IPAB Likely to Trigger in 1H17; Savings Target Small; One-Time Bump in ACA Pharmaceutical Fee and Medical Device Tax Most Likely Result

Print Friendly, PDF & Email

Richard Evans / Scott Hinds / Ryan Baum


203.901.1631 /.1632 / .1627

revans@ / shinds@ / rbaum@ssrllc.com


September 27, 2016

IPAB Likely to Trigger in 1H17; Savings Target Small; One-Time Bump in ACA Pharmaceutical Fee and Medical Device Tax Most Likely Result

  • The Affordable Care Act’s Independent Payment Advisory Board (IPAB) is tasked with keeping per-beneficiary Medicare spending within a range of CPI or GDP if and when spending exceeds target levels, as is likely to be (officially) determined in 1H17
  • This obliges the IPAB (or in its absence the Secretary of HHS) to propose means of reducing costs below the trigger level for the 2019 implementation year. Major spending categories are either legally (e.g. hospital payment rates) or politically (e.g. physician payment rates) off-limits at that point, making reductions in pharmaceutical and /or device spending the most likely options
  • Since passage of the ACA in 2010 there has been bipartisan Congressional support for an IPAB repeal; however legislation has not moved, arguably because of an assured Obama veto. It is unclear whether Clinton would veto an IPAB repeal and unlikley that Trump would; and, the ACA provides a one-time ‘window’ for repeal that requires a specific measure be set in motion between January 1st and February 1st of 2017, and enacted by August 15th of 2017. Repeal during this window is quite feasible, but far from assured
  • Assuming IPAB is triggered, and survives, required savings are likely to be modest (+/- $1.5B), and needed only for 2019. Procedurally, the Secretary of HHS is more likely to ask the drug and device industries for proposals than to force a plan on these industries, at least as a first step
  • For their parts, to make good on the IPAB savings target the pharmaceutical and device industries are more likely to propose one-time adjustments to existing mechanisms than they are to propose creation of de novo mechanisms that could lead to ongoing and/or inflating obligations. Of the existing mechanisms, we see one-time (i.e. single-year) adjustments of the ACA’s pharmaceutical manufacturer / importer fee and medical device tax as the most likely landing point. Pharmaceutical manufacturer support of a bill eliminating tax deductibility of DTC advertising is a feasible but far less likely alternative
  • A dark horse option is pharmaceutical industry support of a measure giving Medicare LIS beneficiaries Medicaid pricing; this would produce +/- $13B in annual savings, far above the likely +/- $1.5B savings target. However because many (ourselves included) see this policy as inevitable, agreeing to it in the context of an IPAB process would essentially pay the IPAB bill with costs that were already almost certain to be incurred

Where we’re BULLISH: Biopharma companies with undervalued pipelines (e.g. AMGN, BAYER, BMY, GILD, ROCHE, SHPG, SNY, VRTX); Biopharma companies with pending major product approvals (e.g. ACAD, ADMA, ALIOF, BIIB, CHMA, CLVS, CPRX, CTIC, GILD, ICPT, JAZZ, LLY, LPCN, MRK, NVO, OCUL, PTCT, SRPT, TEVA, ZSPH); SNY on sales potential for Praluent (alirocumab); CNC, MOH and WCG on bullish prospects for Medicaid HMOs; and, DVA and FMS for the likely gross margin effects of generic forms of Epogen

Where we’re BEARISH: PBMs facing loss of generic dispensing margin as the AWP pricing benchmark is replaced (e.g. ESRX); Drug Retail as dispensing margins are pressured by narrowing retail networks and replacement of AWP (e.g. WBA, CVS); ABBV on Humira US pricing risks; ENDP on risks to branded Rx price premia; Research Tools & Services companies as growth expectations and valuations are too high in an environment of falling biopharma R&D spend (e.g. CRL, Q, ICLR); and, suppliers of capital equipment to hospitals on the likelihood hospitals over-invested in capital equipment before the roll-out of the Affordable Care Act (e.g. ISRG, EKTAY, HAE)

IPAB is likely to ‘trigger’

Passed as a provision of the 2010 Affordable Care Act (ACA), the Independent Payment Advisory Board, when expected growth in per-beneficiary Medicare spending exceeds target levels[1], is obliged to propose measures that reduce actual spending growth to below-target levels. The relevant spending forecasts are those of the Chief Actuary of CMS, who determined in 2013, 2014, 2015 and 2016 that no IPAB-generated savings were required, though the margin between anticipated and trigger growth levels has grown infinitesimally small. In June 2016, the growth forecast missed the target rate by just 12 bps (Exhibit 1). Of far greater significance going forward, we expect spending estimates to cross the threshold and trigger IPAB cost reduction authority for the first time next year – a prediction that CMS has consistently reiterated (in three out of the four determination years to date) – by a margin that has increased in each of the last two determinations

Assuming the trigger level is crossed and that IPAB operates as designed, what happens?

