How Medicare Negotiations Can Avoid Manufacturers’ Loopholes and Save Consumers Money

A year after the passage of the Inflation Reduction Act (IRA), Medicare negotiation reached its first major milestone, with the federal government and pharmaceutical manufacturers entering into agreements to negotiate what Medicare will pay for the first set of 10 drugs. This development highlighted an important question: What is a drug?

The Food and Drug Administration (FDA) treats a drug as a mixture of active and inactive ingredients. The active ingredient is what gives the drug its therapeutic effect; the specific combination of ingredients is commonly referred to as its “formulation.” Pharmaceutical manufacturers often create different formulations containing the active ingredient. For example, a drug initially marketed as an oral tablet might later be introduced as a cream for patients with a different condition. Manufacturers often introduce new formulations to create a new price for an older product or to guard against competition from a generic version of a drug’s older formulation. Although a generic contains the same active ingredient as older and newer branded formulations, patients can end up switching to a newer branded version. Encouraging patients to move from an older formulation to a newer one is often referred to as product hopping.

Different drug formulations could create confusion for Medicare negotiation: negotiating only some of a drug’s formulations would allow manufacturers to encourage patients to use the versions without negotiated prices. This would increase costs for both patients and Medicare.

The IRA instructs Medicare to select drugs for negotiation once they’ve been on the market for seven or 11 years for small-molecule drugs and biologics, respectively. The clock starts with FDA approval of a drug’s first application for marketing, known as a new drug application (NDA) for small molecules, and biologics license application (BLA) for biologics. To market additional formulations, manufacturers often add onto the drug’s first application. However, for some formulation changes, like a new inactive ingredient, the FDA requires a new application, even though the active ingredient stays the same. To avoid treating such new formulations as distinct drugs, the IRA instructs Medicare to negotiate all of a drug’s dosage forms and strengths, including new formulations, and to apply the same price across all.

This blog post examines the implications of this approach, looking at the first 10 drugs selected for negotiation.

Looking at Selected Drugs in the First Round of Medicare Negotiations

All 10 selected drugs are available in multiple dosage forms and strengths. Most were available in different formulations, such as oral tablets and suspensions. Four drugs had formulations approved under additional NDAs or BLAs. All but one of these follow-on applications were recent enough that treating their formulations as distinct drugs would exclude them from negotiation, thereby reducing savings.

Two formulations of aspart, a rapid-acting insulin, illustrate how the IRA’s requirements contend with product hopping. Novolog, the original formulation, was on the market for 17 years. Then, Fiasp was approved under a new application. Fiasp and Novolog are marketed by the same company, Novo Nordisk. Fiasp contains the same active ingredient in the same strength as Novolog, but includes two additional inactive ingredients to hasten its absorption. It has not been demonstrated that this faster action improves long-term management of diabetes. Clinical trials compared Fiasp with Novolog; both are indicated for the same types of patients. Treating Fiasp and Novolog as different drugs because they have different FDA applications would create a loophole. If only Novolog and not Fiasp had a negotiated price, Novo Nordisk could offer Part D plans rebates to promote higher-priced versions of Fiasp at significant cost to Medicare and beneficiaries.

Imbruvica, a cancer drug, shows how the IRA eliminates reformulation as a means of enforcing price increases. Imbruvica was launched in 2013 as oral capsules. In 2018, tablets were introduced at the same strengths, except for the lowest strength, which was not made available as a tablet. Abbvie, which markets Imbruvica, then announced that it would pull the lowest-strength oral capsule from the market, while pricing all strengths of the tablet formulations at the same flat amount, regardless of dose. Because low-dose capsules were the least costly option for patients on lower doses, this would have increased patients’ spending because they would have had to purchase higher doses. (The company abandoned its plans following public outcry.) By requiring that a drug’s negotiated price scale with the amount of active ingredient across its various versions, the IRA makes it impossible for manufacturers to introduce new formulations that exceed the negotiated price of existing versions.

Conclusion

The first cohort of selected drugs showcases the importance of the IRA’s treatment of new formulations. Four of the 10 drugs selected for negotiation have formulations launched recently enough that manufacturers could have avoided negotiated prices if they were treated as distinct drugs. Requiring all formulations of a drug to be selected for negotiation and applying a single price across them avoids loopholes and achieves the intended effect of negotiation — saving Medicare and its beneficiaries money.