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Volume XI, Number 55


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The Fate of the Trump Administration’s Controversial Most Favored Nation Drug Pricing Model Is Unclear Given Mounting Legal Challenges

On November 27, 2020, CMS published its Most Favored Nation (MFN) Model Interim Final Rule (IFR) that seeks to lower the amount paid for 50 high-cost Medicare Part B drugs to the lowest price that drug manufacturers receive in similar countries.[1] CMS utilized its purported authority under the Affordable Care Act (ACA) to implement a pricing model via its Center for Medicare and Medicaid Innovation (CMMI). Comments to the IFR are due by January 26, 2021. The MFN Model will operate beginning January 1, 2021 and continue for seven years until December 31, 2027.

Several parties filed suit on December 4, 2020 challenging the validity of the IFR in the U.S. District Court for the District of Maryland[2], and policy experts believe that the incoming Biden Administration may scrutinize the IFR. Issuing the MFN model via an IFR provides the incoming Administration with an opportunity to quickly modify or suspend the rule. However, absent a temporary restraining order, stakeholders must prepare to comply with the rule effective January 1, 2021, including complying with new claim submission and potential tracking requirements.

What Products Are Included/Excluded

The MFN model includes a cohort of 50 separately payable Medicare Part B drugs (by HCPCS code) that represent a high percentage of Medicare Part B spending, including biosimilars. The 50 drugs that will be part of the MFN model during year one are listed at pages 76,194-76,195 (Table 2) of the CMS interim final rule. CMS will add drugs to this list annually based on updated annual Medicare Part B spending. CMS will also update the HCPCS codes associated with these drugs and post an updated list on a quarterly basis to the MFN model website [3] Sales of products reimbursed under the MFN model will be excluded from average sales price (ASP) calculations and reporting requirements.

Certain classes of medicine are excluded from consideration, including vaccines, radiopharmaceuticals, certain compounded drugs, oral drugs and immune globulin products.[4] CMS will analyze biosimilars when confirming its list of the top 50 high cost drugs. CMS’s initial list contains only one biosimilar product (Udenyca), but considering other biosimilars that are in the pipeline, this list could grow.

The payment model will not apply to claims submitted by acute care hospitals for separately payable Part B drugs that were administered during an inpatient stay or included on an inpatient claim pursuant to CMS’s 3-day bundled payment rule.[5] Finally, drugs on FDA’s shortage list will be reimbursed at the prevailing ASP rate less the existing 6% add-on.[6]

What Participants Are Included/Excluded 

The model includes mandatory participation by certain providers, such as physician practices and hospital outpatient departments (including 340B disproportionate share hospitals).[7] It does not apply to cancer hospitals, children’s hospitals, critical access hospitals, rural health clinics, federally qualified health centers, Indian Health Service facilities or non-subsection (d) hospitals paid on the basis of cost .

The IFR does contain a financial hardship exception. To qualify, participants must meet a significant hardship test – meaning the provider must demonstrate that it meets certain benchmarks related to losses year over year.[8] The hardship exception may prove to be limited given CMS’s requirement to prove significant hardship. Likewise, hardship determinations are within CMS’s sole discretion and are not subject to appeal per the terms of the IFR. In short, physician practices and hospitals may be left with little to no recourse if losses under the Medicare Part B program mount due to drug prices that exceed reimbursement under the MFN model. In fact, CMS recognizes that there could be a “extreme disruption” caused by the MFN Model as detailed in CMS’s detailed economic analysis of the IFR.[9] Note that there is no low volume exception in the IFR.

MFN Payment Scheme

In general, CMS’s new payment model comprises of two payments – 1) a per-drug “MFN Drug Payment Amount” plus 2) an alternative add-on payment.[10] The MFN payment only applies when Medicare is the primary payor.

CMS will calculate the payment for an initial list of 50 high-cost, separately payable Medicare Part B drugs based on a price that reflects the lowest per capita Gross Domestic Product (GDP)-adjusted price of any non-U.S. member country of the Organization for Economic Co-operation and Development (OECD) with a GDP per capita that is at least 60% of the U.S. GDP per capita.[11] CMS will phase in the MFN model over four years by setting the drug’s price based on a blend of the MFN price and the ASP.[12] In the first year, 25% of the price will be based on the MFN price and 75% of the price will be based on ASP. The MFN price will be phased in by an additional 25% each year, such that by the fourth year it will comprise 100% of the drug’s price. If the applicable ASP (less the applicable add-on) is less than the MFN price, the MFN rate will equal ASP less the applicable add-on.

CMS estimates that the MFN Drug Payment Amount may result in a reimbursement reduction of 65% (as it relates to ASP) by year 4. By way of comparison, CMS currently reimburses all separately payable Part B drugs, except for 340B drugs, at ASP plus 6% . The payment rate for 340B drugs is currently ASP minus 22.5%. For 340B drug claims, which must be submitted with the JG modifier, the reimbursement rate under the MFN model will be capped at the lesser of the phased in MFN price or the existing non-MFN payment (i.e., ASP minus 22.5%).[13] CMS expects that 340B entity pricing will remain consistent with ASP minus 22.5% in 2021, with 3% reductions in each following year based on CMS’s predictions concerning future international price increases by manufacturers. As a result, CMS is relying heavily on 340B entities to provide products and services to patients who seek care in alternative venues if and when the patients’ current providers are unwilling or unable to continue offering products subject to MFN model pricing. Time will tell if this holds true.

