President Trump’s FY 2019 Budget Request Addresses Drug Pricing, Generics

By Patricia Van Arnum - DCAT Editorial Director

February 14, 2018

President Donald Trump has released his Administration’s budget proposal for fiscal year 2019. So what are the key budget priorities impacting the pharmaceutical industry and healthcare policy?

The proposed budget includes spending priorities and changes to healthcare policy to increase drug competition and reform Medicare and Medicaid practices to address drug pricing. The budget proposal also outlines funding for the Department of Health and Human Services (HHS) and the US Food and Drug Administration (FDA).

Inside the proposed budget

Among the changes highlighted in President Trump’s proposed budget, which was released on February 12, 2018, is to give the FDA greater ability to bring generics to market faster by incentivizing more competition among generic manufacturers. “This proposal would result in substantial savings to Medicare,” according to the budget proposal. “The Budget proposes to ensure that first-to-file generic applicants who have been awarded a 180-day exclusivity period do not unreasonably and indefinitely block subsequent generics from entering the market beyond the exclusivity period,” said the budget proposal. The proposal makes the tentative approval of a subsequent generic drug applicant that is blocked solely by a first applicant's 180-day exclusivity, where the first applicant has not yet received final approval, a trigger of the first applicant's 180-day exclusivity. "This means the period of exclusivity would immediately begin for the first filer,” as outlined in the budget proposal. “This proposal will enhance competition and facilitate more timely access to generic drugs,” it said. 

The President’s budget proposal also includes new strategies to address high drug prices and increase access by rationalizing the current payment incentive structures in Medicare Part D (prescription drug coverage) and Medicare Part B (medical coverage) to foster greater competition. The proposed budget offers a rationale for reform based on estimates that Medicare Part D prescription drug spending is projected to total $94 billion in 2017, an increase of 97% since 2007. "Research has shown that the misaligned incentives in the Part D benefit design help drive this trend by rewarding drug pricing and price-concession strategies that encourage plans to provide favorable formulary placement and to promote utilization of high-cost drugs when lower-cost options are available,” according to the budget proposal. “This ultimately results in higher spending for both beneficiaries and the Government.”

The proposal points out that in 2015, nearly 1 in 10 Medicare Part D enrollees (3.6 million), including 2.6 million beneficiaries receiving low-income subsidies, reached the highest level of spending in the benefit structure, the catastrophic phase, where Medicare covers 80% of costs. On average, enrollees with spending in the catastrophic phase incurred 40% of their total out-of-pocket costs above the threshold in 2015, according to the budget proposal. Among the changes proposed are establishing catastrophic coverage under the Part D drug benefit through a newly established out-of-pocket maximum.

In addition, the budget proposal eliminates cost sharing for generic drugs for low-income seniors to encourage the use of higher value products, requires plans to share a substantial portion of savings from negotiated rebates with beneficiaries at the pharmacy counter, and enables what it calls as “tougher” Part D plan price negotiations with drug manufacturers through increased plan formulary flexibilities. The proposed budget also calls to permanently authorize a Medicare Part D demonstration that provides retroactive and point-of-sale coverage to certain low-income beneficiaries through a single plan. “Working through one plan for retroactive coverage establishes a single point of contact for beneficiaries to resolve coverage issues, eliminates incentives that impede reimbursement of retroactive claims, and has proven to be less disruptive to beneficiaries,” said the budget proposal.

The budget proposal further addresses pricing under Medicare. Generally, Medicare reimburses Part B drugs provided in doctors' offices or hospitals based on the drugs’ average sales price (ASP) plus 6%; “however, there is no limit to how much Medicare's payment rate for a drug can increase over time, allowing for dramatic price increases,” said the budget proposal. The budget proposal would require all Part B drug manufacturers to report ASP data and provides the HHS Secretary with the authority to apply penalties to manufacturers who do not report required data. The budget proposal places a limit on increases in Medicare's ASP-based payment for a drug based on inflation as measured by the consumer price index. Additionally, the budget proposes to modify hospitals' payments for drugs acquired through the 340B drug discount program to reward them based on the charity care they provide and to reduce payment if they provide little to no charity care. Finally, the budget proposal provides the HHS Secretary with authority to consolidate certain drugs currently covered under Part B into Part D where there are savings to be gained through increased price competition.

The budget proposal points out that when ASP data are not available, Medicare largely reimburses new, single-source Part B drugs at 106% of wholesale acquisition cost (WAC). “Unlike an ASP, a drug's WAC does not incorporate prompt-pay or other discounts benefitting the manufacturer,” said the budget proposal. “If discounts are available on these new Part B drugs, Medicare is paying more than it otherwise would under the ASP-based formula.” To reduce excessive payments, the budget would reduce the payment rate for drugs currently paid at 106% of WAC to 103% of WAC.

The budget proposal also calls for reforms under Medicaid as it relates to drug pricing. Under the Medicaid Drug Rebate Program, states who include optional drug benefits are required to cover any prescription drug offered by manufacturers who have entered into statutorily-defined rebate agreements with the HSS. Under the Medicaid prescription drug demonstration proposed in the President’s budget, participating states would determine their own drug formularies, coupled with an appeals process to protect beneficiary access to non-covered drugs based on medical need, and negotiate drug prices directly with manufacturers, instead of participating in the statutory drug-rebate program. “The proposal includes exempting prices negotiated under the demonstration from Medicaid's Best Price reporting requirements, facilitating price negotiation between states and manufacturers,” said the proposal. “HHS and participating States would rigorously evaluate these demonstrations, which would provide States with new tools to control drug costs and tailor drug-coverage decisions to State needs,” according to the budget proposal.

