Managing Operational Challenges of Government …...Financial Considerations 1. Gross-to-Net impact analysis 2. Update Gross-to-Net and net revenue forecasting models 3. Evaluate business

Managing Operational Challenges of Government Pricing – Policy to Practice

Rick Moore, Senior Manager, Deloitte & Touche LLP

Copyright © 2016 Deloitte Development LLC. All rights reserved. 2Managing the Operational Challenges of Government Prices—How to Get from Policy to Practice

Participation in Government Pricing Programs creates manyoperational challenges, from identifying data availability tomethodology development and system configuration todealing with frequent and significant business and regulatorychanges. The operational challenges increase financial andcompliance risks.

This presentation will focus on some of the commonoperational challenges or considerations we see today or canexpect in the near future and strategies to deal with thosechallenges and mitigate risk.


1.) Planning for and addressing regulatory change Examples: ASP Demonstration, Bipartisan Budget Act - Generics Inflation Penalty and AMP Final Rule - Inclusion of US Territories

2.) Managing business changesExample: Mergers & Acquisitions (M&A)

3.) Managing documentation of Fair Market Value (FMV) and Bona Fide Service Fee (BFSFs) on an ongoing basis

4.) Managing data for better business insights

Examples of Current and Anticipated Operational Considerations or Challenges

Copyright © 2016 Deloitte Development LLC. All rights reserved. Managing the Operational Challenges of Government Prices—How to Get from Policy to Practice


A letter1 from Senator Sanders and Representative Cummings to the Health and Human Services (“HHS”) Office of Inspector General (“OIG”) noted that, between July 2, 2013 and June 30, 2014, the price of half of all generic drugs increased and approximately 10% of such drugs doubled in price during that period.

H.R. 1314, The Bipartisan Budget Act of 20152, imposes a price increase penalty on Non-innovator (“N”) drugs or commonly referred to as generic drugs, similar to the penalty currently imposed on “S” and “I” drugs; beginning 1Q2017.

• Current Non-innovator URA calculation = Average Manufacturer Price (“AMP”) * 13.0%

• New URA – Current URA calculation + inflation penalty

Inflation Penalty on Generics

(1.) http://www.sanders.senate.gov/download/sanders-cummings-letter?inline=file

(2.) https://www.congress.gov/114/bills/hr1314/BILLS-114hr1314eah.pdf

_https:/www.congress.gov/114/bills/hr1314/BILLS-114hr1314eah.pdf

_https:/www.congress.gov/114/bills/hr1314/BILLS-114hr1314eah.pdf


Determining Baseline AMP and Baseline CPI-U depends on whether the generic drug was marketed before or after April 1, 2013.

Importance of April 1, 2013

The first day of the HHS OIG evaluation period was June 2, 2013, which fell within 2Q2013. April 1, 2013 was the first day of this quarter. September 2014 is the final month of the fifth full quarter after April 1, 2013.

Calculating the Inflation Adjustment

Generic drugs marketed BEFORE April 1, 2013

Baseline AMP = AMP in 3Q2014

Baseline CPI-U = CPI-U for September 2014

Generic drugs marketed AFTER April 1, 2013

Baseline AMP = AMP for the fifth full calendar quarter after the drug was first marketed.

Baseline CPI-U = The last month of the Baseline AMP quarter


Manufacturers are required to calculate one baseline AMP for each NDC-9 although their product may meet the definition of the standard AMP and the 5i AMP.

“…we believe that a drug should only have one base date AMP as this section of the statute does not contemplate the calculation of two base date AMPs. In addition, we believe it will not be necessary for manufacturer establishment of two base date AMPs because a manufacturer may make certain reasonable assumptions when determining AMP and has the option to use a smoothing process for determining when a drug is not generally dispensed through retail community pharmacies. We believe such options will result in more stable AMPs since the calculation methodology for 5i drugs should remain relatively consistent from month-tomonth and quarter-to-quarter…”2

One baseline AMP will be calculated and used when calculating additional rebate even if another formula is used to calculate AMP (other than the one used for baseline AMP.)

