THE MORAN COMPANY

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Impact of Medicare Part D on the Fate of Orphan
Products
Donald W. Moran
May 23, 2005
THE MORAN COMPANY
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Impact of Medicare Part D

• My assignment today
• Identify key features of Part D structure that
  will affect pharmaceutical and biotech
  industries, with particular emphasis on
  implications for orphan products.
• Assess uncertainties in a few critical areas.
• Offer a prognosis for resolution of these
  uncertainties.

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Impact of Medicare Part D

• Overall, the implications are profound
• By next year, something approaching 40 million
  Medicare beneficiaries will move from wherever
  they were into a new financing channel.
• A significant share of the existing cash and
  carry traffic at the local pharmacy will go
  away.
• There will be a significant increase in the share
  of product subject to negotiated price
  concessions.
• Net effect will vary product-by-product.

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Impact of Medicare Part D

• One product space where the immediate impact
  wont be significant is in current Part B
  drugs
• In general, these will remain in Part B, and be
  subject to emerging coverage and payment policies
  there.
• A significant number of current and pending
  orphan products are or will be Part B drugs, and
  hence will remain subject to the shifting
  landscape of payment policies set in motion under
  303 of the MMA.
• Having said that, there are uncertainties at the
  boundary between B D.

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Impact of Medicare Part D

• Uncertainties arise from the following facts
• Many products previously manufactured solely in
  injectible/infusible form are now available
  increasingly as self-injectibles or even in
  oral form.
• MMA, however, did not amend the requirement that
  B coverage is limited to drugs that are not
  usually self-administered.
• CMS adopted patient-centric rule for sorting out
  coverage under B versus D.
• Prospect that products could be covered under
  both programs for different patients.

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Impact of Medicare Part D

• In these circumstances
• If self-administered forms become significant,
  growing D coverage volume could induce carriers
  to determine that the product fails the not
  usually self-administered test.
• In that case, the injectible/infusible form could
  lose Part B coverage for all patients.
• While these scenarios may not be generally
  frequent, they are potentially important in the
  world of orphan products.

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Impact of Medicare Part D

• Unresolved questions
• What happens, in such cases, to reimbursement for
  patients for whom office- (or hospital-) based
  administration is considered medically necessary?
• Will Federal policy condone brown bagging the
  product back in from the community pharmacy, with
  coverage under Part D?
• Can manufacturers forestall loss of B coverage by
  distinctive labeling of different product forms?
• CMS regulatory efforts to date have not reached
  these questions.

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Impact of Medicare Part D

• For orphan products (present or future) that make
  it over to the Part D side
• Theres a general presumption that if a script is
  submitted in a community pharmacy setting, it
  will be covered.
• Exactly how it is covered, however, may turn out
  to matter a lot and will vary from drug plan to
  drug plan.

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Impact of Medicare Part D

• Like existing commercial plans, Medicare drug
  plans will have formularies
• Some sponsors (particularly HMOs) may have true
  closed formularies, under which coverage for
  non-formulary products is zero.
• Most others can be expected to have semi-closed
  formularies, in which formulary placement is
  enforced by differential cost sharing tiers.
• Statute and rules offer PDPs wide latitude to
  innovate.

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Impact of Medicare Part D

• CMS will scrutinize formularies for
  non-discrimination
• A safe harbor therapeutic class structure
  with very broad classes was adopted by rule
  there is no explicit protection for orphan drugs.
• CMS has said that it will look more deeply to
  determine whether formulary exclusions threaten
  access for discrete classes of patients.
• Orphan designation, per se, however, has not
  been given explicit standing in either the
  statute or the regulations of formularies.

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Impact of Medicare Part D

• It is important to emphasize that
• CMS scrutiny regarding non-discrimination
  against orphan drug users, even if stringent,
  need not necessarily go beyond the product label.
• It would be fully consistent with their rules to
  require plans to cover a product for on-label
  uses, while still permitting it to be excluded
  from the formulary or subjected to
  non-preferred cost sharing tiers -- for off-label
  use.
• In this regime, use for off label orphan
  indications may have no standing.

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Impact of Medicare Part D

• One area where orphans are explicitly mentioned
  is pharmacy access
• CMS notes that some products, such as those for
  orphan diseases, may only be available in
  specialty pharmacies.
• Plan networks will not be required to include
  these pharmacies, but will be required to offer
  access under out of network provisions.

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Impact of Medicare Part D

• Out of network access will be complicated
• Almost certainly requires paper claims (since out
  of network pharmacy will by definition not be
  tied into the relevant systems).
• Also requires beneficiary to pay any difference
  in cost sharing between the dispensing pharmacys
  usual and customary costs and normal plan
  pharmacy reimbursement.
• Plans are permitted to establish restrictions on
  this access, and the access may not be routine.
• In some instances, this issue could prove quite
  significant.

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Impact of Medicare Part D

• In my experience, implications of cost sharing
  rules are under-appreciated
• Most audiences concerned about high-cost products
  expressed concern throughout the genesis of the
  program about the donut hole in coverage.
• These concerns were addressed by assurances that
  plan sponsors could offer actuarially-equivalent
  coverage that smoothed out the cost sharing.

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Impact of Medicare Part D

• Yet its generally not appreciated that
• Smoothing will require an average copayment
  well in excess of the 25 cost sharing applicable
  to the first coverage tranche in the standard
  benefit package in order for the overall plan to
  be actuarially equivalent to the standard design.
• Particularly true if plans want to offer
  sweetened cost sharing for preferred choices
  (e.g., generics).
• Cost sharing for non-preferred options could,
  therefore, be quite high.

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Impact of Medicare Part D

• This was telegraphed in the recent controversy
  over the specialty tier exemption
• In general, CMS will permit beneficiaries to
  request an exception for reduction in cost
  sharing of non-preferred drugs if medically
  necessary.
• The final rule, however, permits plan sponsors to
  have a specialty tier exempt from this cost
  sharing exceptions process.
• Industry has correctly identified access
  concerns.
• If plans want to do smoothing, however, they
  have to have some way to hit actuarial
  equivalence.

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Impact of Medicare Part D

• All this suggests focus on obscure TrOOP Rules
• Both statute and regulations require
  beneficiaries to spend 3,600 (2006) out of their
  own pocket before catastrophic coverage kicks in.
  (Low income subsidies are available).
• Question is whether manufacturer-sponsored
  foundations can provide financial assistance with
  copays while still allowing beneficiaries to
  reach catastrophic benefit.
• For high cost products, a lot is potentially
  riding on this decision.

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Impact of Medicare Part D

• Summing up from the manufacturers perspective
• Even for Part B drugs, the B/D interface issue
  may already be influencing pipeline
  decision-making.
• For Part D products, formulary placement may be
  critical (particularly for off label orphan
  indications.)
• For this reason, beneficiary plan enrollment
  decisions may influence coverage of specific
  products.
• Once in plans, cost sharing considerations will
  be critical.

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