Medicare’s Protected Class Policy Hinders Rebate Negotiation, Study Finds

A Medicare Part D policy forbidding plan sponsors’ formularies from excluding nearly all drugs in six “protected” classes hinders payers’ ability to negotiate prices and may lead to significantly higher costs to the health care system, according to a recent analysis published in Health Affairs. The study’s lead author notes this is the first peer-reviewed trial suggesting Part D plans “can’t negotiate as high of rebates as they might otherwise be able to” for drugs in the protected classes.

The protected class regulation has been in place since the Part D program began in 2006 and applies to anticonvulsants, antidepressants, antineoplastics, antipsychotics, antiretrovirals and immunosuppressants for treatment of transplant rejection. Combined, medications in those classes accounted for nearly one-quarter of drug spending in Part D in 2021, the researchers noted.

Lead study author Pragya Kakani, Ph.D., and her colleagues used data on commercial health plan formularies and enrollment from MMIT, the parent company of AIS Health. They estimated that MMIT’s data covered 90% of commercial life-years from 2011 to 2019. They also used data from SSR Health on branded drug sales and estimated net prices and rebates during that period. In addition, they compiled data from CMS on Medicare Part B and Part D sales.

The authors found that the average exclusion rate in Part D formularies in 2019 was 24.4% for non-protected classes and 0.6% in protected classes. For commercial plans, the exclusion rates were 7.4% and 3.9%, respectively, which did not represent a statistically significant difference.

Meanwhile, the average drug rebate in the U.S. for all insurance segments in 2011 was 28.5% for protected classes and 30.6% for non-protected classes. By 2019, the average rebates were 32.6% for protected classes and 57.2% for non-protected classes.

“Differences in U.S.-level average rebates between protected and non-protected classes were most pronounced among drugs with higher Medicare market share, a finding that provides strong suggestive evidence of the role of protected-class regulation in lowering rebates,” the researchers wrote.

Mike Kolodij, vice president of health plan consulting at Pharmaceutical Strategies Group, estimates the average rebate for Medicare plans is about 5% for the protected classes and zero with many cancer medications. He suggests that the rebates could get to about 30% in some cases if Medicare insurers were able to negotiate the prices of protected-class medications, although he predicts the rebates would not be high for cancer medications or other drugs that do not have much competition or are considered essential.

“I agree with the general conclusions being made, but I think they’re almost overvaluing the rebates available in these classes,” Kolodij tells AIS Health. “It’s probably even less than what they portrayed in this study.”

The researchers estimated that Medicare rebates in the protected classes could be 43% higher if there was no protected class policy. They added that removing the protected class regulation would have reduced net medication spending in those classes by $47.17 billion from 2011 to 2019.

Kakani acknowledges the $47.17 billion finding was a “back of the envelope calculation” and “there’s a high degree of uncertainty around exactly that number.” However, she tells AIS Health that “it is a bit of an eye-popping number, and perhaps even more than we expected going into the study. I think it has potentially meaningful implications for spending in the Medicare Part D program.”

Policy Is an ‘Obvious Problem’ for Payers

Stacie Dusetzina, Ph.D., a professor in Vanderbilt University’s department of health policy, tells AIS Health that the protected class policy “is an obvious problem for Medicare and the Part D plans and PBMs that manage the benefit” because of the inability to negotiate prices. However, she says “there is a reason those drug classes are protected,” citing the fact that plans could decide to not cover certain medications and prevent people with high-cost conditions from getting access to essential drugs.

“Ultimately, there should be some negotiation by CMS for these products since their prices are not competitive in this market,” Dusetzina says.

While payers would prefer to be in a better negotiating position, Kolodij says the protected class policy is not “an issue that comes up a lot in general just because it’s been a fact of life for our clients since Part D was incepted.” He adds that payers are generally in favor of making medications readily available in certain protected classes such as mental health and HIV.

“Those are all things I think that most payers want people to use this benefit for because if you don’t, the cost will emerge elsewhere,” Kolodij says.

Pharmaceutical trade groups and patient advocacy organizations, meanwhile, are in favor of the protected class policy. For instance, the National Alliance on Mental Illness notes two of the protected classes (antidepressants and antipsychotics) are essential for many people with mental health conditions and claims the policy provides “critical medication access protections for many of the most vulnerable Medicare beneficiaries.” The Patient Access Network Foundation adds that many people take multiple drugs in the protected classes, so any changes to the policy could impact them and “cause substantial anxiety and confusions for beneficiaries who already must navigate significant financial and administrative hurdles.”

CMS Allows Some Utilization Management

CMS allows plans to implement utilization management strategies such as prior authorization and step therapy in five of the six protected classes — but only for beneficiaries who are initiating therapy. The only exception is antiretrovirals, which plans must cover without restrictions.

In May 2019, CMS issued a final rule codifying the protected class policy. However, the agency did not finalize proposed exceptions that would have allowed Part D sponsors to exclude a protected class drug from a formulary “if the price of the drug increased beyond a certain threshold over a specified look-back period” or “if the drug represents only a new formulation of an existing single-source drug or biological product regardless of whether the older formulation remains on the market.” CMS had also proposed in November 2018 to expand the use of utilization management in protected classes to include people who are already taking the medications, but that was not included in the final rule.

In June 2020, Avalere Health released an analysis that was funded by Merck & Co Inc. that found utilization was about 75% lower in four of those classes (anticonvulsants, antidepressants, antineoplastics and antipsychotics) when utilization management was applied compared with when that strategy was not used from 2014 to 2018.

“Even without exclusions, [utilization management] substantially may make it challenging for enrollees to access drugs under the protected classes — which, by definition, are in place to protect vulnerable patient populations,” the authors wrote. “In addition, the findings demonstrated that [utilization management] in protected classes can have a similar reduction in utilizations as an exception can have on the non-protected classes.”

Kolodij, meanwhile, says “there really isn’t a lot that can be done from a utilization management” perspective for the protected classes, and the options are “pretty limited” for most Plan D sponsors. Even if the protected policy was overturned, Kolodij says, “I don’t think [plans] would be purely seeking to maximize rebates on these classes.”

However, he adds that “managing the classes more tightly is something they’d be in favor of, especially with the additional liability that they have as a result of the Inflation Reduction Act. There’s a lot of changes to the Part D program going into effect next year that puts a lot more risk on plans to manage tightly, but they haven’t been given any additional levers. It’s a bit of a challenge for them.”

Some of the changes going into effect in 2025 include capping Part D beneficiaries’ annual out-of-pocket drug costs at $2,000 and making plan sponsors responsible for 60% of any costs beyond that cap, up from 20% this year.

Kakani, for her part, says it is uncertain how much plans and the government would earn in rebates if the protected class policy was no longer in place because PBMs do not always pass along the full rebates.

“I think it’s relatively uncontroversial that if you got rid of protective class policy, the government would get some savings out of it,” she says. “I think the question is the magnitude of those savings, both because there’s been uncertainty about how much higher would the rebates actually be…and also because there’s some uncertainty about how much of that would make it back to the government.”

This article was reprinted from AIS Health’s biweekly publication Radar on Drug Benefits.