For new generic products, the baseline AMP will reflect the AMP calculation methodology used in the baseline quarter depending on the products market date.

Baseline AMP

81 (.2)‏ Fed.Reg.5243


“For N drugs with market dates after April 1, 2013, for which the baseline AMP is established in second quarter 2017 or later, the additional rebate portion of the URA calculation would only apply prospectively from the quarter in which the drug’s baseline AMP is established.”

- Market Date may not be a simple answer and the data may not be readily available.

- Understand your product portfolio and determine where you may have to make reasonable assumptions.

Baseline AMP – Recalculation


Market Date

CMS has provided the following guidance regarding the market date for N-drugs:

1. “For N drugs, the Market Date is the date the drug was first marketed under the labeler’s rebate agreement. If an N drug was purchased or otherwise acquired from another labeler, the Market Date should be equal to the Market Date of the original product, if that date is available. If a Market Date falls on a date that is earlier than 9/30/1990, DDR will automatically populate the Market Date field with a value of 9/30/1990 since dates earlier than the start of the MDR program are not applicable.” Medicaid Drug Rebate Data Guide for Labelers, Rev. July 2016.

2. “In order to calculate the additional rebate portion of the URA calculation for N drugs, section 602(a) of the BBA of 2015 amended section 1927 of the Act to establish a ‘Base AMP’ value for N drugs based, in part, upon each N drug’s Market Date.” Manufacturer Release No. 97, April 15, 2016 (link).

3. “Consistent with Manufacturer Release 90, a manufacturer that buys a drug product from another manufacturer is responsible for obtaining the baseline data of the drug. This includes obtaining the necessary data to report a baseline AMP consistent with section 1927(c)(1)(C) of the Act. Baseline data such as market date and baseline AMP must follow the new drug application (NDA)/abbreviated NDA (ANDA) of the product. To determine if drugs should have the same baseline data, manufacturers may access the FDA Online Label Repository at http://labels.fda.gov/, and enter each drug’s NDC to determine if the drugs have the same NDA/ANDA.” (This excerpt does not refer specifically to N drugs, but the entire release addresses N drugs.) Manufacturer Release No. 101, Sept. 22, 2016 (link).

https://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Downloads/Rx-Releases/MFR-Releases/mfr-rel-097.pdf

http://labels.fda.gov/

https://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Downloads/Rx-Releases/MFR-Releases/mfr-rel-101.pdf


Ref. Task Task OwnerStart Date

Due Date

Duration Status

1 Identify the applicable products.

2Identify stakeholders such as legal, finance, etc… the type of analysis that will be applied in order to set expectations (for example: a Gross-to-Net Analysis and impact analysis )

3Determine each products market date and baseline quarter based on whether the generic drug was marketed before or after April 1st, 2013.

4Perform Gross-to-Net Impact Analysis to estimate the potential future additional Medicaid Rebate Liability and increased PHS price related to the potential increase on URA

5Revise existing Gross-to-Net Models and Net Revenue Forecasting Models to continuously and consistently estimate

6Update product master to include (1.) Baseline AMP Period, (2.) Baseline AMP and (3.) Baseline CPI-U and (4.) Market Date

7Revise the Unit Rebate Amount ("URA") methodology documentation to incorporate the inclusion of the Additional Discount in the calculation

8Update the GP system to include the Additional Discount in the URA calculation

9 Run the Q1 2017 URA calculations and make updates to DDR

10Perform manual validations of the URA calculation for Q1 2017 URAs; compare to GP system

11Update Medicaid Policy and Standard Operating Procedures ("SOP") documentation

12Perform a lookback review to compare previous URA to new URA and analyze actual impacts

Example Project Plan


Financial Considerations1. Gross-to-Net impact analysis 2. Update Gross-to-Net and net revenue forecasting models3. Evaluate business and pricing strategy. Including, but not limited to, price changes,

drug launches, contractual terms, etc. Particularly during the fifth full quarter as these decisions may impact base AMP

