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02/10/21 08:54 AM EST
Most Favored Nation Model | Outline of Major Provisions and Impacts REGN, AMGN, JNJ, AMGN, NVS
Takeaway: CMS released the MFN rule on Friday as part of their pair trade with the drug industry. Lawsuits follow but outcome far from certain

Friday, the White House released the Most Favored Nation Model for Medicare Part B drugs. The pharmaceutical industry hates it about as much as they love the safe harbor rule relased on the same day. Since implementation begins almost immediately, barring intervention by the courts, it is worth understanding and maybe even a few props for creativity.

What It Does. The MFN Rule initially establishes payment for the top 50 Medicare Part B drugs by spend and with certain exclusions. The price established will reflect the lowest per capita GDP-adjusted price of any non-US member country of OECD with a GDP per capita that is at least 60% of US GDP. The rule also establishes a flat add-on payment of $148 for the administration of Part B drugs to replace the current 6% surcharge, (4.3% after sequestration.)

How It Works. The vehicle for the MFN rule is a mandatory demonstration using authority created under the Affordable Care Act. For you wannabe wonks, it is known as Section 1115A. The demonstration is scheduled to last from Jan. 1, 2021, through Dec. 31, 2027. With certain exceptions, the MFN rule will apply to all providers administering Part B drugs. The model will take a blended approach to phasing-in the new payment methodology over three years. Here are some specifics:

Affected Providers. The model will affect all providers enrolled in Medicare that administer Part B which are known as the 5i drugs; inhalation, infusion, instilled, implanted or injected. A list of drugs in the MFN Model and their associated practice areas can be found here.

  • The MFN Model will exclude the following providers: children’s hospitals, Prospective Payment System exempt cancer hospitals, Critical Access Hospitals, Indian Health Service facilities, Rural Health Clinics, Federally Qualified Health Clinics, hospitals paid on a reasonable cost basis and neoplastic disease hospitals.
  • For 1Q and 2Q 2021, acute care hospitals that participate in a CMS Innovation Model under which they are paid on a fully capitated basis will be excluded. For 3Q 2021 and beyond, the same hospitals will be excluded provided the CMMI model in which they participate on a fully capitated basis adjusts for the payment difference for MFN Model drugs. Ex. Maryland Total Cost of Care Model.

Affected Drugs. Initially the drugs in the MFN Model will include single source drugs and biologicals with the highest spend using 2019 data. A list can be found here. The model only applies to separately payable drugs in Medicare Part B and does not include drugs that are supplied on an inpatient basis or as part of a bundle (e.g., drugs related to ESRD). The MFN Model drugs will exclude:

  • Vaccines
  • Radiopharmaceuticals
  • Oral Medical Part B Drugs
  • Compounded drugs
  • Intravenous immune globulin products
  • Drugs subject to EUA
  • Covid-19 therapeutics
  • Drugs without HCPCS codes
  • Drugs paid by DME MACs and those with place of service that indicates home or home-like setting (i.e., home infusion services)

The initial list of 50 drugs will be updated annually. In performance years 2-7, CMS will array the top drugs by spend, applying the same exclusions above and using the most recent claims data available. Those drugs not already on the MFN model list will be added. So, in performance years 2-7, the number of drugs on the list could expand above 50. Drugs will not be removed from the list unless:

  • Permanently withdrawn from the U.S. market
  • Its HCPCS code with terminated and no replacement is available or terminated
  • Meets the exclusion criteria

Drug Model Payment Methodology. The price paid for drugs in the MFN model will be derived from the lowest GDP-adjusted country level price based on non-US OECD member countries with a GDP per capita that is at least 60% of the U.S. GDP per capita. Limits will be established to ensure the MFN payment amount does not exceed the non-model payment for the drug. The steps for arriving at the MFN model are:

