The Little-Known Rule That Could Disrupt the Medicare Essential Medicines Market

As a part of the CMS FY 2025 Inpatient Prospective Payment System proposed rule, CMS followed up on its promise from last year to propose policies that would help the hospital industry to maintain access to essential medicines. But could this Medicare Essential Medicines proposal have unintended consequences on drug makers?

Background on the Medicare Essential Medicines proposal:

In the proposed rule for the Inpatient Prospective Payment System (IPPS) for fiscal year 2025, the Centers for Medicare & Medicaid Services (CMS) has outlined a new policy to provide separate Medicare payments to small, independent hospitals for the additional costs of establishing and maintaining 6-month buffer stocks of designated “essential medicines.”

CMS stated this policy is intended to help mitigate the negative patient care impacts that can occur when hospitals lack access to essential drugs during shortages. The agency believes the separate payment will provide a financial incentive for small, resource-constrained hospitals to build more resilient pharmaceutical supply chains.

The proposal stems from prior CMS requests for feedback on potential policies to support hospital access to critical medicines. CMS noted it will continue to evaluate the policy details, including the essential medicines list, eligible hospital criteria, and payment mechanics, based on public comments received.

Key Details of the Proposed Policy

Eligible Hospitals: The separate IPPS payments would be limited to small hospitals with 100 or fewer beds that are considered “independent” (not part of a larger chain organization). CMS believes these smaller, often rural facilities are most vulnerable to disruptions in drug supply.

Essential Medicines List: The proposed Medicare Essential Medicines policy would cover buffer stocks of 86 medicines identified as “essential” by the Department of Health and Human Services’ Essential Medicines Supply Chain and Manufacturing Resilience Assessment. This list could be updated over time.

Buffer Stock Size: Hospitals would need to maintain a 6-month supply of the eligible essential medicines to receive the separate IPPS payment. CMS determined this stock level based on feedback that a 3-month supply may be insufficient given the typical duration of drug shortages.

Eligibility Exclusions: If an essential medicine is currently listed in shortage on the FDA Drug Shortages Database, a hospital could not establish a new buffer stock of that drug and receive the payment. However, hospitals that had already built a 6-month stock prior to the shortage could continue to be paid for maintaining that supply as it is drawn down.

Payment Mechanics: The separate IPPS payment would cover the hospitals’ reasonable, incremental costs of establishing and maintaining the buffer stocks, either through direct storage or contractual arrangements with manufacturers/distributors. It would not cover the actual drug acquisition costs. Payments could be made as lump sums or biweekly interim payments.

What are the implications to drug makers?

Drug makers have long grappled with the challenge of maintaining reliable access to critical “essential” drugs, especially during times of shortage or supply chain disruption. This proposed Medicare Essential Medicines policy proposal could significantly reshape the essential medicines landscape – with implications for how drug makers develop, price and distribute these vital products.

While the heart of the CMS plan to provide separate Medicare payments to small, independent hospitals to establish and maintain 6-month “buffer stocks” of 86 designated essential medicines is admirable – bolstering hospitals’ access and resilience against shortages, this proposed policy could upend the way drug makers think and strategize about their portfolios.

Even though the number of hospitals that could benefit from these additional IPPS payment should be relatively small, changes in purchasing patterns could have trickle down effects on production planning, inventory management and even pricing models. The proposed policy focuses on smaller, resource-constrained hospitals, those that often lack the purchasing power to negotiate favorable terms. If they can now tap into Medicare funds to build substantial buffers, it may shift the balance of power, forcing manufacturers to adjust commercial strategies and pricing to retain their business.

The proposed policy also allows for these small hospitals to rely on third parties, either wholesalers or manufacturers themselves, to house and service these hospital stockpiles. Managing this additional on-hand inventory, along with the logistics of ensuring the each hospital’s stockpile is kept separate may require drug makers to expand their skills into logistics management. The added logistics of tracking eligibility and coordinating with the FDA’s shortage database adds another layer of complexity that must be navigated.

Notably, the proposal aims to exclude buffer stocks of medicines currently listed in shortage – a sensible safeguard against exacerbating supply crunches.

Overall, this CMS plan, if implemented, has the potential to fundamentally reshape the essential medicines market. Drug manufacturers should expect to have to closely analyze the nuances, proactively engage with policymakers, and reimagine our operational and commercial approaches to adapt. The future supply, pricing and availability of these critical therapies may hang in the balance.