Application of ‘Functional Equivalence’ To Payment for Office-Administered Biopharmaceuticals

As competing biotech therapies emerge, the discussion of therapeutic equivalence becomes not just a clinical matter, but one of payment too.

Abstract

The emergence of competing biotech products has led to much discussion about their interchangeability. Beyond the clinical implications of designating products as therapeutically equivalent, the dollars at stake with biopharmaceuticals promise to make reimbursement issues more and more important. Medicare’s approach could influence private payers, which have been slower to address these issues.

Third-party payers, or their contracted pharmacy benefit managers, consider treatment with some pharmaceuticals and biopharmaceuticals as interchangeable — that is, yielding equivalent clinical results and toxicities — and refer to this as therapeutic equivalence. The term functional equivalence also has been used, with recent experience suggesting this term as preferable. This article discusses application of the functional equivalence concept to biopharmaceuticals that are administered in physicians’ offices and paid for through Medicare.

TERMINOLOGY

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) prohibits the Centers for Medicare and Medicaid Services from applying a functional equivalence standard to pharmaceuticals or biopharmaceuticals, unless the standard existed prior to the law’s enactment. But therapeutic equivalence (and functional equivalence — the terms seem to be interchangeable) appears to have many definitions, creating both confusion and an opening for such a standard’s use.

In the American Journal of Managed Care, Danzon (2005) referred to functional equivalence as therapeutic referencing “in all but name,” and defines therapeutic referencing as a policy that “applies the same reimbursement to different compounds in a therapeutic class — for example, all beta-blockers — with the reimbursement level usually set at the lowest price in the class.”

Elan Rubinstein, PharmD, MPH

In the New England Journal of Medicine, Neumann (2003) defined it this way: “Essentially, a standard of functional equivalence applies a cost-effectiveness principle: assuming that alternative interventions are equivalent, one should not pay more for one of them.”

The American Society of Health-System Pharmacists has yet another take. The ASHP Guidelines on Formulary System Management state, “Drugs are considered therapeutically equivalent if they can be expected to produce essentially the same therapeutic outcome and toxicity. The use of therapeutically equivalent products can contribute to improvement in the drug-use process by maintaining a high quality of drug therapy in the most cost-effective manner” (ASHP 1992).

Unfortunately, therapeutic equivalence also has another meaning. According to the 26^th edition of the U.S. Food and Drug Administration’s Approved Drug Products with Therapeutic Equivalence Evaluations (the “Orange Book”), products are considered therapeutically equivalent if “they are pharmaceutical equivalents and if they can be expected to have the same clinical effect and safety profile when administered to patients under the conditions specified in the labeling.” They are considered pharmaceutical equivalents “if they contain the same active ingredient(s), are of the same dosage form, route of administration and are identical in strength or concentration.”

IN MEDICARE’S EYES

A key direction in applying functional equivalence focuses on biopharmaceuticals administered in physicians’ offices. In this, Medicare has taken an important lead.

Neumann’s article makes an important distinction, asking “whether Medicare should have the power to make the [functional equivalence] determination” and concluding that “The MMA’s emphatic answer … was no.” The MMA, however, does not prohibit CMS or its fiscal intermediaries from indirect use of the functional equivalence concept to achieve savings.

Least costly alternative (LCA) is one such indirect use. According to the Medicare Payment Advisory Commission which advises Congress on Medicare issues, LCA policy allows Medicare contractors to deny the cost of a more expensive service if a clinically comparable service costs less. The June 2005 MedPAC Report to the Congress explains: “During the last several years, many carriers have implemented an LCA for two drugs used to treat prostate cancer — leuprolide acetate (Lupron) and goserelin acetate (Zoladex) — administered in physicians’ offices. Current payment for leuprolide is $226.66 versus $192.68 for goserelin. According to the Office of Inspector General, carriers implemented an LCA in 47 of 57 jurisdictions in 2003. Thus, in these jurisdictions, contractors paid physicians the payment amount for Zoladex when they furnished Lupron” (MedPAC 2005).

Riverbend Government Benefits Administrator, a Part A intermediary, recently applied a different LCA policy for erythropoietin analogs (Local Coverage Decision #L1942): “This policy contains a latent LCA clause that will be activated if and only if the cost of a therapeutically equivalent analog significantly exceeds the cost of epoetin. Erythropoietin analogs will be covered in their entirety as long as the weighted average per-patient cost of treatment with the analog does not exceed the cost of comparable treatment with epoetin by 15 percent or more.”

Under the MMA, CMS is permitted to make “adjustments as determined to be necessary to ensure equitable payments.” An article in Oncology Reimbursement Connection discussed one such application: “Although darbepoetin alfa [Aranesp] is classified as a sole-source drug in 2005, CMS made an equitable adjustment to the payment rate because darbepoetin alfa is considered functionally equivalent to epoetin alfa [Procrit] for payment purposes; a conversion factor was applied to the payment rate of epoetin alfa to determine the 2005 payment rate for darbepoetin alfa” (Holle 2005).

One approach used to address functional equivalency is grouping biopharmaceuticals within the Healthcare Common Procedural Coding System (HCPCS). For example, last May, a HCPCS work group made a preliminary recommendation to join two existing HCPCS codes for the five hyaluronan derivatives available in the United States for osteoarthritis treatment. Four of these products share one HCPCS code; the fifth has its own code. This fifth product has an average selling price almost twice that of the other products and holds a market share of approximately 50 percent. If the HCPCS codes are merged, the five products’ ASPs would be weight-averaged, which, from a payment perspective, would genericize the category.

CONCLUSION

The idea of functional equivalence of biopharmaceuticals is likely to influence public and private payers’ cost-containment efforts. Though only a few biopharmaceuticals may be considered functionally equivalent, it is likely that payers’ efforts to apply this concept to them will have a meaningful impact on cost and trend for biopharmaceuticals administered in physicians’ offices.