T HE M ORAN C OMPANY

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

2. 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. THE MORAN COMPANY

3. 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. THE MORAN COMPANY

4. Impact of Medicare Part D • One product space where the immediate impact won’t 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. THE MORAN COMPANY

5. 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. THE MORAN COMPANY

6. 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. THE MORAN COMPANY

7. 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. THE MORAN COMPANY

8. Impact of Medicare Part D • For orphan products (present or future) that make it over to the Part D side: • There’s 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. THE MORAN COMPANY

9. 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. THE MORAN COMPANY

10. 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. THE MORAN COMPANY

11. 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. THE MORAN COMPANY

12. 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. THE MORAN COMPANY

13. 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 pharmacy’s 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. THE MORAN COMPANY

14. 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. THE MORAN COMPANY

15. Impact of Medicare Part D • Yet it’s 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. THE MORAN COMPANY

16. 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. THE MORAN COMPANY

17. 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. THE MORAN COMPANY

18. Impact of Medicare Part D • Summing up from the manufacturer’s 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. THE MORAN COMPANY