Managing government pricing programs

Pharmaceutical CommercePharmaceutical Commerce - January/February 2015

When state and federal governments are involved, prices and reimbursements have both regulatory and financial consequences

The strategic and operational elements managing government programs. Credit: Blue Fin

During recent projects with pharma-ceutical manufacturers, members of our consulting team had reason to ask individuals in various roles how they managed their government programs. Three of them offered to introduce us to their head of Government Pricing. Four of them focused solely on the steps they take to confirm that service fees are bona fide. Another provided details of the systems used for contracting operations and government pricing.

Of course, each of these starting points have merit in answering our initial question, but when taken together, they give rise to an increasingly important question: “What does it mean to manage government programs?”

The continuing evolution of government programs is forcing manufacturers to think about the strategic implications of these programs on their overall brand strategies. The changes stemming from healthcare reform are simply the latest in a long list of refinements, and they further demonstrate that the challenge of managing government programs is no longer just about keeping apprised of regulatory guidance. Rather, the challenge is how to manage government programs as the key strategic influences they’ve become, requiring clear understanding of the programs’ fit within an overall brand strategy and implications on Gross-to-Net.

Why the Gross-to-Net reference? Whether an element of brand strategy impacts reimbursement rates to providers or expected discount levels, brand managers need to know the effect on the bottom line. Executed correctly, the Gross-to-Net framework allows brand managers an integrated view of the financial impact from strategic decisions, starting with top line sales and flowing down the resulting waterfall of discounts to net results and profitability. Since commercial discounting practices ultimately determine the resulting reimbursement rates and/or discounts for government programs, the Gross-to-Net framework is the ideal place to model these dependencies and their ultimate effect on profit.

ACA’s effect on programs

The scope of government programs for pharmaceutical manufacturers has never been larger. According to National Health Expenditure Data, the government (including the DOD, the VA, Medicare, Medicaid, the Children’s Health Insurance Program and Indian Health Service) spent $104.8 billion on prescription drugs in 2013, representing about a third of the total domestic drug market of $329.2 billion. [1,2] In March of 2010, President Obama signed into law the Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (collectively known as the Affordable Care Act or ACA), setting the stage for a new round of regulatory change and introducing new healthcare entities to the marketplace. The list of implications is long, but the following areas stand out as instructive examples when considering how best to manage government programs.

1. Changes Expected from a Medicaid Drug Rebate Program (MDRP) Final Rule

A new MDRP Final Rule is yet to be published by the Centers for Medicare and Medicaid Services (CMS), but based on the CMS’ proposed rule, the industry expects either changes or further definition on several fronts. Among the more significant changes is the possible inclusion of additional entities, such as specialty pharmacies, home infusion pharmacies, and home health care providers, in the determination of Average Manufacturer Price (AMP). CMS is also considering adopting a quantitative method similar to the Department of Veterans Affairs’ 90/10 Rule for the quarterly calculation of Non-Federal Average Manufacturer Price. This method would be used to determine whether a drug is “not generally dispensed” through a retail community pharmacy, and therefore, whether a manufacturer should use the “traditional” AMP methodology or a “5i” (injected, infused, inhaled, instilled or implanted) AMP methodology. Both of these expected changes will force manufacturers to look closer at their distribution channels and effects on AMP calculations, Medicaid liability and resulting 340B prices.

2. Health Insurance Exchanges (HIX)

The creation of Health Insurance Exchanges, and the health plans available through them, brings about new questions and decisions for manufacturers. While manufacturers have contracted with payers and their member health plans for years, the exchanges establish a new dynamic where the makeup of a health plan’s covered lives is more directly determined by the consumer versus the employer. What types of individuals are attracted to which plan? Are the people covered by a given plan more or less likely to have a reduced out-of-pocket maximum for deductibles, copayments, and coinsurance based on eligibility for cost-sharing subsidies? Are they more or less likely to need the manufacturer’s drug? Can manufacturer-sponsored promotions like copay cards be legally utilized by patients on these plans? How should contracts with these plans be treated in Medicaid pricing calculations? These are questions that manufacturers continue to consider as they decide on their approach to these new entities within their strategies.

3. Accountable Care Organizations (ACOs)

Intended to tie provider reimbursement to quality metrics and reduced cost of care for an assigned population of Medicare beneficiaries, ACOs represent a new entity type in the healthcare marketplace that manufacturers continue to consider in their brand and contract strategy development. In addition to ACOs aimed at the Medicare shared savings program of the ACA, ACO models are also developing throughout the country with commercial insurers and even state Medicaid programs. Despite ongoing challenges for provider organizations establishing ACOs, manufacturers with products that can help ACOs achieve quality metrics or reduce costs continue to evaluate the opportunity to establish contractual arrangements with these organizations. This brings about the need for manufacturers to better understand which ACOs warrant consideration for contracting, how best to design these arrangements and how best to engage with each ACO’s organizational structure.

