marci anderson, va oig allison pugsley, hogan lovells...2014/05/19 · big four: va, dod, public...

Marci Anderson, VA OIG

Allison Pugsley, Hogan Lovells

1 May 19, 2014

2

Background

Single v. Dual Pricing

Establishing the Federal Supply Schedule Price ◦ Big 4 Price

◦ OGA price

Price Changes throughout the Contract Term ◦ Price Reductions

◦ Price Increases

◦ Annual Price Changes

Prices on the FSS contract are determined based on the interplay of:

◦ Veterans Health Care Act of 1992; and

◦ Contract provisions/terms of the FSS contract

Threshold Decision: Single or Dual Pricing?

Once established, FSS prices change based on:

◦ FSS Price Reductions Clause

◦ Economic Price Adjustment Clause

◦ Annual Price Updates under the Public Law

3

May 19, 2014 4

5

“Covered drug” defined at 38 U.S.C. § 8126(h)(2): ◦ Single-source, innovator multiple-source, and specified

biological products

Manufacturers must make VHCA “covered drugs” available for sale on an FSS contract at statutorily-capped pricing known as the Federal Ceiling Price (FCP) to be eligible for Medicaid and Medicare Part B reimbursement, and purchase by the “Big Four” Federal agencies (§ 8126(a)): ◦ Big Four: VA, DoD, Public Health Service (PHS) (including

Indian Health Service) (IHS)), and Coast Guard (§ 8126(b))

Other Government Agencies (OGAs) and other eligible FSS purchasers are not entitled to FCP, so VA allows manufacturers to decide whether to extend FCPs to the OGAs

6

Single pricers ◦ Voluntarily provide FCP (or lower) pricing to all

FSS-eligible purchasers as the FSS “contract price”

◦ Maintain single price list

Dual pricers ◦ Establish two prices:

Big Four price: capped at FCP

OGA: negotiated price that serves as the FSS “contract price”

◦ Maintain two price lists ◦ Disclose CSP information for both OGA and Big

Four pricing

7

Election is all or none ◦ Manufacturers may elect to offer all FSS

purchasers the lower Big4 price via a temporary price reduction

◦ This election does not affect the price used to establish the FSS Max Cap in the second and subsequent year of a multi year contract

8

Pros: Simpler administratively: ◦ Only one price point to negotiate CSP disclosures

will be limited only to prices that are equal to or lower than the FCP for offered products

◦ Only one price list to maintain

◦ Only one set of prices to monitor for compliance with the Price Reductions Clause

Cons: Limitation on price increases ◦ Single pricing rules depress or inhibit increase in FCP

over the term of the contract

But depending on company’s commercial pricing strategy, this may not be much of an issue

9

Pros: Permits price increases and may limit other liabilities ◦ OGA price typically is much higher than FCP ◦ OGA price allows for FCP to increase more quickly over time

relative to single pricers (OGA price is used as the FSS Max Cap in the FCP calculation)

◦ Lower rebate liability under the TRICARE retail rebate program

Cons: More complicated administratively: ◦ Two price points to negotiate CSP disclosures will be

more involved to address FCP-based Big 4 price and the negotiated OGA price

◦ Two price lists to maintain ◦ Two sets of prices to monitor for compliance with the Price

Reductions Clause

Differential between MFC, Tracking Customer Price and calculated FCP

Inflationary market could mean heavy additional discounts which would favor dual pricing

Deflationary market could mean there is a potential for the Tracking Customer price to become the permanent FSS price

Applies to all 42-2A products on contract. Overall benefit should be evaluated.

10 May 19, 2014

The dual election is made at the time of contract award

(Unwritten allowance) Established single pricers can change to dual pricing at any time during the contract period

The election applies to all covered drugs on contract

Solicitation includes Dear Manufacturer letter in Exhibit 1 immediately preceding the FSS Price List Election Form ◦ This guidance will be updated to be clearer

11 May 19, 2014

12 May 19, 2014

13 May 19, 2014

Based on data received from PBM as of May, 2014 ◦ 297 Schedule Contracts with 42-2A products ◦ 25 Interim Agreements which must be single priced

until a negotiated FSS price can be established in order to elect dual pricing

◦ 112 Covered Drug Manufacturers have elected Dual Pricing

◦ 160 Covered Drug Manufacturers have elected Single Pricing

◦ 41 percent have elected Dual Pricing, up 3 percent from this time last year.