  1. By April 30, 2017 the Chief Actuary of CMS will publish the Determination year 2017 Medicare Trustees Report projecting per beneficiary Medicare cost growth (annually, averaged over the 2015-2019 period), and the target growth rate (the annual average of CPI-U and CPI-medical care, also averaged over the 2015-2019 period). The likely Medicare growth rate of 2.82 percent exceeds the likely target growth rate of 2.62 percent, triggering the IPAB authority to propose cost reductions (Exhibit 2)[2]

  1. The IPAB convenes to draft proposals that generate cost savings at least as large as the applicable percentage (i.e., the difference between the Medicare growth rate and the target growth rate, or 2.82 -2.62 =20 bps)[3] times projected total Medicare spending in the Proposal year 2018 (currently about $720B), or roughly $1.5B (Exhibit 3). These draft proposals must be shared with MedPAC[4] and the Secretary of Health and Human Services by September 1, 2017

  1. By January 15, 2018 the IPAB submits its final proposals to the president and Congress.
  2. The Secretary of Health and Human Services begins implementing the proposals on August 15, 2018 unless Congress has overruled them via the legislation that meets the strict calendar limits and parliamentary procedures set forth in the ACA (including limits on debate, requirements for offsetting proposals yielding savings at least as great as the IPAB proposed, and three-fifths super majorities in both houses to pass)
  3. On October 1, 2018 (January 1, 2019 for proposals related to Medicare Parts C/D, or calendar-year based payment rates) proposals take effect

In all likelihood the IPAB will be unable to recruit members (who are precluded from other work, required to undergo a confirmation process, and generally paid less than they’re currently making), and even if members were nominated, Senate confirmation would likely be a challenge. In the case that no IPAB exists, the obligation to propose savings falls to the Secretary of HHS, who has until January 25, 2018 (rather than January 15) to submit proposals that achieve the same savings

Where can the IPAB look for savings?

The statute gives broad deference to the IPAB in generating cost savings proposals with two very significant caveats:

  1. Contrary to the most doomsday descriptions put forth by its opponents, the IPAB specifically CANNOT ration care, increase premiums or cost sharing, restrict benefits, or change eligibility criteria
  2. Through proposal year 2018 (which is driven by the determination made in 2017), the IPAB cannot further reduce the payment rates for those providers whose payment rates were reduced in the ACA in excess of a productivity reduction. Importantly, this takes off the table fee-for-service payment rates associated with:
    1. Inpatient acute care hospitals
    2. Long-term care hospitals
    3. Inpatient rehab facilities
    4. Psychiatric hospitals
    5. Hospice care
    6. Outpatient hospitals

These exempt services represent about a third of total Medicare spending (Exhibit 4), but do not preclude the IPAB from extracting savings from, e.g., Medicare Advantage and/or Part D plan subsidies, physician payment rates, or payment rates for physician-administered drugs, paid for under Part B – though in reality we doubt IPAB would propose, or Congress willingly approve, any changes to these payments. This leaves drugs, devices, and insurers’ margins as viable sources of savings, and it’s our belief that drugs and devices are by far the most likely targets. Exhibit 5 expresses the applicable savings targets in each year as a percent of total non-exempt Medicare spending (0.3 percent in 2017), and as a percent of specific non-exempt category spending (6.6 percent of Part B drug spending; 1.5 percent of Part D drug spending; 3.8 percent of administrative costs and the net cost of private insurance[5] in 2017). So assuming IPAB survives and is triggered, the savings burden is likely to fall on branded pharmaceuticals / biotechnology, and also perhaps medical devices

What form might IPAB-proposed savings take?

