Background on BBBA Medicare Price Negotiation

In the wake of stalled action on the Build Back Better Act (BBBA) at the end of 2021, Congressional Democrats remain interested in advancing the core pieces of the legislation’s drug pricing provisions, including Medicare negotiation, likely in the form of a narrower package. President Biden reiterated support for Medicare negotiation in his State of the Union address on March 1. If such a policy were to advance in the coming months, it is likely that a Medicare negotiation policy would follow a similar design to the policy included in Senate BBBA legislative text, released December 11, 2021.

The Medicare negotiation policy included in the BBBA differs from prior proposals, such as H.R.3, on the basis of drugs eligible and selected for negotiation, as well as the definition of Maximum Fair Price (MFP). The approach proposed in the BBBA begins with defining a set of eligible drugs based on key criteria, selecting up to a maximum number of drugs per year, and negotiating a price with a defined ceiling, as described below and displayed in Figure 1.

Eligible Drugs

All insulin products, as well as certain top drugs based on total Part B and D expenditures, would be eligible for negotiation. Top Part B and D drugs would be limited to single-source drugs that have been available for at least 7 years for small molecule drugs and at least 11 years for biologics from the time of Food and Drug Administration (FDA)-approval or licensure to the selected drug publication date.

Certain orphan drugs, plasma-derived products, and drugs that represent less than $200 million in Medicare Part B and D spending are excluded. In addition, a temporary exclusion for “small biotech drugs” applies through 2027.

Drug Selection

The Secretary would select drugs each year from the set of eligible drugs, up to a defined maximum number of drugs:

• 2025: 10 drugs based on Part D spending, plus all insulins
• 2026: 15 drugs based on Part D spending, plus all insulins
• 2027: 15 drugs based on Part D and Part B spending, plus all insulins
• 2028 and beyond: 20 drugs based on Part D and Part B spending, plus all insulins

Notably, a drug would remain as a selected drug until the first year that begins at least 9 months after a generic or biosimilar is FDA-approved and enters the market. Once eligible drugs have been selected for negotiation in a given year, the Secretary must choose from among a refreshed list of negotiation eligible drugs each subsequent year to meet the defined maximum total. As a result, the total number of drugs negotiated in a given applicable price year beyond 2025 is cumulative.

MFP Calculation

Selected drugs would be subject to a negotiation process (outlined in Figure 1 below), with the MFP establishing a ceiling for prices applicable in the Medicare program. The Senate version of the BBBA would calculate the MFP to be the lower of either:

• The Part D drug’s average net price after accounting for all price concessions received by Part D plans, and for a Part B drug, the Average Sales Price (ASP)
• The applicable percentage of the non-federal average manufacturer price (non-FAMP) based on the number of years since the drug’s approval:
  • Drugs approved for more than 16 years prior to selected drug publication date: MFP of 40% of the non-FAMP
  • Drugs approved for 12–16 years prior to selected drug publication date: MFP of 65% of the non-FAMP
  • Small molecule drugs approved for 7–12 years, and biologic products approved for 11–12 years prior to selected drug publication date: MFP of 75% of the non-FAMP

There are also special rules for calculating the MFP for certain low-cost insulin products.

While the MFP establishes the ceiling for Medicare prices on negotiated drugs, there is no set price floor for most drugs. A temporary floor of 66% of the non-FAMP for small biotech drugs would apply in 2028 and 2029.

Application of the MFP

The MFP would be used in the calculation of beneficiary cost sharing for both Part B and D drugs. Part D plans would be required to include selected drugs on formularies, with the MFP set as the Part D negotiated price. For Part B selected drugs, Medicare reimbursement to providers would be 106% of the MFP (rather than 106% of ASP under current law), which may lead to reductions in provider payments.

Excise Tax for Noncompliance

Manufacturers that do not participate in negotiations would be subject to an escalating excise tax based on sales of the product. Initial noncompliance would result in a 65% excise tax, increasing by 10% quarterly to a maximum of 95% if the manufacturer remains noncompliant.

Administrative and Judicial Review

Stakeholders will be limited in their ability to challenge the legality of certain aspects of the negotiation process.

*Other information would include R&D costs; market data for the drug, including distribution of sales across different programs and projected future revenues; unit costs of production and distribution; prior federal financial support; data on patents and existing pending exclusivity; national sales data; information on clinical trials; and information on unmet medical needs.

The House passed its version of the BBBA on November 19, 2021, largely along party lines, 220–213. On December 11, 2021, the Senate Finance and Health, Education, Labor, and Pensions Committees released new drafts of the BBBA. While the BBBA stalled at the end of 2021, drug pricing policies remain a priority, as Democrats in Congress consider options to advance parts of President Biden’s domestic agenda in 2022.

Avalere’s Analysis

Using this information and the criteria outlined in the proposed Senate BBBA text released December 11, 2021, Avalere identified drugs most likely to be selected for negotiation over the first 6 applicable price years (2025–2030), with the assumption that the Secretary would select up to the maximum number of drugs each year. While this analysis does not account for future changes in drug spending, pricing, utilization, and new market entries and the timelines for specific generic/biosimilar entries are subject to change, it provides a directional assessment of drugs eligible and likely to be selected across years based on available information.

Key Findings

Avalere’s analysis finds that over the course of 2025–2030, more than 120 drugs may be subject to Medicare price negotiation. This count reflects the cumulative nature of the negotiation policy, which would implicate high-spending single-source drugs under Medicare Part D, Part B, and insulins. The set of drugs estimated to be selected for negotiation includes Parts B and D drugs with high total program expenditures, spanning several therapeutic areas, including oncology, anti-inflammatory, pulmonary, diabetes, anti-infectives, and cardiovascular.

In 2025, the first year of applicable price year implementation, 10 high-spending Part D drugs and all insulins may be subject to negotiation. These products represent approximately $52 billion in Medicare Part D spending—or more than 25% of annual Part D spending—in 2020. In total, the set of Part D drugs that could be subject to negotiation from 2025–2030 represents approximately 50% of 2020 Part D spending. Similarly, the top 10 Part B drugs in 2020 totaled about $15.6 billion in expenditures, about 40% of 2020 Part B drug spending. Part B drugs are included in negotiation beginning in 2027. Looking ahead, the policy could raise questions regarding incentives for innovation and patient access in the future. In addition, experiences with the initial negotiation periods may inform future efforts by policymakers interested in changing or expanding the policy over time.

Funding for this work was provided by Gilead Sciences, Inc. Avalere maintained full editorial control.

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Data Sources

Avalere used multiple sources to approximate the criteria outlined in the BBBA legislation, including the Centers for Medicare and Medicaid Services Drug Pricing Dashboards to identify top drugs by Part B and D spending in 2020. Avalere then used Medispan data to identify single-source and multi-source drugs. Avalere used Drugs@FDA, the FDA Purple Book, the FDA Orange Book, and other publicly available FDA resources to identify small molecule drug (approved through a New Drug Application) vs. biologic (approved through a Biologics Licensing Application), FDA date of approval, orphan drug status, and biosimilars and generics that have been approved or tentatively approved but not yet marketed.