The American Rescue Plan Act of 2021: Pharmaceutical Industry Impact

On March 12, 2021, President Biden signed into law the America Rescue Plan Act of 2021 (the Act), which provides nearly two trillion dollars in funding for various government programs, including many related to public health. The Act includes significant funding not only for COVID-19-related vaccines and therapeutics, but also for a wide range of initiatives that are expected to benefit the pharmaceutical industry, such as support for continuous manufacturing and the resumption of timely and comprehensive FDA facility inspections (including pre-approval inspections necessary for drug approvals). On the other hand, the Act is expected to result in increased Medicaid rebate payments by the pharmaceutical industry starting in 2024 when Medicaid rebates paid by innovator pharmaceutical manufacturers will no longer be subject to a cap. We address these and other provisions below.

Funding for COVID-19 vaccines and therapeutics

The Act benefits the pharmaceutical industry by providing significant additional funding for COVID-19 vaccines and therapeutics. Congress not only directs the funds to purchasing finished products, but also to augmenting private industry manufacturing capabilities and the development of new vaccines and therapeutics to address emerging COVID-19 variants.

First, the Act allocates $6.05 billion to the Department of Health and Human Services (HHS) for the research, development, manufacturing and purchase of vaccines and therapeutics to address COVID-19, emerging COVID-19 variants or future diseases with pandemic potential. The new HHS funding follows the $11 billion provided by the March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act and the $23 billion provided by the December 2020 Consolidated Appropriations Act. The Act also directs $750 million to the Centers for Disease Control and Prevention (CDC) to combat COVID-19 and other emerging infectious disease threats globally. Although the funds will be spread across numerous CDC activities, Congress states that the allocation may be used for global immunization, so funds may be used to purchase vaccines.

New to this round of relief funding is the $10 billion directed to the production and purchase of medical supplies, including vaccines and therapeutics, under the Defense Production Act (DPA). Congress expressly notes that the funds may be used to purchase the materials, manufacturing machinery, additional manufacturing or fill-finished lines or facilities, technology, or equipment necessary to produce vaccines and therapeutics. Funding may also be used for the construction or renovation of private facilities. The Biden administration has repeatedly signaled its willingness to use the DPA to bolster domestic supply of critical vaccines and therapeutics. The administration already invoked the DPA to equip two Merck facilities to manufacture the Johnson & Johnson vaccine and to provide Pfizer with the equipment necessary to expand its own vaccine production. The government has not yet indicated how the money allocated by the Act will be distributed or how private companies may access the new funds.

Food and Drug Administration appropriations

The Act allocates $500 million to FDA to fund numerous agency efforts related to COVID-19 vaccines and therapeutics. Congress expressly identified the following priorities for FDA in the Act:

Monitoring the efficacy of vaccines and therapeutics against new COVID-19 variants. FDA’s key priorities in 2021 will involve ensuring the efficacy of authorized products against new variants, and supporting the development of vaccine boosters and therapies to address these variants. In the Act, Congress directs FDA to continue to monitor the continued performance, safety and efficacy of authorized vaccines and therapeutics against emerging variants. As part of this effort, on February 22, 2021, FDA issued multiple guidance documents intended to assist companies developing COVID-19 vaccines and therapeutics to address current and future virus variants. In the press release announcing the new guidance, FDA acknowledged that it is already communicating with individual companies evaluating the impact of COVID-19 variants. Of key importance is the update to the vaccine guidance Emergency Use Authorization for Vaccines to Prevent COVID-19, where FDA states that changes to approved vaccines to address new variants may be based on data from clinical immunogenicity studies, which would compare the effects of the new and old vaccine formulation on a recipient’s immune response, instead of full clinical trials. This will accelerate the development process for modified vaccines significantly. FDA also issued guidance addressing the development of therapeutics, including monoclonal antibody treatments, and providing recommendations on developing data to support emergency use authorizations for therapies intended to treat emerging variants.

Facilitating advanced continuous manufacturing activities of vaccines and related materials. Over the past few years, FDA has supported innovation of advanced manufacturing technologies, including continuous manufacturing, which the agency sees as vital to public health emergency preparedness and response. Continuous manufacturing is an integrated process that saves time by eliminating hold times between manufacturing steps. In January 2021, FDA announced a memorandum of understanding with the National Institute of Standards and Technology (NIST) intended to increase supply chain resilience and advanced domestic manufacturing through the adoption of technologies such as artificial intelligence, machine learning and emerging manufacturing processes.

