</a> IRA § 1194(b)(1).

<a href="#_ftnref3" id="_ftn3">[3]</a> United States, Department of Health and Human Services, Center for Medicare and Medicaid Services. Medicare Drug Price Negotiation Program: Revised Guidance, Implementation of Sections 1191 – 1198 of the Social Security Act for Initial Price Applicability Year 2026. June 30, 2023. &nbsp;Meena Seshamani, M.D., Ph.D., CMS Deputy Administrator and Director of the Center for Medicare, <a href="https://www.cms.gov/files/document/revised-medicare-drug-price-negotiation-program-guidance-june-2023.pdf">https://www.cms.gov/files/document/revised-medicare-drug-price-negotiation-program-guidance-june-2023.pdf</a> [hereinafter CMS June 30 Guidance].

<a href="#_ftnref4" id="_ftn4">[4]</a> IRA § 1191(d)(5)(A).

<a href="#_ftnref5" id="_ftn5">[5]</a> The CMS June 30 Guidance calls for submission and consideration of “data,” “information,” or “evidence” for various purposes. Those terms appear to be used indiscriminately, even though data (raw measurements), information (data in context) and evidence (information vetted for reliability/relevance to decision-making elements) are very different concepts with different uses. For brevity, we use “Pricing Facts/Opinions” to include all three terms.

<a href="#_ftnref6" id="_ftn6">[6]</a> IRA §§ 1193(a)(4).

<a href="#_ftnref7" id="_ftn7">[7]</a> IRA § 1194(e)(1).

<a href="#_ftnref8" id="_ftn8">[8]</a> IRA § 1194(e)(2).

<a href="#_ftnref9" id="_ftn9">[9]</a> CMS June 30 Guidance at 62.

<a href="#_ftnref10" id="_ftn10">[10]</a> IRA § 11003.

The CMS List of Selected Drugs: Developing Effective Arguments for Pricing of Selected Drugs Under the Inflation Reduction Act of 2022

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