4. Impact on contracts with Wholesalers and service fees paid as part of those contracts

Government Pricing Systems Considerations1. Update Government Pricing systems to URA inclusive of the additional inflation

penalty

Policy and Procedure Considerations1. Update Medicaid Polices and Standard Operating Procedures (“SOPs”)2. Update URA Methodology Grid

Summary Considerations for manufacturers


Effective April 1, 2017:

• Sales within the five territories will be Average Manufacturer's Price (AMP) and Best Price (BP) inputs, and

• Territory Medicaid utilization will be rebatable

Territories may opt out of MDRP; no deadline in the final rule for this decision

Will territorial government-mandated price concessions be excluded from BP?

Will manufacturers pull back price concessions that would set Best Price (reminiscent of 1990)?

How to operationalize if manufacturer affiliates (e.g., Asian or Central American units) have current responsibility over certain territories?

Expansion of Medicaid to US territories




Considerations for manufacturers


• Adjust reserves and accruals to reflect increased Medicaid fee-for-service and Medicaid Managed Care Organization (Medicaid MCO) rebate liability

• Can Medicaid rebate liability for Puerto Rico and US territories be estimated based on states with similar Medicaid lives and Managed Care enrollment?

Financial

• Update AMP and BP methodology documentation and systems to include state codes, transaction type and/or Class of Trade (COT) associated with US territories as required

• What data requirements to be captured now in order to appropriately apply smoothing to US territory data in April 2017?

Operational

• Price concessions currently offered to customers in US territories could have an unintended impact of lowering BP and increasing Medicaid rebates

• Review Contracts in PR

Strategic


Identify Territory Transactions

- Territory specific COTs

- Incorporating new data fields in transaction data

Validation and Methodology:

- Ensure that territory transaction data contains necessary elements and that the data is treated appropriately in the calculations

- Date for inclusion of territories data

Important to Note:

- Manufacturers must include territory transactions even if the territory waives the rebate receiving portion of MDRP

Operational Considerations cont.


Managing the Operational Challenges of Government Prices—How to Get from Policy to PracticeCopyright © 2016 Deloitte Development LLC. All rights reserved. 14

M&A Challenges


2015 was marked with top pharmaceutical companies making record-breaking mergers and acquisitions that for the first 10 months totaled a massive $367.6bn. Pharmaceuticals in the USA was the biggest source of merger activity with deals worth $271.4bn. 2016 is already predicted to be a big one for merger activity, with deals up from $20.5bn in the same period a year ago.

Pharma & Biotech M&A, 2010-2015

Source: ProClinical Life Sciences Recruitment Blog “Top mergers and acquisitions in the pharmaceutical industry”


Global life sciences M&A—Annual

Source: Deloitte 2016 Global life sciences outlook


Strategy: Do price regulation programs pose obstacles to the business goal or strategy underlying the acquisition or divestiture?

Evaluating the risks: What is the appropriate scope of due diligence?• Potential Financial Exposure• Potential Compliance Risks

Allocating the risks: What should the contract say?

Integration: What are the parties’ continuing responsibilities to facilitate seamless GP compliance?

GP roles in transactions


Compliance risks may not have been contemplated pre-deal• Maybe the right questions were not asked, or the awareness not there• Maybe there was not enough detailed information to actually be aware of the

risks

Compliance Risks have to be identified, and appropriate impact and mitigation strategies identified• Have there been substantive compliance issues?• Will a recalculation be necessary?

Evaluating compliance risks


When the Due Diligence is done, Post Deal, and the GP team has to be able to evaluate the Financial and Compliance impact, that is when the work begins

The right expertise• Internal• Consultants• Lawyers

Capacity and Resources• Commercial, GP• IT

Getting the right data• Collect, Review, Reconcile, Validate

Systems• Working with large data sets• Turning around results in a short period of time

What it is going to take…


Development collaborations/licensing/authorized generics• Responsibilities for product administration

Company Acquisition• Inherit the acquired company’s historical reporting and compliance

Product Acquisition/Divestiture• The new company takes over prospectively, but significant operational

considerations on the overlap

What are the GP implications of transaction structures?