14 May 19, 2014

If a company changes its election (from single to dual) during the life of the contract, new CSP forms must be submitted to negotiate an FSS price

Two pricelists will have to be provided, one for OGAs and one for the Big 4

Decision should be made based on the differential between the market price (MFC/TC) and the FCP

15 May 19, 2014

In second and subsequent years of an FSS contract, the FCP is based on the lower of the FSS Max Cap and the Calculated Max (statutory calculation)

The FSS Max Cap is based on the FSS price in effect on 9/30 of the prior year, increased by the percentage change in CPI-U

Has the potential to change a “negotiated” price into a statutory price

Note: FSS price that is lowered based on a temporary price reduction price does not count as FSS contract price for FCP calculation (Dear Manufacturer Letter October 15, 1997)

16 May 19, 2014

CPI-U nfamp_Y1 nfamp_old nfamp_new nfamp_chg add_disc Calcmax Y1 fcp_Y1

0.00% $2,167 $1,977 $2,327 $350 $350 $1,297 $1,297

FSS (9/30) FSS Y2 max nfamp_Y2 nfamp_old nfamp_new nfamp_chg add_disc calcmax11 fcp_2011

$1,883 $1,904 $2,575 $2,327 $2,652 $325 $298 $1,659 $1,659

CPI-U in Year 2 is 1.14%, FCP increases from Y1 to Y2 by 28% (rounded)

Same Data for a Single Pricer:


0.00% $2,167 $1,977 $2,327 $350 $350 $1,297 $1,297


$1,297 $1,479 $2,575 $2,327 $2,652 $325 $298 $1,659 $1,479 CPI-U in Year 2 is 1.14%, FCP increases from Y1 to Y2 by 1.14%

17 May 19, 2014

If you have a permanent price reduction to the tracking customer it could have a significant impact on your FCP

Using the same data but using a significantly reduced price in effect on 9/30 ($1,100) establishes an FCP for which there is no benefit to being a dual pricer.

18 May 19, 2014


0.00% $2,167 $1,977 $2,327 $350 $350 $1,297 $1,297


$1,100 $1,113 $2,575 $2,327 $2,652 $325 $298 $1,659 $1,113

CPI-U in Year 2 is 1.14%, FCP decreases from Y1 to Y2 by 14% (rounded)

Same Data for a Single Pricer:


0.00% $2,167 $1,977 $2,327 $350 $350 $1,297 $1,297


$1,100 $1,113 $2,575 $2,327 $2,652 $325 $298 $1,659 $1,113

CPI-U in Year 2 is 1.14%, FCP decreases from Y1 to Y2 by 14%

19 May 19, 2014

21

The Big 4/single FSS price is determined to a great extent by the FCP, which limits how high the price may be.

However, the VA may seek to obtain sub-FCP

pricing for the Big 4/single FSS price where a manufacturer has commercial prices that are below the applicable FCP

There is no legal requirement that a company provide better-than-FCP pricing to the VA

Providing sub-FCP pricing as the Big 4/single FSS price will ◦ Depress FCP over time (FSS Max Cap) ◦ Increase the risks of triggering the Price Reductions Clause

22

OGA price is a negotiated price – not capped by FCP ◦ Generally will be driven by the company’s

commercial pricing

Although OGAs typically do not represent significant FSS sales, the OGA price has important effects on the Big 4 price ◦ The OGA price sets the FSS Max Cap, which caps

the FCP in the second and subsequent years of an FSS contract

23

Review and analyze commercial pricing to identify ideal price points

◦ Review of sales/contract data allows for a true understanding of current pricing practices

