HHS Needs More Rebate Information To Negotiate Medicare Drug Prices, Say USC Experts

The Department of Health and Human Services (HHS) has selected the first 10 drugs subject to Medicare price negotiation under the Inflation Drug Act (IRA), although they won’t go into effect till Jan. 1, 2026. But the negotiation process — some say it is not really a negotiation but price setting by the federal government — has started and the negotiated “maximum fair price,” or MFP, are scheduled to be published by Sept. 1 of this year.

The IRA spells out the criteria that the HHS secretary is to use to arrive at an MFP, a list that includes (but is not limited to) a drugmaker’s research and development costs and the extent to which those costs have been recouped; the current unit cost of production and distribution; how much the federal government spent on research related to the drug; and U.S. sales and revenue data.

But Steven Lieberman, M.Phil., M.S., and Paul Ginsburg, Ph.D., argue in a recent Health Affairs Forefront blog post argue that the closely held information about rebates and net prices could result in an MFP that is above what favored commercial payers pay for drugs.

“Having HHS set the [MFP] for Medicare without knowing the actual, post-rebate (net) prices received by a manufacturer from all payers — including Medicaid, the 340B program and commercial payers — creates uncertainty about the magnitude of the actual price cut and complicates understanding the value of a drug relative to therapeutic alternatives,” Lieberman and Ginsburg wrote in a Forefront blog post published on Feb. 16.

Lieberman is a nonresident senior fellow at the University of Southern California Schaeffer Center for Health Policy and Economics and a nonresident fellow in economic studies at the Brookings Institution. Ginsburg is a professor of health policy at the Sol Price School of Public Policy at the University of Southern California and a senior fellow at the Schaeffer Center.

Lieberman and Ginsburg note if prices are set too low it might have a “chilling effect on investment and limit the development of new drugs.”

As Lieberman and Ginsburg explain, the IRA law sets up a method for HHS to arrive at a ceiling amount for the MFP for the drugs that the HHS has picked for negotiation, although there is nothing to prevent the department from deviating from that ceiling price and setting the MFP lower.

Under the IRA ,HHS can use one of two prices to calculate a ceiling MFP: the nonfederal average manufacturers price (non-FAMP) or the net Medicare Part D price.

Non-FAMP is a confidential price reported to the Department of Veterans Affair by drugmakers. It is the average price wholesalers pay manufacturers for brand-name drugs distributed to nonfederal purchasers. It is a price paid to drugmakers before they have applied any of the rebates that get paid to health plans and pharmacy benefit manufacturers. IRA says HHS can set the ceiling MFP based on a percentage of the non-FAMP: 40% of the non-FAMP for drugs with 16 years of market exclusivity and 75% of the non-FAMP for other drugs, according to Lieberman and Ginsburg.

The other benchmark HHS can use to set the MFP is the net Medicare Part price, which is an enrollment-weighted price of a selected drug for all Part D plans. Unlike the non-FAMP, the net Medicare Part D price does reflect rebates and is based on non-public information that the Part D plans report to CMS.

The problem, according to Lieberman and Ginsburg, is that neither the non-FAMP nor net Part D price captures the true price of what a drugmaker is receiving for a drug from a variety of different payers once rebates and discounts get factored in. They cite a 2017 Congressional Budget Office report that shows, for example, that Medicaid net prices are considerably lower than non-FAMP and net Part D prices. If HHS were to use the 75% of non-FAMP benchmark to set the price it pays for a drug that is heavily rebated, it would likely wind up paying a higher price than other payers pay because of the substantial rebates, even factoring in the 25% cut from non-FAMP, they say.

Similarly, say Lieberman and Ginsburg, the net Part D price is also likely going to be a higher price for many drugs than the price drugmakers get from Medicaid and the 340B program and perhaps also some large commercial payers, who can drive a hard bargain for large rebates (and therefore lower net prices) because they have a large enrollment and if they set up a tight formulary that favors a manufacturer’s drugs.

Lieberman and Ginsburg say HHS needs a fuller picture of rebates and net prices to arrive at a negotiated price. “Under the current process for establishing the MFP, the manufacturer but not the secretary will have detailed information on rebates and net prices,” they say.

Lieberman and Ginsburg also make a case for HHS having more granular data at the national drug code (NDC) level because a single drug may have many NDCs, each with a different rebate and therefore net price profile. They point to Enbrel (etanercept) as an example. It has 31 NDCs, they say, that differ by dosage, package size and route of administration.

“[P]olicy decisions benefit from having more rather than less information, so requiring data on actual net costs will improve MFP negotiations,” wrote Liberman and Ginsburg. “Having appropriate data will enhance the likelihood of an [HHS] secretary making analytically sound decisions rather than reacting without adequate information to popular pressures to lower drug prices for Medicare beneficiaries or lobbying by manufacturers for a higher MFP.”