Believing that no IPAB members will be seated, we expect the IPAB savings proposal obligation to fall to the Secretary of HHS. And, believing the drug and possibly also the medical device industries are the likely targets for any savings required, we see the ‘form’ of those savings beginning as a negotiation between the Secretary and the trade associations of these industries. The path of least resistance for HHS is to ask the industries how they’d propose to meet the savings target, rather than unilaterally declaring a savings mechanism and triggering a head-to-head fight with the trade associations

Given the modest absolute dollar value (+/- $1.5B) and one-time nature of savings required, the industries presumably will favor a temporary rather than a permanent source of cost offsets. And, anything proposed by industry is likely to be an adjustment of existing mechanisms, rather than creation of de novo mechanisms whose cost impacts would persist – and potentially grow larger – over time

We believe the drug and medical device taxes called for in the ACA are the most likely mechanisms, and that the respective industries’ trade associations would propose one-time adjustments to the payment levels (pharmaceuticals) or applicable rates (devices). In 2019 (the year savings would have to be delivered), the ACA calls for a $2.8B fee on pharmaceutical manufacturers and importers (down from $4.1B the year prior); the amount owed in this year could simply be adjusted upwards as a one-time measure toward reducing the 2019 spending forecast. Similarly, the ACA calls for a 2.3 percent medical device tax (which was suspending for two years by the Consolidated Appropriations Act of 2016), but which is scheduled to resume on January 1st, 2018. This rate could be adjusted upward for the 2019 year only, thus contributing to the savings needed to keep spending below the IPAB target

We note that some members of the pharmaceutical trade association (PhRMA) are likely to see Senator Franken’s (D-MN) bill (S.2623) eliminating tax deductibility of direct-to-consumer advertising spend as a strategically attractive source of IPAB target offsets, in that these members see DTC spending as a zero-sum game whose elimination would aid margins. As such support for S.2623 is a potential means of meeting the savings target; however, we see this mechanism as far less likely than a one-time adjustment of the pharmaceutical fee, because the DTC measure remains controversial within PhRMA, represents an additional de novo mechanism, and is an ongoing rather than one-time effect

At third option from the pharmaceutical industry perspective would be to support movement of Medicare LIS beneficiaries’ drug spending to Medicaid, thus significantly lowering effective net pricing. By reverting these beneficiaries’ pricing to Medicaid – as it was prior to the launch of Part D – we estimate that the effective rebate on the 55 percent of total Part D spending generated by the LIS population would jump to the Medicaid average rate of 56 percent, from its current average rate of 31 percent. Across ALL Medicare enrollees, rebates would jump from 29.5 percent (currently approximately the average commercial rebate of 17 percent plus a 12.5 percent effective donut hole rebate) to 43 percent (Exhibit 6)

Not only would this move generate 2019 saving of $13 billion – about 10x the applicable savings target – but it takes the IPAB out of play completely through at least 2025. Since moving LIS enrollees back to Medicaid-level pricing also caps year-on-year drug price inflation in this segment of the enrollees, the move would satisfy the 2017 IPAB trigger and mitigate the risk that the IPAB is triggered again in the 2022-2025 period (Exhibit 7)

These savings are far in excess of what’s required to meet the 2018 IPAB target, and would be ongoing as opposed to one-time. The only rationale for industry to offer support for this policy is that many view the Medicare LIS to Medicaid switch as inevitable, thus agreeing to the switch in the context of an IPAB savings process would allow industry to ‘pay’ the IPAB bill by agreeing to something that is already quite likely to happen. Given the mismatch between costs to industry and the IPAB savings target, and at least some doubt as to the inevitability of a Medicare LIS to Medicaid switch, we see this as the least likely option

Through 2017 the target growth rate is the average of CPI-U and CPI-medical care; after 2017 the target growth rate is per-capita GDP growth plus 1 percent

  1. Projected 2017 figures from the 2016 Medicare Trustees Report, published 6/22/16
  2. Capped by statute at 1.5 percent, almost certainly a non-binding condition next year
  3. Medicare Payment Advisory Commission
  4. Includes both government administrative expenses, as well as estimated net cost of Medicare Advantage/PDPs (premiums less benefit spending). https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/DSM-14.pdf


©2016, SSR, LLC, 225 High Ridge Rd, 2nd Floor, Stamford, CT 06905. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein. The views and other information provided are subject to change without notice. This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. In the past 12 months, through a wholly-owned subsidiary SSR Health LLC has provided paid advisory services to Pfizer Inc (PFE) and to Merck (MKGAY) on both securities-related and non-securities-related topics

Print Friendly, PDF & Email