The VA likely will demand MFC pricing but there is no legal requirement to offer MFC pricing

However, company must be prepared to justify proposed pricing that is higher than MFC

Need to convince the VA that the FSS offer that you have developed is reasonable

Highlight the differences between the government and customers receiving pricing that is lower than FSS offered price

◦ e.g., performance commitments

Grant favorable pricing through a Temporary Price Reduction (TPR)

24 May 19, 2014

25

Specific to FSS contracts Allows Government to get benefit of commercial price

reductions during contract term During negotiations, establish a “tracking customer” and

ratio. Tracking customer (or category of customer) is agreed upon

prior to award ◦ MFC Category is VA’s “first position” ◦ VA may accept tracking customer that resembles “group”

of FSS purchasers ◦ May have different tracking customers for different

products, NDCs Tracking customer is generally a commercial customer or

group of customers Select tracking customers that company is able to track Once Tracking Customer is selected, ratio created by

dividing FSS price by tracking customer price.

26

“Any change in the Contractor’s commercial pricing or discount arrangement applicable to the identified customer (or category of customers) which disturbs this relationship shall constitute a price reduction.”

No price reduction for:

◦ Sales to Federal agencies

◦ Firm fixed price commercial orders > Maximum Order Threshold

◦ Billing errors

Notice: 15 days after effective date

Price reduction has same effective date and terms as triggering price reduction

No “exception” to “triggering” of clause where commercial price reduction is based on terms or conditions that differ from FSS

◦ Volume purchase commitment

◦ Market share commitment

27

“Tracking” customer (or “basis of award” customer) or category of customers is negotiated and agreed upon prior to FSS contract award ◦ Most Favored Customer (MFC) is VA’s negotiation goal ◦ Company does not have to agree to MFC as tracking

customer ◦ VA may accept tracking customer that resembles “group” of

FSS purchasers ◦ May have different tracking customers for each product or

NDC-11

Advocate for preferred tracking customer approach and establishment of clear and appropriate ratio

28

Factors to consider in selecting a tracking customer: ◦ Stability of pricing

◦ Ease and ability of monitoring

◦ Ability to ascertain bottom-line pricing

◦ Nature of customer relationship

◦ Longevity of customer relationship

29

Parties must agree on the government’s “price or discount relationship to the identified customer (or category of customers)”

Generally, this is a ratio between the FSS price and tracking customer price at the time of FSS contract award

FPR should specify: ◦ The tracking customer’s “baseline” price from

which tracking will begin on day 1 of contract ◦ Triggering events (i.e., up-front discounts only or

rebates as well; or only certain rebates, etc.)

30

This is how the PRC works for:

◦ OGA pricing

◦ Big 4/FSS pricing not established at FCP

◦ All non 42-2A(covered drugs) products

Tracking Customer Price of Product A = $10

FSS Price of Product A = $8

Tracking Ratio of Product A (FSS price/Tracking Customer Price) = 0.80

If Tracking Customer Price is reduced 10% -- i.e., from $10 to $9, then …

FSS price must also be reduced 10% -- from $8 to $7.20.

Alternatively, new FSS price is new Tracking Customer Price times the tracking ratio -- $9 * 0.80 = $7.20

If the price established is the submitted FCP, the price reduction clause does not apply because the price is set by law or regulation

When the tracking customer price falls below the statutorily set price, price reductions apply at a ratio of 1:1

In subsequent years, FCPs are recalculated and if tracking customer price ends up higher than next year’s FCP, FSS price may be reset to be at the next year’s FCP.

31 May 19, 2014

0

5

10

15

20

25

30

35

40

45

FCP

TC

32

Once the TC falls below the FCP

the FSS price becomes the price

paid for all purchasers

May 19, 2014

33

◦ Initial Tracking Customer Price of Product A = $10 ◦ FSS Price/FCP of Product A = $6 ◦ Tracking Ratio of Product A (FSS price/Tracking

Customer Price) = Not Established at Time of Award (will be 1:1)

◦ If Tracking Customer Price is reduced 10% -- i.e., from $10 to $9, then …

◦ No change to FSS price because new Tracking Customer price of $9.00 is still higher than FSS price/FCP of $6.