All MFN participants, including 340B entities, will also receive a per-dose add-on payment of $148.73, which will be adjusted for inflation each quarter.[14] The add-on applies to 340B drug claims even when paid at the existing ASP minus 22.5% rate.[15] The add-on will no longer present a percentage of ASP under the MFN Model. CMS believes this add-on, coupled with a 340B agnostic approach in 2021, may result in an initial increase in revenue for 340B entities . Note that the add-on payment will not apply to, and should not be billed for, waste billed using the JW modifier.[16]

Please be advised that the add-on will require a separate claim line item using HCPCS code M1145.[17] Participants will be responsible for tracking entitlement to the add-on and when M1145 may be used. Failure to include M1145 may result in a foregone add-on, and misuse could result in overpayments/false claims depending on the individual circumstances.

Outstanding Questions

Based on our analysis of the MFN model, the following are some key unanswered questions that many of our clients face:

  • Will drug manufacturers voluntarily reduce pricing in response to the MFN IFR and other market forces, or will providers and suppliers face situations where MFN reimbursement is far below the actual price paid?

  • Will other pricing and rebate structures change in reaction to the MFN model, such as sudden increases in global prices?

  • Who will bear the burden of identifying drugs subject to MFN reimbursement, participants, manufacturers or both?

  • In addition to accurately billing for HCPCS code M1145 for add-on payments, what other billing/claim risks are presented by the MFN model?

  • Will CMS routinely grant financial hardship exceptions?

  • Will the Biden Administration suspend use/enforcement of the IFR?

High Level Procedural Issues with the Rule

CMS issued the MFN as an IFR and effectively skipped over the notice and comment process mandated by the Administrative Procedures Act. While CMS included justification for this action in the IFR, including rapidly rising drug prices during a public health emergency that has resulted in historic unemployment, time will tell if that is sufficient justification to deny the public the ability to effectively engage in the rulemaking and comment process.

Also, the IFR also relies on authority granted under the ACA in order to make sweeping changes to an entire payment system. This raises two interesting issues. First, some may argue that the ACA and the creation of the CMMI was for the purpose of designing and testing innovate payment model changes for a subset of services and/or providers, and typically on a voluntary basis. A court could find that Congress did not give CMS the authority to use the CMMI to implement such sweeping and mandatory changes contained in the MFN model. Also, the current Administration is challenging the legality of the ACA. Should the United States Supreme Court strike down the ACA in its entirety, the statutory authority for issuing the MFN model would no longer exist .

[1] 85 Fed. Reg. 76,180, available at https://www.govinfo.gov/content/pkg/FR-2020-11-27/pdf/2020-26037.pdf.

[2] See Complaint, Ass’n of Community Cancer Centers v. Azar (D. Md. Dec. 4, 2020) (No. 1:20-cv-03531), available at https://www.phrma.org/-/media/Project/PhRMA/PhRMA-Org/PhRMA-Org/PDF/P-R/PhRMA-Complaint-on-MFN-Rule-Filed-2020-12-04.pdf.

[3] CMS “Most Favored Nation Model,” https://innovation.cms.gov/innovation-models/most-favored-nation-model (last updated Nov. 30, 2020).

[4] 85 Fed. Reg. 76,252.

[5] Id. at 76,186-76,187, 76,251.

[6] Id. at 76,254.

[7] Id. at 76,184, 76,251.

[8] Id. at 76,255-76,256.

[9] Id. at 76,237, 76,239.

[10] Id. at 76,253.

[11] Id. at 76,181

[12] Id. at 76,254.

[13] Id. at 76,215, 76,255.

[14] Id. at 76,217.

[15] Id. at 76,215.

[16] Id. at 76,220.

[17] Id. at 76,220.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 345



About this Author

Kyle A. Vasquez, Polsinelli, Compliance Support Lawyer, Health Care Reform Attorney

Kyle Vasquez provides pragmatic legal and compliance support to a wide range of health care clients. He utilizes his background in health law and his prior experience as a health care consultant to develop creative approaches that address the unique challenges that health care providers face. Kyle works collaboratively with health care stakeholders to assist in identifying forward-thinking models that meet their financial and operational needs. Kyle represents a broad set of health care entities including multi-hospital health systems, community hospitals, FQHCs,...

William D. Galvin III Polsinelli Associate Kansas City HealthCare

William D. Galvin is dedicated to providing effective, efficient and innovate legal solutions to health care clients. He applies his understanding of health care issues towards representing hospitals, physician groups, and other health care professionals and organizations in a variety of health care matters.

William’s past experience includes working for a large health information technology vendor negotiating contracts with third party suppliers and coordinating with internal stakeholders and the legal and finance departments. While pursuing his Master of Laws (“LL.M.”) William...