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Drug & Device Provisions in HR 3962

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Kevin Outterson, Boston University Law

The following is a summary of the drug & device provisions in HR 3962, as passed by the House on Saturday, Nov. 7.

Winners: PhRMA; BIO; seniors in the donut hole; transparency

  • PhRMA & BIO escape with minimal net financial costs; on balance the bill might be revenue positive for the drug industry once increased demand is considered.
  • BIO in particular obtains a very favorable provision hamstringing generic (biosimilar) competition with biological products, more favorable than the bills that didn’t pass during the last years of the Bush Administration.
  • Seniors with drug spending high enough to place them in the donut hole benefit from its rapid phase out.
  • Several provisions improve transparency, including the Physicians’ Payments Sunshine Act and limited transparency for PBMs.

Losers: MA plan sponsors; device makers

  • Medicare Advantage plan sponsors lose billions in subsidies above the cost of traditional Medicare.
  • Device makers pay a 2.5% tax and will face future safety issues from a national registry of clinically important devices.

Mixed: Generic drugs

  • Generic drugs lose big on the biosimilar legislation and the branded drug discounts in the donut hole.
  • A new fraud and abuse exception for free generics is a small win.
  • Ending the “pay for delay” generic settlements hurts some companies, but should benefit generic companies generally.

Many of these ideas are discussed in my Health Affairs article with Aaron S. Kesselheim (28:5, w832-w841 (online 30 July 2009)).

Medicare Advantage

  • Medicare Advantage (MA) plans face a quick transition to being capped at traditional Medicare costs, ending the subsidies for MA (§1161). CBO Option 63 scored the savings at $157 billion over 10 years.

Medicare Part D

  • The much derided Medicare Part D donut hole is phased out by 2019 (§1181(a), (b)).
  • As part of the “PhRMA Deal,” the companies agreed to give a 50% discount for drugs in the (quickly shrinking) donut hole. This accounts for a majority of PhRMA’s $80 billion in contributions to health reform. The House accepted the discounts, but count the full cost for True Out of Pocket (TROOP) purposes, making it easier for Part D beneficiaries to cross the donut hole and regain full Part D benefits. This slight of hand creates the anomaly wherein $100 in actual out of pocket spending in the donut hole counts as $200 in True Out Of Pocket spending for Part D purposes (§1182).
  • Some Part D beneficiaries complained that plan formularies changed during the year, but they couldn’t switch plans. Section 1185 prohibits mid-year formulary changes in Part D, but does not prohibit mid-year price changes faced by beneficiaries that have similar effect. For example, if a beneficiary signed up with Plan X because their high priced drug was covered, the Plan could not drop the drug or move it to a different tier during the year. But because drug companies and pharmacies change prices during the year, the out of pocket costs to patients may still vary during the year.
  • Section 1186 repeals the “non-interference” rule that prohibited price negotiation in Part D. Simple repeal will probably have modest practical effect, without other changes. As explained in our Health Affairs article, mere volume does not drive drug price reductions. Much more important is the ability to move market share between drugs within a class. One change that would have reduced prices would be to increase formulary flexibilities for Part D plans, but §1186 blocks this route. The “2 drugs per class” and “6 protected classes” rules in Part D formularies appears to escaped, to the delight of PhRMA. Price negotiation is built into the public option as well.

Dual Eligibles

  • Medicaid imposes mandatory rebates on drug manufacturers. The MMA 2003 moved dual eligible individuals from Medicaid to Part D, effectively repealing rebates for those beneficiaries. The House Bill restores the mandatory rebates for dual eligibles (§1181(c)) raising about $2.8 billion per year. These rebates only cover dual eligibles, not the entire Part D population. Expanding the rebates to all Part D was CBO Option 67, scored at $110 billion over 10 years, but PhRMA blocked that.
  • Section 1205 tackles a problem that occurred when Medicaid beneficiaries were randomly assigned to Part D plans, without regard to their likely drug needs or the plan’s benefits. Now these decisions will be made with “intelligent enrollment.”

Medicaid & 340B

  • Mandatory Medicaid rebates are increased to 23.1%, scored by CBO Option 74 to raise $7.2 billion over 10 years. It raises less than one might expect because of the dynamic effect on Medicaid supplemental rebates. Section 1742.
  • The low-cost 340B drug program is an excellent safety net and price discrimination tool. The 340B program offers very low-cost drugs to patients affiliated with Federally Qualified Health Centers and other safety-net providers. Section 2501 strengthens the program, which many states have recently expanded.


  • Pharmaceutical Benefit Managers will be covered by modest transparency rules, drawing on state-level reforms over the past few years (§233).
  • The Physician Payments Sunshine Act is found in §1451, disclosing payments from the drug and device industry to prescribers. The key sticking points here were pre-emption of similar state laws (limited), the de minimus limit ($5), and the scope of coverage, especially samples (no public transparency) and clinical trials (delayed reporting). The pre-emption and clinical trials compromises were reasonable, but the industry won for no good policy reason on samples. Overall, this is a solid transparency rule, much better than some versions in the Senate. The sunshine act was also described in CBO Option 44.


  • Medical device makers get hit with a 2.5% excise tax (§552) as well as a national device registry for all Class III devices + life supporting & life sustaining Class II devices (§2571). The registry is a good research and patient safety tool; the excise tax was just a convenient way to grab some revenue from device makers.


  • The generic drug “pay 4 delay” settlements are targeted by Section 2573. Federal antitrust enforcement authorities like this provision.
  • The much-discussed biosimilar legislation is disappointing (§2575). The CBO Option 68 originally scored biosimilar legislation at $9.2 bn over 10 years, but this bill is much, much weaker from a consumer point of view. Potential generic entrants are saying that no one will bother to use the pathway this bill sets up, and that the 12 years of data exclusivity is much too long. There is a dearth of reliable empirical work on the DE period, with just one well-timed study from Grabowski in support of BIO’s goals.
  • Section 1188 permits the routine waiver of copays or deductibles to encourage no-cost generic prescriptions. Now pharmacies can offer free generic drugs to Medicare Part D beneficiaries without running afoul of the fraud & abuse rules. This is a great idea for all drug classes other than antibiotics, since free antibiotics will spur unnecessary resistance.
  • The phase out of the donut hole, coupled with the 50% discounts on branded drugs is a big policy win for PhRMA. Seniors in the donut hole were increasingly turning to generic drugs and the companies were having trouble converting them back to brand named product when the new plan year began. This provision reduces generic pressure on the companies, and generates incremental sales and profits for the companies even with the discount. Moreover, since the donut hole is being phased out, the discounts will gradually disappear, with the generic commercial threat diminished.

Other Provisions

  • Comparative effectiveness gets another boost in the House Bill (§1401). CBO Option 45 scored the savings at $860 million over 10 years, which is conservative. Just avoiding Vioxx would have had a larger impact.
  • Section 2587 calls for a report on neglected parasitical diseases (including Chagas). This is a good global health provision slipped into the larger health reform effort.
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