◦ But if Tracking customer price reduced again from $9 to $5.50, then

◦ New FSS price = $5.50 because Tracking Customer price is lower than FCP

As noted earlier, if FSS price is not established by FCP, then PRC operates in the “usual” way. ◦ Tracking ratio is established at date of contract

award and must be monitored/maintained

◦ Reductions to Tracking Customer Price trigger FSS price reductions

May 19, 2014 34

For Dual Pricers, where Big 4 price is set at FCP, PRC is triggered for the Big 4 price only if the tracking customer price causes the OGA price to go below the Big 4 price ◦ At that point, a 1:1 ratio applies and the Big 4 price must

be reduced to match the OGA price

Ratio in award document is expressed as “1:1” or “1:1 when tracking customer net price causes OGA price to fall below FCP”

35

36

◦ Tracking Customer Price of Product A = $10 ◦ OGA Price of Product A = $8 ◦ BIG 4/FCP of Product A = $6 ◦ Tracking Ratio of Product A (FSS price/Tracking Customer Price)

= 0.80 ◦ If Tracking Customer Price is reduced 10% -- i.e., from $10 to

$9, then … ◦ OGA price will be new tracking customer price times ratio: $9 *

0.80 = $7.20 ◦ No change to BIG 4 price because new OGA price of $7.20 is

still higher than FCP/BIG 4 of $6. ◦ But if Tracking customer price reduced again from $9 to $7,

then ◦ New OGA price = $7 * 0.8 = $5.60 ◦ New BIG 4 price = $5.60 because OGA price is lower than FCP

An example with numbers (all are rounded, without IFF):

37

OGA Big 4 TC Ratio

$100.00 $75.00 $105.00 0.95

$76.00 $75.00 $80.00

$74.00 $74.00 $78.00

May 19, 2014

What happens when the OGA ratio is greater than 1:1? ◦ There is the potential for the Big 4 price to be

affected prior to the OGA price.

May 19, 2014 38

An example with numbers (all are rounded, without IFF):

OGA Big 4 TC Ratio

$102.00 $75.00 $85.00 1.2

$96.00 $75.00 $80.00

$84.00 $70.00 $70.00

May 19, 2014 39

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

FCP

FSS

TC

40

All FSS purchasers pay the

FSS price once the price falls

below FCP

May 19, 2014

What if the Big 4 price was a negotiated price, rather than a statutory price? ◦ The tracking customer ratio is established based on

the relationship at the time of award. ◦ Any price reductions will apply immediately. ◦ If price reductions result in an FSS price that is less

than the FCP max the FSS Max cap will govern. However, because the FSS Max cap includes the CPI-U,

the FSS price may still be less than the FCP.

41 May 19, 2014

May 19, 2014 42

FSS Price Increases are governed by two provisions ◦ Veterans Health Care Act

FCP and CPI-U

◦ FSS Economic Price Adjustment Clause

Must establish price increases to commercial customers, including tracking customer

The tracking ratio discussed earlier applies to FSS price increases as well as price reductions

For 42-2A products that are dual priced, increases to the OGA/FSS prices are also limited to the CPI-U cap. See 38 USC 8126 (d)(1)

43

Where Big 4 price is set at FCP, there is no room to take price increases other than annual updates of Big 4 pricing based on new FCP

Where Big 4 price is set below FCP, price increases during the year may be taken up to FCP if supported by increase in tracking customer price

44

VHCA imposes an inflation-based constraint on increases to OGA prices

◦ In 1st year as declared by VA, there is no CPI-U constraint, so OGA pricing can be increased as supported by tracking customer price increases

Note that VA-declared 1st year is not always same as contract award year, so companies may have 2 opportunities to increase OGA pricing without CPI-U constraint

◦ In 2nd and subsequent years as declared by VA, OGA price may not be increased by more than CPI-U, even if a larger price increase could otherwise be supported by tracking customer price

45

In the second and subsequent year of a multi-year contract price increases are limited to the increase to the tracking customer or the FSS Max-Cap, whichever is less.

