340B Changes: What Biosimilar Manufacturers Need to Know

What is the 340B Drug Pricing Program, and what changed in 2018?

Medicare’s 340B Drug Pricing Program was created to support and improve medication access for underserved patients. In this program, manufacturers are required to sell separately payable, non—pass-through drugs and biologics—including biosimilars—to select providers and hospitals at an estimated 15% to 60% savings (exact pricing or savings are not publicly disclosed). Hospitals are able to qualify for these discounts if they serve high proportions of low-income Medicare, Medicaid, and Supplemental Security Insurance patients, or indigenous patients.

Prior to January 1, 2018, 340B facilities treating Medicare beneficiaries were reimbursed at the average sales price (ASP) of the drug plus 6% (biosimilars at ASP plus 6% of the reference product’s ASP). However, the Medicare Part B Outpatient Prospective Payment System (OPPS) established a new rate for drugs billed by 340B facilities as of 2018 of ASP minus 22.5%.

Medicare does have a process whereby manufacturers can apply for pass-through status, which allows innovative biologics and medical devices 2 to 3 years during which they are funded partly through regular reimbursement mechanisms and partly through other congressionally allocated sources in order to encourage uptake without additional strain to the healthcare system. A drug with pass-through status will continue to be paid at ASP plus 6%; however, once the 2- to 3-year time period has expired, Medicare payment will be reduced to ASP minus 22.5%.

Payment for biosimilars under the OPPS is also affected by this policy. While biosimilars with pass-through status will be reimbursed at ASP plus 6% of the reference product, the payment rate will change to ASP minus 22.5% of the reference product’s ASP after it expires.

What’s the issue? How are changes affecting providers, hospitals and health systems?

While, in some cases, a 340B-participating hospital could have potentially been reimbursed for a higher amount than it paid for a particular medication under the old rules, that differential was crucial for maintaining operations. These facilities qualify for the program because they support vulnerable populations, many of whom cannot afford their co-pays or do not have insurance. These health systems are able to remain financially viable largely due to additional reimbursement for 340B-purchased medications, along with an annual lump payment provided by Medicare.

CMS believes that it can save the overall US healthcare system $1.6 billion by reducing the reimbursement amount for 340B drugs and reallocating those funds across all hospitals (both 340B and non-340B) reimbursed under OPPS. However, many 340B hospitals argue that the new model will put them at risk of closure, accelerating the health system consolidation already taking place in the market. And, with research showing that more localized care at community hospitals is of greater benefit to patients, potential closures could also mean jeopardizing quality.

Another issue is that this rate does not incentivize providers or patients to consider biosimilars if these products do not have pass-through status. Under the new construct, the losses that a hospital experiences when prescribing a reference product are the same as when prescribing a biosimilar; however, Medicare originally designed the payment system at ASP plus 6% of the reference product to encourage product uptake. While the 6% add-on is the same, the discount of the biosimilar alone would save the Medicare program and a patient 20% to 40%. If a provider is going to lose the same amount of money from the use of a biosimilar versus a reference product, that incentive for uptake is gone, and it can cost the entire system more.

What do manufacturers need to consider now?

Biosimilar manufacturers will need to develop multi-pronged strategies to ensure that their products are able to reach patients treated by 340B hospitals in this new landscape. They will need to develop distinct approaches for 340B and non-340B facilities before and after pass-through status expires. Manufacturers need to ask themselves: What does the product’s life cycle look like? What are the goals for the product, and does our commercialization and distribution strategy encourage utilization?

Manufacturers should consider these questions a minimum of 18 to 24 months ahead of market launch. For example, biosimilar manufacturers who take advantage of their pass-through status will be able to gain greater market share and deliver on the promise of biosimilar savings. Maximizing market share means more than simply obtaining pass-through status, however. Early in the commercialization process, provider education about biosimilars will need to begin in order for the product to have faster uptake, which maximizes the full pass-through term of the product.

Manufacturers will need to be well versed in all facets of reimbursement as they launch biosimilars. With second-, third- and fourth-line entrants expected in 2018, the challenges will only increase as products seek fair reimbursement. 340B-designated hospitals are a microcosm that magnifies the complex issues that will continue to arise for biosimilar products, especially as Medicare often serves as a guide for private and commercial payers.