The Fallout of the Budget Agreement and Other 2013 Pharma Surprises from Washington

At this time last year, pharma manufacturers had reason to be optimistic. Anticipated 2013 milestones included the first major market expansion since enactment of the Medicare Prescription Drug benefit and, with bi-partisan consensus that the budget sequester was bad for the nation and would be lifted, it seemed the Medicare Part B reimbursement cuts might soon be addressed.

The year, unfortunately, did not work out quite like anyone expected. While the Affordable Care Act Exchange plans launched on October 1, the program has thus far been inconsistent and smaller than expected, and prescription medication coverage in the plans is far more limited than anticipated. But more troubling to the industry is what occurred to Part B pricing just weeks ago.

On December 18, 2013, a bi-partisan and bi-cameral agreement was reached to create the first federal budget in several years and lift the sequester spending cuts. Known as the Murray-Ryan Budget Agreement1, the legislation was intended to address the national budget, calm economic worry and avoid another government shutdown. With its passage, the 2% spending cuts automatically imposed since 2011 on virtually all spending programs—including defense, social services, transportation and agriculture—were removed.

This should have been good news across the board—but it was not so for pharma. Here’s what happened.

In the pharmaceutical space, the sequester cuts had reduced Medicare program spending for Part B-covered medications (including qualified outpatient drugs, vaccines, dialysis drugs or drugs associated with durable medical equipment), which was previously more than $20 billion. Under statute, these expenses were to be reimbursed at “average wholesale prices” (ASP) plus 6%, but under the sequester, were reimbursed as ASP plus 4%. When the Budget Agreement lifted the sequester cuts several weeks ago, reimbursement should have returned to statutory levels. Instead, the opposite occurred.

In order to understand the change, a quick lesson in “budget speak” is needed. There are, for these purposes, four types of federal spending: Mandatory and discretionary, in both the defense and non-defense categories. The principal non-defense “mandatory” spending category is Medicare. Thus, when section 101(c) of the Agreement extended the current rates for non-defense mandatory spending by two years, the effect was to lock in the 2% cut through 2023 for Part B drug reimbursement. Translating this into real dollars, for pharma alone the net impact over the next decade will be more than $5 billion in reduced Part B reimbursement.

While $5 billion may not seem like a lot in today’s healthcare market, the indirect rate-cut may portend a larger trend by the federal government to reduce drug spending in the coming years and, by extension, to have state Medicaid programs do the same. A 2011 survey showed that 44 states indicated a strong preference for the federal government to develop a single national benchmark to set Medicaid prescription drug reimbursement rates.2 That benchmark, if adopted by the federal government, would be ASP.

As previously reported in our September column in PM360, over the course of 2013, Medicare narrowly defined the scope of prescription drug coverage in the new federal and state Exchange plans by requiring plans to cover only “one drug per therapeutic class,” rather than “all or substantially all” drugs in the therapeutic classes. Although the data is preliminary, early indications are that drug coverage in the new Exchange plans will be very limited and access to higher-cost drugs—particularly in the mental health, AIDS, epilepsy and cancer categories—may be severely curtailed, if accessible at all. Combining the Exchange regulations with Congress’s recent action to reduce Part B reimbursement by extending the sequester cuts for the next decade is a troubling sign. To the extent that state Medicaid programs push for a standard federal drug reimbursement benchmark, we can expect “ASP plus 4%” to be that proxy.

Making sure patients have access to medication—new and old—is our shared mission. To do so, in 2014, pharma marketers should ask their government affairs and finance colleagues for continued updates on:

1. Reimbursement;
2. Reimbursement; and
3. Reimbursement.

Only time will tell what 2014 brings. For now, pharma marketers should watch this developing story carefully to help assess education and outreach needs, in close coordination with government affairs.

The views expressed in this article are those of the authors and do not reflect the views of their employers or their clients.

1. Bipartisan Budget Act of 2013 (H.J. Res. 59). Available online:

2. Office of Inspector General, Replacing AWP: Medicaid Drug Payment Policy, Report No. OEI-0 3-11-00060 (July 2011).

  • David Farber, JD

    David Farber is a partner at the law firm of King & Spalding, based in Washington, D.C. David is a health policy expert, representing clients before the Courts, CMS and the Congress on a range of healthcare issues.


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