“It’s a forced divestiture as part of a larger transaction.”

“We need an additional product in this area to help us leverage contracts.”

“We think this product is undervalued and the market will support a price increase.”

“We’re trying to learn this therapeutic area in advance of some of our pipeline compounds.”

“We’re using this as a way to enter the US market.”

Why do we want to do this deal?Consider the GP implications of the following answers…


Included/excluded assets and liabilities

Representations and warranties

Indemnities and responsibility for existing investigations and audits

Allocation of GP liabilities for pipeline inventory

Timing for buyer labeling

Transition responsibilities• Who calculates and reports• Data sharing• Cooperation

Key contract terms allocate GP risks

Payment obligation follows the NDC-Intercompany payment

mechanism-Timing of data-sharing-Disputes


Compliance and financial risks

Potential effects on pricing strategy relevant to targets

Educational challenges• They want numbers• Timing: don’t wait for the transaction because you won’t have time to

present

Promote senior management and board awareness of GP implications


BFSF and FMV Documentation Challenges


BFSF has been an important concept since it was originally introduced, in the calculation of ASP, and continues to be a focus in the AMP Final Rule. Related topics:

•Revisions made to the concept from the Proposed Rule

•Revisions to the “no pass through” prong of the four-part test

•The persistence of no additional guidance on determining FMV

•The discussion surrounding “price appreciation credits”


• CMS declines to provide guidance as to what constitutes FMV for an administrative or service fee and

• CMS continues to allow manufacturers the flexibility to determine what FMV of a service is during the BFSF evaluation (81 FR 5169 § 447.502 (4)(c))

• Manufacturers are required to document their FMV determinations and that such documentation should make clear the methodologies or factors used to assess whether a fee is FMV

• The determination of FMV must be articulated by the manufacturer and made contemporaneously with the FMV analysis while the contract is being negotiated as opposed to annually, quarterly, or other means of method/frequency seen in industry (81 FR 5169 § 447.502 (4)(c))

FMV

Source: CIS industry survey of more than 50 life sciences manufacturers, “Bona Fide Service Fees and Fair Market Value: Benchmarks and Best Practices”, May 2015.

How often do you review and/or update your FMV analysis?


• Develop a Request for Proposal (RFP), send it out to potential service providers and maintain and document RFP responses

• Develop an internal analysis of what it would costs internally to perform the services and compare whether it would be less expensive to out source

• Utilize FMV tools (i.e., FMV calculators) to determine and document FMV

Most common approaches manufacturers use to develop FMV for service fees internally

FMV


Most common approaches used by CIS by Deloitte to develop FMV for service fees

FMV

Market Approach Cost-plus (Bottom-Up) Approach FMV Range

Value based on market comparability Value based on bottom-up approach to recreate the service

Methodologydescription

• Analysis of comparable services available in market

• Leveraged when:

− Comparable market data is available

− Cost approach is not definitive

• Adjustments to account for differences between target/comparable service

• Analysis of total costs incurred by a industry participants to recreate the service activities conducted to create each of the Activities

• May include elements of opportunity cost

• Includes building the value of individual elements within a service activity

• Triangulation of Approaches

Key components

& Inputs

• Agreement type and transaction date

• Service provider type and services performed

• Product type

• Manufacturer size / type

• Potential cost to of an industry participant to recreate similar Activities

• Direct Fixed and Personnel Costs

• Overhead / Profit


• Determining which FMV approach or approaches is sufficient and reasonable for the services being valued (i.e., Market Approach vs Cost Approach or both).

• What data sources are most reliable and accessible to use when performing and documenting an FMV analysis?

• How are manufacturers valuing specialty pharmacy data?

• How are manufacturers valuing generic marketing and program service fees commonly found in generic distribution service arrangements?