4. Growth of the 340B Drug Discount Program

Since the passage of the ACA, the 340B Drug Discount Program has grown dramatically as a result of several factors, including the addition of four new eligible entity types, guidance from the Health Resources and Services Administration (HRSA) allowing each 340B Covered Entity to establish multiple contract pharmacy arrangements and growth in Disproportionate Share Hospitals (DSH), largely as a result of the ACA Medicaid Expansion. The growth of this program puts ever increasing pressure on manufacturers to ensure they have properly derived the 340B price, provided the 340B price to Covered Entities and safeguarded against providing rebates to states for 340B drugs dispensed to Medicaid patients of Covered Entities.

5. The Impact of Discounting on Reimbursement Rates for Medicare

Part B Eligible Drugs

While the calculation and reporting of Average Sales Price (ASP) to CMS predates the ACA, manufacturers of Medicare Part B covered drugs continue to face constraints on their discounting practices due to their impact on reimbursement rates for these products. Since reimbursement rates are ultimately determined using ASPs reported by manufacturers, it follows that discounts lowering ASP also lower the rates at which the providers are reimbursed. With specialty pharmaceuticals occupying an ever—increasing share of the pharma marketplace, and the routes of administration for such drugs frequently indicating Part B coverage, the number of manufacturers calculating ASP is on the rise as well.

These examples inform what it means to manage government programs in two important ways. First, they highlight that managing government programs is about more than just the operational aspects of government price calculations. Brand leadership, Finance and Managed Markets teams need to factor the realities of government programs into their strategy development processes. Second, manufacturers need more than just a strong set of tools and systems for calculating and reporting government prices. Strategic and operational teams alike need a consistent framework with enabling systems that can assist them in identifying and quantifying how dependencies between commercial discounting practices and government programs impact their bottom line.

Start with a strategy

Evaluating the role of Health Insurance Exchanges and ACOs in brand strategy is probably the most straightforward. Understanding where opportunities in the marketplace exist for a brand is certainly within the scope of most strategy development projects, and understanding how to engage with these entities is just a secondary step in this process. Fundamentally, it is measuring the incremental throughput from an arrangement with a certain entity type and determining what level of investment is necessary to achieve the arrangement and a desirable return.

What may be less often considered during brand and contract strategy development are the impacts of discounts and contracts on government program liability, or the attractiveness of the product in the marketplace. If the launch team for a specialty product develops a strategy to provide discounts through contracts with payers, perhaps even healthcare exchange plans, or engage in distribution arrangements that include certain types of payments to channel partners, are they aware of the implications on the reimbursement rates to providers? If not, their strategy is deficient and not easily reversed once implemented. For Medicare Part B covered drugs, physicians who buy and bill ASP reimbursed drugs may be forced to acquire a product at a loss if the manufacturer has any agreements with service providers that are outside of the fee-for-service model.

Similarly, the regulatory price reporting for the Medicaid Drug Rebate Program (MDRP) requires that strategy development teams understand very specific dependencies between commercial financial arrangements and their company’s resulting Medicaid liability. For example, price increases for branded drugs can quickly create significant impacts to Medicaid liability through the additional rebate component of the Unit Rebate Amount (URA) calculation. The “additional” URA is an incremental amount per unit, paid when the AMP for the drug has increased at a rate faster than that of the Consumer Price Index for urban consumers (CPI-U). This can easily account for 40% or more of the total URA for a brand launched at too low a price and subject to significant price increases thereafter. For a brand with total annual Medicaid liability of $50 million, that represents $20 million in rebates that might have been avoided with a more informed pricing strategy.

The additional URA aside, manufacturers can manage their Medicaid liability by managing the commercial pricing and discounting strategy that ultimately determines their AMPs and BPs. For a branded drug, any discount greater than 23.1% of AMP to a Best Price-eligible customer will set a new, lower Best Price and increase the URA. In other words, for every percentage point discount over 23.1% of AMP given to a Best Price-eligible customer, the manufacturer will pay an additional percentage point of AMP as a rebate for every unit of Medicaid utilization.

Finally, the pricing for the 340B program hinges on Medicaid pricing, so any failure to anticipate commercial pricing impact on Medicaid liability usually means an impact to 340B prices as well.

Quantify the bottom line impact

If commercial discounting and government programs are so dependent on each other, then strategically and operationally aligned teams clearly need a consistent means of confirming that the impacts of those dependencies are known and quantified. Yet this continues to be a challenging area for manufacturers at such a critical time. So what’s needed?

