a pill in place of a model globe

Issuing the Most Favored Nation Interim Final Rule Was a Mistake

By Abe Sutton

While the Most Favored Nation (MFN) Interim Final Rule (IFR) advances a well-calibrated policy to standardize pharmaceutical prices across developed nations, procedurally, its issuance was a mistake.

The Trump administration would have been wiser to issue a Notice of Proposed Rulemaking (NPRM) for two reasons: first, an NPRM would have circumvented some of the procedural vulnerabilities of the IFR. And second, had the Trump administration issued an NPRM, President-Elect Biden’s team would have faced significant pressure to finalize the policy.

In this post, I touch on what MFN is, examine why the interim final rule is legally vulnerable, explore why the Biden team likely would have adopted the policy had an NPRM been issued, and explain how industry should think about this situation.

MFN IFR overview

The logic behind the payment model

MFN would produce an approximation of what we would see if there was free trade on drugs, as prices across the developed world fall into an equilibrium.

It is currently rational for pharmaceutical companies to accept low reimbursement rates in some countries. As long as reimbursement is above the pharmaceutical companies’ marginal cost of production, doing so is profitable. This is an easy bar to clear, as pharmaceutical manufacturing costs are typically low (with the exception of CAR-T therapies). The major expense in pharmaceutical production is research and development.

MFN would shift the negotiating dynamic by giving pharmaceutical companies an incentive to walk away. To the extent that foreign counties choose to lose access to the covered drugs, pharmaceutical revenues would fall. To the extent that foreign countries choose to retain access, pharmaceutical companies would negotiate prices to maximize their overall profit.

The initial proposal: International Pricing Index

As originally advanced, the Center for Medicare and Medicaid Innovation (CMMI) proposed to create a payment model dubbed International Pricing Index (IPI).

Under the model, Medicare reimbursement for a limited set of physician-administered drugs (within Part B) would have been set based the weighted average price paid in a set of developed counties.

The theory behind the model was that the IPI reimbursement formula would shift pharmaceutical companies’ incentives. In response, pharmaceutical companies would either obtain higher reimbursement or pull out of the market. Either way, other developed countries would no longer freeload off of development incentivized by U.S. patients. The hope was that developed countries would choose to pay higher prices, which would redistribute part of the incentivization burden from American patients, without drastically reducing overall incentives.

The Interim Final Rule: Most Favored Nation

As finalized, the policy saw a number of changes. Significantly, the MFN IFR sets the reference price to the lowest price paid in any Organization for Economic Cooperation and Development (OECD) country whose gross domestic product (GDP) is at least 60% of US GDP. This is in contrast with the weighted average price across a smaller basket of countries referenced by IPI. Additionally, the MFN IFR models the policy across all Medicare Part B beneficiaries, rather than the 50% proposed in IPI.

Legal vulnerability of the MFN IFR

Unfortunately, the IFR is highly vulnerable to procedural challenges. The Trump administration attempted to claim a good cause exemption from the notice and comment requirements imposed by the Administrative Procedure Act. They did so by claiming notice and comment is contrary to the public interest in this case. This claim is based on the “acute need for affordable Medicare Part B drugs now, in the midst of the COVID-19 pandemic.”

It is unclear how seriously courts will take this claim. Courts have upheld IFRs issued in situations where notice would be contrary to the public interest as it would prompt anticipatory behavior by the affected parties. For example, when announcement of the rule would enable the sort of financial manipulation a rule seeks to prevent. The contrary to the public interest claim in this IFR is not grounded in precedent.

Additionally, the extent to which courts will view a payment model rolled out across the entire nation on a mandatory basis as a pilot has not been litigated. Prior mandatory models, have been designed to cover lower percentages of the country. For example, the ESRD Treatment Choices model covers 30% of the Medicare program.

The Biden analysis

In the current political environment, the issuance of the IFR is bewildering. Had the Trump administration issued an NPRM, the Biden administration would have faced a choice between finalizing a policy they largely agree with on a rapid timeline or working from scratch on their own idealized policy. Faced with competing health priorities, it seems unlikely the Biden team would opt for the latter approach.

The current policy and political environments would have also weighed in favor of the MFN approach.

The policy perspective

From a policy perspective, COVID has highlighted the need to continue encourage pharmaceutical innovation. A robust pharmaceutical industry is critical for not only extending and improving the quality of human life, but also protecting Americans from new threats in our globalized world. MFN strikes a balance by preserving much of the current incentive while responding to Americans’ concerns about drug prices. While MFN would incentivize less innovation than our current approach, by addressing Americans’ drug pricing concerns, it would produce more politically sustainable revenues.

The political perspective

Democrats lack control of the Senate, and the Biden administration is unlikely to pick up Republican votes for Medicare drug price negotiations. Even if Democrats reach 50 seats following the Georgia runoffs, passing partisan health reform would invite a backlash. And it would be challenging to stir the public support against the pharmaceutical industry right now.

Advice for industry on reacting to the MFN IFR

The pharmaceutical industry has a number of pathways to challenge MFN in court. They should do so, challenging the procedure followed, the scope of the model, and the broad delegation of authority given to CMMI.

Simultaneously, industry should start preparing for MFN. This advice is not primarily based on the possibility the IFR will be upheld. It is based on the possibility the Biden team adopts the policy, even if the IFR is struck down.

Selling off the rights to drugs in other OECD counties may not make sense in the future. Global price setting would require an integrated approach to protect overall revenues. Pharmaceutical companies that sell off rights in the OECD should hedge against a regulatory change. They can do so by adopting contract clauses protecting their U.S. revenues in the event MFN is implemented. Doing so now would be far cheaper than buying back those rights after MFN increases their value.

Abe Sutton

Abe Sutton is a J.D. Candidate at Harvard Law School in the Class of 2022. From 2017 until 2019, Sutton focused on health policy with the federal government, serving at the National Economic Council, Domestic Policy Council and Department of Health and Human Services. In these roles, he coordinated health policy across the federal government, with a focus on the shift to paying-for-value within Medicare, increasing choice and competition in health care markets, and updating the federal government’s approach to kidney care. Prior to that, Sutton was a consultant with McKinsey & Company where he worked with clients in the health sector. He holds undergraduate degrees in political science, management, and health care management and policy from the Wharton School and the College at the University of Pennsylvania. He has been named to Forbes 30 Under 30 for Law and Policy.

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