• When should an FMV analysis be performed (before, during, or after negotiation)?

− Per CMS final rule, the FMV analysis should be performed contemporaneously while the contract is being negotiated.

• How are companies managing and ensuring that all service arrangements are FMV and have FMV documentation?

Challenges, common questions, and recommendations

FMV


Challenges in achieving an integrated state in leveraging data insights


Market research benchmarking

Setting the stage

What is the biggest challenge in the gross-to-net landscape for your business?

Source: Deloitte market research from October 2015

Across stakeholder functions, manufacturers acknowledge common priorities and challenges in achieving an integrated state in leveraging data insights.

Stakeholder

Priorities Challenges

USING DATA

TO DRIVE TOP

AND BOTTOM

LINE

AVOIDING

PENALTIES AND

FEES

VISIBILITY / EFFICIENCY IN

OPERATIONS

IMPROVING

STAKEHOLDER

RELATIONSHIPS

LACK OF

INSIGHTS

FROM THE

DATA

COST / TIME

TO MANAGE

SYSTEMS

MAINTAINING / DEVELOPING

TALENT

SYSTEM

DOWNTIME

C-level (e.g., CFO, Chief

Commercial)H H L L H M L M

Heads of Functions(e.g., Head of Contract

Mgmt.)H H H H H H M M

Managers and Directors(e.g., Medicaid)

H H H H H M M M

Users, Analysts(e.g., Chargebacks)

M H H L M L L M


Isolated to integrated

Analytic maturity continuum

• Limited knowledge sharing across GP functions;

• Spreadsheet based GP monitoring; disparate data availability

• Decisions are made in department silos

• Knowledge sharing across the commercial functions;

• Integrated solution; shared data across business functions

• Strategic alignmentand coordinated decision making

• Knowledge sharing across the organization;

• Closed loop solution; harmonized data across business and manufacturing functions

• Embedded in strategic planning and decision making at all levels

Strategic

Integrated

OperationalIsolated

No Capability

Analytic Capability Continuum

Based on Deloitte’s experience helping clients, many companies are living with isolated analytic capability

A systematic approach is required to develop a continuum along which analytic maturity can be achieved

• Some knowledge sharing across contract functions;

• Automated solution exists; arduous data collection;

• Workflow trending; Reactive reporting & analytics

• GP calculations are performed and reported


Leading practices that life sciences companies should consider adopting that can facilitate movement along the analytics maturity continuum

Some fundamental success factors

Collaboration with decision stakeholders

One source of truth for

assumptions, decisions, and

algorithms

Cross-functional governance and process

Continuous monitoring, scenario, and causality analysis

Robust and integrated

analytics solution

Questions?


Senior Manager | Deloitte AdvisoryDeloitte & Touche LLPDirect: [email protected]

Richard Moore is a Senior Manager and Market Leader in the Deloitte Life Sciences Advisory practice and is based in the Philadelphia area. He is experienced in providing Commercial and Government Pricing compliance, Contracting, Gross to Net, and M&A support with a focus on the management of associated operational, strategic, and financial risks for emerging, small, mid-size, and top-ten pharmaceutical, biotechnology, and medical device manufacturers.

He has managed litigation support projects for clients with alleged False Claims Act violations related to Government Pricing. Richard has also managed projects including but not limited to: GP recalculations and restatements for top 10 manufacturers, Bona Fide Service Fee and Fair Market Value analysis, establishment of a GP compliance infrastructure including development of policies and procedures and training, and GP impacts on gross to net. He is experienced in projects involving complete and accurate client data gathering, g/l reconciliation, and system methodologies for Government Pricing Program calculation processing and reporting.

Rick Moore

Contact information

mailto:[email protected]

This document contains general information only and Deloitte is not, by means of this document, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This document is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this document.

As used in this document, “Deloitte” means Deloitte & Touche LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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Managing Operational Challenges of Government …...Financial Considerations 1. Gross-to-Net impact analysis 2. Update Gross-to-Net and net revenue forecasting models 3. Evaluate business