How Pfizer’s Warranty Program Gets Around Best Price?

On October 13th our friends over at STAT  broke the news [sorry, Paywall] about a “warranty” pilot program from Pfizer that offers both patients and health plans (including Medicare Part D plans) the opportunity to receive a refund for any amounts paid to purchase the company’s longstanding oral lung cancer therapy XALKORI when use is discontinued in the first three months for clinical reasons. The program is unique from other value-based arrangements that have emerged over the last several years for a number of reasons including that: it relies on a warranty as the mechanism for refund; it includes Medicare Part D plans alongside commercial payers; and because it offers refunds to patients for out-of-pocket costs, as well as insurers. Of course- this is a Medicaid blog – so we’d like to focus today on one particular question. How does the Pfizer warranty program avoid implicating Medicaid best price?

A Brief Reminder on Why We Care About Best Price

As our regular readers know, we talk a lot about Medicaid best price on this blog, particularly because of the intersection of this central price discounting and reporting rule and new and emerging value-based arrangements. My colleague Haider did a great deep dive into best price rules earlier this year in the context of a Trump administration regulation that would allow manufacturers to set multiple best prices in order to encourage value-based arrangements. Way back in 2016 (man, we are getting old!), I did a nice primer that explained for our readers why Medicaid best price and innovative payment arrangements are often at odds. But I still think it is worthwhile to remind our readers why we are even having this conversation.

By way of background, under the Medicaid drug rebate program, Congress has required manufacturers to provide rebates on covered outpatient drug sales to states and the federal government as a condition of payment for those drugs under Medicaid.  The amount of the rebate for each drug is the greater of two amounts: either a flat percentage multiplied by the average manufacturer’s price (AMP) of the drug or the AMP for the drug minus its “best price,” i.e., the highest discount granted to a purchaser of the drug.  Both of these requirements are detailed in section 1927 of the Social Security Act.

The best price policy dates back to the beginnings of the Medicaid Prescription Drug Rebate Program (passed as part of the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-508) which had at its core the idea that state Medicaid programs should be granted a most-favored customer status.  Section 1927(c)(1)(C) of the Social Security Act defines best price, in part, to mean:

“with respect to a single source drug or innovator multiple source drug of a manufacturer … the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity or governmental entity within the United States.” [With certain exclusion applying.]

In regulations at 42 C.F.R. § 447.505,   CMS has further clarified the meaning of best price as:

“for a single source drug or innovator multiple source drug of a manufacturer (including the lowest price available to any entity for an authorized generic drug), the lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity in the United States in any pricing structure (including capitated payments), in the same quarter for which the AMP is computed.”

Of course – price reporting is complicated – and there are a lot of exceptions and exclusions to the above definitions. But for purposes of our discussion today, it is good enough to know that best price is generally the “best price” offered by a manufacturer to a defined set of purchasers, with a number of exceptions. While this rule has at its root some very noble policy goals, it also has had the unintended impact of preventing some novel, value-based arrangements. Why? Because in a traditional value-based arrangement (such as an outcomes-based agreement), in which a manufacturer agrees to refund a payer if a therapy fails, that refund could re-set a manufacturer’s best price. For example, if a manufacturer offers a $100,000 therapy but provides a $50,000 rebate/refund upon clinical failure, the manufacturer’s best price could become $50,000 (requiring the manufacturer to now lower its price to the Medicaid program to that new, lower amount). One could also imagine an even more extreme example where a full refund resulted in a best price of $0.

How Does the Pfizer Warranty Program Avoid Best Price?

In many ways, from the perspective of the payer or individual, the Pfizer program looks a lot like other, traditional value-based arrangements and thus would appear to raise the traditional best price concerns (there are also potential anti-kickback statute concerns – but we will save those for another post and probably another blog!) If a patient has to discontinue therapy for clinical reasons, the patient/payer is entitled to a refund up to the wholesale acquisition cost, or WAC, of the drug. In the case of the XALKORI pilot program, that could be an amount of up to $57,432 (the program is currently time limited through the end of the year and only available if you discontinue the product before your fourth, 30-day refill).

Now is the time I need you to scroll back up and look at the statute and regulations! If you read the fine print of Pfizer’s program, Pfizer is not making any refund payments to patients or health plans as part of this warranty program. Instead, Pfizer has partnered with an insurance company (here, New Hampshire Insurance Company, an AIG Company) to underwrite the program and pay/process refunds. In exchange for premium payments to its insurer (the details of this are not public, of course), the insurance company (not Pfizer) warranties the clinical utility of XALKORI. And what happens if a patient discontinues use of XALKORI for clinical reasons in the first three months? The insurer, not Pfizer, pays the patient or health plan.

Remember the wording of the best price definition? “The lowest price available from the manufacturer.” When New Hampshire Insurance Company cuts a $57,432 check to a health plan for a patient discontinuation, it is not the manufacturer making the payment and thus, arguably, best price is not implicated.

What Does CMS Have to Say About All of This

There is no warranty safe harbor or exception from best price, but Pfizer does appear to have crafted a program that enables it to enter into value-based arrangements with health plans and patients, offer full refunds, and avoid implicating best price. Do we have any idea if CMS has or will buy into this argument. We do (sort of!)

Recall I mentioned the Trump administration regulation published in late 2020 which has now been the subject of multiple delays? Well in that regulation, which dealt in part with a new policy which would (if ultimately implemented) permit manufacturers to establish multiple best prices to encourage the use of value-based arrangements, CMS opined on – and appeared to bless– the warranty model:

The premium paid by the manufacturer to a third party to warrant a drug and provide benefits to payers and patients when certain clinical or performance measures are not achieved serves as an incentive to payers, providers, and patients to purchase the drug. Therefore, the premium paid by a manufacturer reduces the drug’s price, and must be included in ‘‘best price.’’ However, the benefits paid by the third party in the event the drug did not meet certain clinical or performance measures are exempt from ‘‘best price’’ because payments made from the third party to the payer do not represent a price available from the manufacturer to any best price eligible entity as provided in § 447.505(a) and does not represent a manufacturer sale to an AMP eligible entity consistent with § 447.504(b) or (d). Therefore, under this warranty model, a manufacturer would pay both Section 1927 rebates for the drug, as well as pay for a premium for a warranty policy, the value of which they would have to be included in the calculation of their best price, regardless of whether the manufacturer uses a VBP arrangement that results in multiple best prices.

CMS’ takeaway: while the premium payments from Pfizer to the insurance company may implicate best price, the refund payments facilitated through a third-party insurer do not implicate best price because they do not represent “a price available from the manufacturer.”

What’s Next

Going forward, we expect other manufacturers may follow on the heels of Pfizer in developing their own warranty programs for tried-and-true therapeutics. At this time, the Pfizer program is set to expire at the end of 2021 so we will need to wait and see if the program was a success. We will of course report back here as this story develops!

One thought on “How Pfizer’s Warranty Program Gets Around Best Price?

  1. Great post about a very interesting work-around. And very timely, since I’m doing a guest lecture next week about value and innovations. While I don’t think we’ll get to the level of detail about outcomes based arrangements (or warranties) for therapeutics and implications for best price, we might…. So now I have another arrow in my quiver to spark discussion. Thanks & Best Wishes, MIke

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