Conducting inspections of vaccine and therapeutic manufacturers delayed or cancelled due to the pandemic. Routine surveillance inspections, both domestic and international, have been suspended indefinitely due to the pandemic unless considered mission critical (typically certain pre-approval or for-cause inspections). As a result, the number of FDA Form 483s (the form FDA issues at the end of an inspection identifying its observations) declined significantly over the last year. These delays and suspensions have negatively impacted the timeline for certain drug approvals, based upon FDA’s inability to conduct pre-approval inspections. In some cases over the past year, FDA pushed back user fee dates or issued complete response letters when it decided it could not waive the pre-approval inspection. In-person inspections may remain limited through 2021, but will likely ramp up as FDA inspectors are vaccinated and COVID-19 case numbers decrease. By expressly funding inspection efforts in the Act, Congress has signaled that it views restarting inspections as critical to the safety of the U.S. drug supply.

Overseeing the supply chain and mitigating shortages of COVID-19-related vaccines and therapeutics. FDA will continue its efforts over the past year to ensure the U.S. has adequate access to vaccines and therapeutics. Congress first addressed pandemic-related drug shortages in the CARES Act, which included a number of provisions aimed at preventing or mitigating shortages, including obligating companies to notify FDA in the event of a shortage during a public health emergency and expediting and prioritizing the review of product applications and facility inspections when appropriate.

The Act’s removal of the cap on Mandatory Prescription Drug Rebates to the Medicaid Program

If a pharmaceutical manufacturer wants to have its drugs reimbursed by state Medicaid programs and Medicare’s Part B program, it typically must enter into an agreement with the HHS to join the Medicaid Drug Rebate Program (MDRP). Under the MDRP, innovator pharmaceutical companies are generally required to provide the following rebates to the Medicaid program:

The greater of (i) 23.1% of the “average manufacturer price” (AMP) of a drug or (ii) the difference between a drug’s AMP and “best price.”¹

The difference between the drug’s AMP for the current quarter and the baseline AMP (defined as the AMP in the first full quarter after launch of the drug), adjusted by the Consumer Price Index for All Urban Consumers (an index designed to measure inflation).

Since the enactment of the Affordable Care Act, the above rebates have been capped at 100% of AMP.²

The Act eliminates the rebate cap starting on January 1, 2024. As a result, manufacturers of certain drugs whose prices have increased substantially since their launch may be required to make larger rebate payments starting in 2024. This could result in situations where innovator pharmaceutical manufacturers pay Medicaid more for certain drugs than they receive in compensation. Although data regarding the number of drugs that have reached the rebate cap is not public, in a 2018 speech, then-HHS Secretary Alex Azar stated that there were 2,300 such drugs. The significance of removing the cap is confirmed by a recent report by the Congressional Budget Office, which estimates that elimination of the cap will result in the industry paying several billion dollars of additional rebates each year to the federal government.

Innovator pharmaceutical manufacturers required to pay rebates in excess of 100% of AMP may conclude that there are no attractive alternatives to paying a larger rebate. For instance, under MDRP rules, a manufacturer may not cherry-pick which of its drugs are included in the program — it generally is all or nothing. Therefore, a decision to remove one drug from the program could trigger exclusion from the MDRP, with the likely consequence of a manufacturer losing its ability to have any of its products sold under Medicaid or Medicare Part B.

The extent to which innovator pharmaceutical company pricing strategies will be impacted by removal of the Medicaid cap remains unclear. When developing future pricing strategies for newly launched drugs, innovators may wish to consider both market dynamics and how baseline pricing at launch and potential changes in prices thereafter may impact the amount of rebates they will be required to pay. Pricing strategies may also be impacted by potential future changes in federal or state drug pricing laws — the likelihood of which is difficult to assess at this time. In particular, at the federal level, Democrats do not have a filibuster-proof majority in the Senate and some Democratic Senators appear skeptical of drug pricing reform initiatives.

Paul Rubin is partner at Debevoise & Plimpton and co-chair of the firm’s Healthcare & Life Sciences Group. Jacob W. Stahl is counsel in Debevoise & Plimpton’s New York office and a member of the firm’s Litigation Department. Melissa Runsten is a corporate associate at the firm and a member of the Healthcare & Life Sciences Group.

Notes

1. AMP is defined as “the average price paid to the manufacturer for the drug in the United States by (i) wholesalers for drugs distributed to retail community pharmacies; and (ii) retail community pharmacies that purchase drugs directly from the manufacturer” (with certain exclusions). “Best price” is defined as the “lowest price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the United States” (with certain exclusions).

2. State Medicaid programs also typically require manufacturers to enter into supplemental rebate agreements.