This is unique to SIN 42-2A.

OGA Price increases typically are taken as part of the Annual Price Update process

May 19, 2014 46

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

FCP

FSS

TC

47 May 19, 2014

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

FCP

FSS

TC

48 May 19, 2014

These occur in December, after the company receives its calculated FCPs from the VA PBM

Submit a Request for Modification to update Big 4 and OGA pricing

VA CO will compare proposed pricing against both the FCP and the tracking customer price/ratio to determine whether the proposed pricing is acceptable

50

Update Big 4 price based on the FCP

Big 4 price may go up or down

Proposed Big 4 price will also be compared to proposed OGA price and tracking customer price

51

In a VA-declared 1st year, OGA price increase is not capped by CPI-U and can be increased as long as it would not disturb the tracking ratio

In VA-declared 2nd and subsequent years, OGA price increases are capped by CPI-U and tracking customer price

52

Year FCP Calc Ceiling

9/30 FSS Price

CPI-U

FSS Max Cap

FCP TC Price

Ratio TC Constr

Big 4 Price

2014 $70 $68 2% N/A 1st Yr

$70 $80 1:1 $80 $70

2015 $65 $70 0% $70 $65 $84 1:1 $84 $65

2016 $76 $65 3% $66.95 $66.95 $78 1:1 $78 $66.95

2017 $78 $66.95 4% $69.63 $69.63 $65 1:1 $65 $65

2018 $80 $65 2% $66.30 $66.30 $64 1:1 $64 $64

53

Assume: 2013 Contract award – single pricer; Big 4 price set at FCP

54

Assumptions:

2013 contract award ◦ Tracking Customer Price = $100

◦ OGA Price = $95

◦ Tracking Ratio = 0.95

◦ Big 4 Price = FCP

Year PY OGA Price

CPI-U OGA CPI-U Constrt.

TC Price Ratio TC constraint

OGA Price

FCP Big 4 Price

2014 $95 2% N/A – 1st year

$104 0.95 $98.80 $98.80 $70 $70

2015 $98.80 0% $98.80 $106 0.95 $100.70 $98.80 $74 $74

2016 $98.90 3% $101.76

$101 0.95 $95.95 $95.95 $80 $80

2017 $95.95 4% $99.79 $110 0.95 $104.50 $99.79 $78 $78

2018 $99.79 2% $101.79

$84 0.95 $79.80 $79.80 $81 $79.80

55

Assumptions

◦ July 1, 2011 contract award

Tracking Customer Price = $100

OGA Price = $95

Tracking Ratio = 0.95

Big 4 Price = FCP

◦ July 1, 2016 contract award

Tracking Customer Price = $150

OGA Price = $150

Tracking Ratio = 1:1

Big 4 Price = FCP

56

Year PY OGA Price

CPI-U OGA CPI-U Constraint

TC Price

Ratio TC constrt.

OGA Price

FCP Big 4

2013 $102.82 1.5% $104.36 $135 0.95 $128.25 $104.36 $85 $85

2014 $104.36 2% N/A – 1st Yr

$140 0.95 $133 $133 $87 $87

2015 $133.00 0% $133.00 $125 0.95 $118.75 $118.75 $92 $92

2016 $118.75 3% $122.31 $130 0.95 $123.50 $122.31 $90 $90

2017 $150 4% $156.00 $155 1:1 $155 $155 $95 $95

2018 $155 2% $158.10 $160 1:1 $160 $158.10 $94 $94

57

58 May 19, 2014

Allison Pugsley

Hogan Lovells

(202)637-6817

[email protected]

Marci Anderson

VA OIG

(910) 346-5020

[email protected]

59

marci anderson, va oig allison pugsley, hogan lovells...2014/05/19 · big four: va, dod, public...

Documents