The Centers for Medicare and Medicaid Services (CMS) intends to alter assignment of Healthcare Common Procedure Coding System (HCPCS) Level II codes for certain physician-administered 505(b)(2) drugs.  At its core, CMS has stated its desire to “codify” internally created criteria for classifying Part B drugs as single source or multisource, which may disadvantage products developed and approved under the 505(b)(2) regulatory pathway. Under the proposed change, CMS assumes pharmaceutical and therapeutic equivalence of certain 505(b)(2) drugs to a reference product, without bioequivalence data, which differs from the FDA designation.

Background

The FDA reviews some new drug applications (NDAs) according to section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act (“the Act”).  The FDA review of an “an application that contains full reports of investigations of safety and effectiveness but where at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant has not obtained a right of reference (section 505(b)(2))1.”  The 505(b)(2) pathway was created in the Waxman-Hatch Act of 1984 to codify the previous FDA “Paper NDA” policy. The intent is “to encourage innovation without creating duplicate work and reflects the same principle as the 505(j) application: it is wasteful and unnecessary to carry out studies to demonstrate what is already known about a drug,” FDA explained in its guidance. The most common reason for 505(b)(2) submission is that the sponsor has made “changes to previously approved drugs,” including its recommended dose, its formulation, its route of administration, its strength, or the drugs with which it is combined. This distinction is critical for innovators that utilize the 505(b)(2) regulatory pathway as means to speed development and access to improvements to previously approved drugs.2  Over 60% of NDAs approved by  FDA are 505(b)(2) approved products, and they provide improved patient /healthcare system benefits.

Implications

Single source drugs are assigned unique HCPCS codes that are reimbursed according to the Part B fee schedule as a % above Average Sales Price (ASP), or the average price reported to CMS quarterly by manufacturers for the single source product. Multisource drugs are deemed to be therapeutically equivalent, and the ASP is calculated by including quarterly pricing information from all generic product manufacturers.

The FDA’s Database for Approved Drug Products with Therapeutic Equivalence Evaluation (also known as the “Orange Book”) draws distinctions between drugs that have been shown to be therapeutically equivalent and those that are not.  i.e. they  are approved as safe and effective, have the same active ingredient, meet compendial standards, have the same labeling, and are bioequivalent- the active ingredient has the same rate and extent of absorption when administered in the same molar dose. However, CMS has informally had different criteria for establishing single source versus multisource designations, for over 10 years.3  For example, their interpretation of statute in “the FDC Act”, which they have not been delegated authority to implement. is that once therapeutic equivalence is established by two manufacturers in a certain category, CMS has the authority under the Social Security Act to review HCPCS coding applications on a case-by-case basis and make determinations of whether a drug is single source or multisource, even if the FDA has determined that a 3rd NDA approval via 505(b)(2) pathway is not pharmaceutically or therapeutically equivalent to previously marketed drugs.

Action Required

In its recently published Physician Fee Schedule Proposed Rule, CMS has stated “Some drugs approved under Section 505(b)(2) of the Federal Food, Drug, and Cosmetic Act share similar labeling and uses with generic drugs that are assigned to multiple source drug codes. CMS is proposing to continue assigning certain 505(b)(2) drug products to existing multiple source drug codes. This approach is consistent with our interpretation of the definition of multiple source drug in section 1847A of the Act and would be limited to 505(b)(2) drug products where a billing code descriptor for an existing multiple source code describes the product and other factors, such as the product’s labeling and uses, are similar to products that are already assigned to the code.

The proposed approach is consistent with the concept of paying similar amounts for similar services and with efforts to curb drug prices. The proposal also encourages competition among products that are described by one billing code and share similar labeling.”

One basis for this proposal is CMS’ perception of the price disparity that can exist between a multisource generic and a single source 505(b)(2) product. However, this perception ignores patient benefits. This thought process is similar to that which drove manufacturing offshore.

CMS is seeking comments on this proposal, which must be submitted in writing no later than 5 pm on October 5, 2020.  Although this annual proposal is normally finalized in late November, we are in election year, and the Administration may seek to finalize the rule before the election to make a pronouncement of its efforts to reduce drug prices. The BHA team is available to assist those interested in preparing written comments in response to this proposal. Please contact us to learn how we can help.