Separately, the budget proposes a legislative change to clarify the Medicaid definition of brand drugs, which the proposal says “would address inappropriate interpretations leading manufacturers to classify certain brand and over-the-counter drugs as generics for Medicaid rebate purposes, reducing rebate amounts owed.”

Funding for HHS and the FDA

In addition, the HHS released the full FY 2019 Budget for the HHS, inclusive of the Addendum to the President’s FY 2019 Budget to account for the Bipartisan Budget Act of 2018, which was the concurrent resolution signed into law by President Trump on February 8, 2018 to fund the government until March 23, 2018, which will enable Congress to write an omnibus spending bill for the rest of the fiscal year.

The President’s budget request for HHS proposes $95.4 billion in discretionary budget authority and $1,120 billion in mandatory funding. Under the $1,216 billion in budget outlays, 52% is for Medicare and 34% is for Medicaid. Under the proposal, the National Institutes of Health and the FDA would see increases, but the budget for The Centers for Disease Control and Prevention would face reductions.

“The President’s budget makes investments and reforms that are vital to making our health and human services programs work for Americans and to sustaining them for future generations,” said HHS Secretary Alex Azar in a February 12, 2018 statement in commenting on President Trump’s FY 2019 budget. “In particular, it supports our four priorities here at HHS: addressing the opioid crisis, bringing down the high price of prescription drugs, increasing the affordability and accessibility of health insurance, and improving Medicare in ways that push our health system toward paying for value rather than volume.“

The President’s FY 2019 budget for HHS includes $5.8 billion in total resources for the FDA, an increase of $663 million or 13% above a continuing resolution for FY 2018. At this total level, the budget provides an increase of $190 million in user fees while increasing budget authority by $473 million. The proposed budget includes $486 million for the FDA to speed the development and approval of new drugs and medical devices as well as to increase the quality and safety of next generation manufacturing practices. In addition, the budget provides an initial allocation of $10 million to the FDA as part of a historic $10-billion department-wide investment to address the opioid epidemic and mental illness. The budget invests $500 million in the National Institutes of Health to support and supplement existing efforts with a public–private collaborative research initiative on opioid abuse.

FDA Commissioner Scott Gottlieb commented on the President’s budget proposal and highlighted further funding for manufacturing initiatives. “…[T]he Administration’s newly released budget request provides the FDA with the resources to continue to fund our current programs at consistent levels, said Gottlieb in a February 13, 2018 statement. “The request will allow the agency to continue to support our core public health mission, including protecting the safety of the foods we eat. It also includes about $400 million in additional funding to advance planned initiatives to further promote innovation and competition and advance the health and safety of American families.”

Gottlieb points out specific priorities with the proposed funding for the FDA. “These initiatives are aimed at supporting new and ongoing efforts to foster more investment and innovation in the development of therapeutics and diagnostics that target unmet medical needs; advance drug and device competition; stand up new domestic industries–such as pharmacy outsourcing facilities; and create more modern, domestically based manufacturing, including continuous manufacturing of drugs and biological products, including vaccines,” he said in the February 13, 2018 statement. “These manufacturing platforms can bring more businesses back to the US, help lower drug and device development costs,” and reduce the risk of shortages.

Industry feedback

Several industry trade groups offered their comments on the proposed budget, including the reforms to Medicare.

“We share President Trump’s goal of making medicines more affordable and accessible for patients,” said Stephen J. Ubl, the president and chief executive officer (CEO) of Pharmaceutical Research and Manufacturers of America (PhRMA), an industry trade group of innovator-research-based pharmaceutical companies, in a February 12, 2018 statement. “We applaud the President for proposing to give seniors in Medicare Part D access to negotiated savings at the pharmacy counter, which is an important step that would lower out-of-pocket costs and make it easier for seniors to access the medicines they need. At the same time, we have concerns with other elements of the budget request which appear to limit access to innovative medicines and erode market-based systems in Medicare Part D and Part B.”

Ubl offered further feedback. “We look forward to engaging with the Administration in the days ahead to ensure any changes to Part D strengthen the program for patients. Congress should repeal the harmful Part D changes in the recent budget deal and instead pursue additional reforms to improve affordability and predictability for seniors, such as adding an out-of-pocket maximum as called for in the President’s budget request. We are also pleased that the budget request includes additional market-based proposals to address misaligned incentives in the system and recognizes further changes are needed to the 340B program. In addition, we support an ongoing focus on fighting the prescription opioid crisis.” The 340B program is a US government program created in 1992 that requires drug manufacturers to provide outpatient drugs to eligible healthcare organizations and covered entities at reduced prices

Biotechnology Innovation Organization (BIO) President and CEO Jim Greenwood issued the following statement in response to President Trump’s FY 2019 budget proposal. “While we are still reviewing the details of the President’s proposed budget, we applaud the President’s efforts to lower patients’ out-of-pocket costs for prescription drugs, to provide more funding to combat our nation’s opioid epidemic, and to rein in abuses of the 340B drug discount program,” he said in a February 13, 2018 BIO statement. “That said, we have serious concerns that elements of this proposal could fundamentally upset the successful Medicare drug benefit that has been tremendously successful at providing American seniors with access to needed treatments and cures while coming in well under initial CBO [Congressional Budget Office] estimates. We will continue to review these proposals in the coming days and stand ready to work with the Administration and members of both parties in Congress to advance policies related to health, agriculture, and energy that will preserve America’s role as the world leader in biotechnology innovation.”