The concept of the Gross-to-Net solution has become more popular over the last five years among manufacturers. While the solutions being offered by software vendors may prove helpful for organizations trying to more readily identify the impacts of their strategic decisions, the underlying benefits start with more fundamental steps.

For instance, manufacturers can achieve great improvement by establishing the use of consistent models across brand teams with assumptions, commercial and government pricing data, and sales forecasts by customer segment that provide a common understanding of the impact of actions in the marketplace. And manufacturers can reinforce the value of these models by providing education and training across the organization on government programs and their interdependencies with commercial tactics.

To illustrate what this can look like, consider the following case study. A branded manufacturer was redefining its institutional contracting strategy for discounted prices to Group Purchasing Organization (GPO) member hospitals. The team understood that the prices offered would impact Best Price and worked with an existing Excel-based pricing and sales model to quantitatively assess the expected impact of proposed discounting. As expected, the model identified a lower Best Price, increasing the Medicaid liability resulting from the agreements. However, the model also revealed that the Medicaid business for this product was significant enough that the increased Medicaid liability would be greater than the incremental revenue generated by the targeted institutions. As a result, the team modified its strategy and targeted smaller discounts that avoided the overpowering impact on Medicaid liability.

The manufacturer in this case benefitted not from software, but from application of a consistent Gross-to-Net view during strategy development using spreadsheet templates. By implementing such models and providing training in their use, the organization improved its ability to manage government programs and can more effectively evaluate whether software solutions from external vendors will actually deliver incremental value.

More operational considerations

While the Gross-to-Net view of the business has increased in importance, the systems to which the industry has paid more attention over the past two decades are no less important. In fact, revenue management systems and government pricing solutions from companies like Revitas, Model N, BPI, iContracts and others actually provide the inputs for some of the key Gross-to-Net components.

Revenue management and government pricing systems are also critical to dealing with the changing methodologies for government price calculations, like those that will stem from the MDRP Final Rule, as well as mitigation of the increasing risks associated with the growth of the 340B Drug Discount Program. When it comes to government pricing, these formal, scalable systems provide manufacturers a configurable solution to adjust pricing methodologies to align with changing regulation and policy, and consistently apply those methodologies to verified, detailed transactional data.

As for management of the 340B program, manufacturers know that a single errant transaction providing 340B price to an ineligible entity can set a new Medicaid Best Price, dramatically increasing Medicaid liability, and necessitating a restatement and true-up with 340B Covered Entities and Medicaid State Agencies. Management teams need to understand that what rests between their compliance business and the eventuality described above is the quality of the processes, people and revenue management system they’ve implemented to maintain pricing eligibility and validate 340B transactions.

Last, but not least, manufacturers need to apply a governance structure and process to confirm on an ongoing basis that all components of their organizations are taking a comprehensive view of government programs and utilizing tools and processes to manage them holistically. This is usually accomplished by implementing a multidisciplinary Contracting and Pricing Committee with clearly defined processes to ensure compliance and visibility across the organization.

Effectively managing government programs is not just about the government. It requires that a manufacturer go deep and wide, a mind shift that starts at strategy and includes operational investments that allow for very specific and appropriate treatment of data down to the transaction level. Yet the management task crosses the breadth of their commercial organization, including brand teams, finance, legal, government pricing, commercial operations and managed markets. Having experts on the details of regulatory price reporting to stay apprised of changing statutes and regulations is important. But as the implications of government programs become more complex and expansive, it is equally important for manufacturers to reinforce collaboration across the organization and throughout their products’ commercial lifecycles based on a consistent and comprehensive financial view of their business.


Mike McCarthy is Managing Partner at Blue Fin Group. He has consulted for twenty years for healthcare manufacturers with extensive experience in the contracting and government pricing of managed markets. Within these domains, he specializes in program management, policy development, process optimization, analytics, data management and systems implementation. Mike is a frequent speaker at industry conferences and maintains a strong working knowledge of the solutions and services available in the managed markets space.

Rob Ririe is Managing Partner at Blue Fin Group. He has deep expertise and experience assisting healthcare manufacturers in addressing a broad range of strategic issues and operational challenges across the value chain. Rob has assisted manufacturers in the successful implementation of solutions, including work in managed market strategy and operations, channel strategy, policy development, process redesign, organizational transformations, and CRM. Rob leverages his twenty plus years of industry and consulting experience within the life science space to balance practical approaches with cutting edge ideas.


1. Centers for Medicare & Medicaid Services, Office of the Actuary, Division of Health Statistics, NHE Tables, accessed December 18, 2014. 2. Summary of the report Medicine Use and Shifting Costs of Healthcare: A Review of the Use of Medicines in the United States in 2013, accessed December 18, 2014.

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