  • Identify the available international drug pricing information for the MFN Model
  • Remove incomplete and low sales and volume data
  • Convert extracted data to the HCPCS code level unit and adjust for volume issues such as intentional overfill
  • Calculate the unadjusted country-level price (representing the average price per unit of drug where the unit of drug is the same as the HCPCS code billing unit) for the MFN Model
  • Calculate the GDP adjuster for each included country
  • Apply the GDP adjuster to unadjusted country-level price
  • Select the lowest GDP-adjusted country level price for each drug, which, if available will be the MFN price
  • Identify the applicable ASP (defined as the payment amount determined by the Act, less the applicable add-on percentage) for the MFN model drug's HCPCS code
  • Compare the MFN Price to the applicable ASP
  • Identify the applicable phase-in formula and adjustment
  • Apply the applicable phase-in formula and adjustment to calculate the MFN Drug Payment Amount

(The rule includes examples of these calculations but since they are only illustrative I have not included. Email me if you would like a look.)

Phase-in Formula. The MFN Model payment rate is scheduled to phase-in over the first three performance years of the model according to this schedule:


Adjustments to Phase-in Formula to Address Price Increases. The model seeks to avoid the cost-shifting by adjusting the phase-in formula of the MFN model using two triggers:

  • A greater cumulative percentage increase in either applicable ASP or any monthly US list price for any of the NDCs assigned to the MFN model drug's HCPCS code compared to the cumulative percentage increase in CPI; and
  • A greater cumulative percentage increase in either the applicable ASP or any monthly US list price for any of the NDCs assigned to the MFN drug's HCPCS code compared to the cumulative percentage increase in the MFN payment rate.

CMS will accelerate the phase-in of the MFN price by 5 percentage points at the next quarterly update for each MFN model drug that meets these two requirements.

Example: if both trigger conditions are met for an MFN Model drug during the applicable ASP calendar quarter for the second quarter of performance year 1, the phase in formula would be 70% applicable ASP and 30% MFN price for that quarter and remaining quarters in year 1, assuming both trigger conditions are not met in subsequent quarters in that year.

Additional Phase-in Provisions:

  • CMS will apply the acceleration of the phase-in formula for each calendar quarter of the MFN model where both trigger conditions are met.
  • They will further accelerate phase-in of the MFN price by an additional 5% at the next quarterly update if the cumulative percentage increase in the applicable ASP continue to be greater than the cumulative percentage increase in the CPI-U and MFN price.
  • After full phase-in of the MFN price is reached, if both the trigger conditions are met, there will be a decrease in the MFN Model Drug Payment amount equal to the largest difference in the cumulative percentage increase in the applicable ASP.

This phase-in approach is the first of its kind, at least as far as I can recall. Of course, we have never seen anything quite like the MFN Model either. I suspect that the phase-in rules represent experience with other demonstration programs that have yielded little in the way of saving the federal government money. Both Seema Verma, CMS Administrator and Brad Smith CMMI Director have noted the need for a new direction for demonstration models to make them more effective. The MFN Model would appear to incorporate that view.

Add-on Payment. Under the current Part B drug payment system, physicians are paid 6% of the drug payment for administration. The MFN drug model calls for that payment to be fixed in Performance Year 1 at $148. This amount will be adjusted for inflation in future years. Specialty areas will be impacted differently. CMS has modeled impacts which can be found here.

It is a complicated program, necessitated by the complexity of the drug channel itself.

Of course, there will be lawsuits. The government choose to implement the MFN Model as an Interim Final Rule using the public health emergency as a reason to skip a preliminary rule and comment period. A whole lot of stuff is happening using the PHE so it isn’t completely crazy.

Also worth pointing out is the Part B payment system is not codified (unlike the Part D benefit design). Rather, deference is given to the Secretary to gather data and come up with appropriate reimbursement. Until now, HHS Secretaries have all stuck with the payment system that has been in place for many years but there is no reason it cannot be changed.

Finally, the section of the ACA that enables demonstrations does not require rulemaking for a Phase I, or test phase, of a model. It does require it for Phase II when a model may be expanded nationwide. The MFN Model does pose a bit of a conundrum because it is beginning life as a national model. So, not clear how that will shake out.

Expect the pharmaceutical industry to move quickly to court but a positive outcome for them is not certain.

Call with questions.

Emily Evans
Managing Director – Health Policy

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