Market assumptions led to $4B gap between CBO, OMB on biosimilars

Differing assumptions about the price and market penetration of generic biologics led to a nearly $4 billion difference between White House and congressional estimates of how much money the drugs are likely to save, people familiar with those estimates told FDA Week. Shaving five years off of the exclusivity period for brand-name products had an almost negligible impact on savings projections.

The initial outline of President Barack Obama’s fiscal 2010 budget proposal pegged the total savings from generic biologics at $9.2 billion over 10 years. A senior official in the Office of Management and Budget told FDA Week the administration based its math on an approval pathway that would award seven years of data exclusivity to reference products and prohibit ever-greening (the practice of extending patents through minor product changes). When the Congressional Budget Office analyzed the same policy, it came up with 10-year savings of $13 billion.

Both offices also assumed that follow-on or generic biologics would fall under the same Medicare Part B billing codes as their reference products, a proposal the Biotechnology Industry Organization strongly opposes. Obama didn’t wade very far into the specifics of the biosimilars debate when he was in the Senate. But the policies embodied in the White House budget hew to the left even among Democratic proposals — closer, for instance, to Rep. Henry Waxman (D-CA) than Sen. Edward Kennedy (D-MA).

The White House intends to put the savings from generic biologics toward a health care reserve fund. CBO and OMB’s $4 billion disagreement over the size of that contribution stems in large part from different assumptions about the price discount that generics are likely to provide, the OMB official said.

An official in CMS’ Office of the Actuary, which helped prepare the OMB estimate, said the $9.2 billion figure assumes a maximum discount of 25 percent from generic versions of biological drugs. CBO did not provide the specific figure it used for its most recent analysis. One of its previous estimates, however, assumed that generic competition would create a 20 to 25 percent discount in the first year, building to 40 percent within four years.

CBO and OMB also used different assumptions about follow-ons’ market penetration, the CMS official said. In a reversal of the mismatch on discounts, OMB was on the high end with its assumption of a 50 percent market share. CBO’s specifics were again unavailable, but its previous estimate provided only for 10 percent penetration in the first year, growing to 35 percent by the fourth year.

CBO last explained these details in June 2008, when it scored the generic biologics bill that passed the Senate health committee.

With traditional generic drugs, all of this might be more linear: More market penetration would mean bigger discounts, and that combination would mean bigger savings. But neither OMB nor CBO saw such a simple connection between market share and pricing. That discrepancy only underscores the complexity and uncertainty that surround the market-in-waiting for generic biologics.

They might, as OMB guessed, be widely prescribed but not have a drastic effect on total biologics spending. They’ll be expensive to make and expensive to test, and might even need to be marketed like brand-name drugs. Or, as CBO appeared to predict, follow-ons might cost a lot less but there might not be very many of them. Because they’ll be hard to develop and expensive to manufacture, companies might focus their efforts on a handful of highly similar drugs.

On both fronts — discounts and market penetration — OMB’s assumptions were generally in line with the most conservative independent estimates, including those conducted by Avalere Health and Duke University economist Henry Grabowski. CBO’s June 2008 score was initially seen as consistent with those studies, as well, because of its low bottom-line savings ($6.6 billion over 10 years). But its discount and market penetration assumptions were more permissive than those independent studies’.

Again, CBO did not say whether it has changed its assumptions since last summer. Either way, its total estimate has basically doubled in less than a year. The original $6.6 billion total was based on a policy with 12 years of exclusivity and no limits on ever-greening. By last December, CBO had increased the potential gain from that policy to $9.2 billion. Also in December, CBO posed the hypothetical option of shared Part B billing — and with that, the total jumped to $12 billion. In February it analyzed the OMB proposal, which meant dropping the exclusivity period from 12 years to seven, and came up with $13 billion.

In short, CBO opened with a conservative projection but has pushed it steadily upward. OMB adopted a much more generics-friendly policy framework, yet came up with a significantly smaller savings. And when CBO took up the new OMB policy outline, its total projection barely changed. So, as contentious as exclusivity and ever-greening are in the legislative debate, they didn’t have much of an effect on government savings estimates.

Exclusivity will ultimately have a major impact, the CMS official said, but it will probably be outside the 10-year window that CBO and OMB use. The effects of various exclusivity periods are hard to predict, the official said, because economists must use current spending rates as a baseline. Market protection for most of today’s biologics will run out within 10 years no matter what; they’ve been on the market so long that it makes little difference whether exclusivity is set at seven or 12 years. BIO reached the same conclusion in a January study, which found less than $1 billion in additional 10-year savings when the exclusivity window dropped below 12 years. Ever-greening is a similar issue. It would have a substantial impact down the line, but those effects are difficult to assess using current spending as a baseline.

Even the definition of that baseline differed between CBO and OMB, the CMS official said, adding that OMB’s data were probably more up-to-date because the information is collected from CMS records. Sales of blockbuster biologics such as Epogen and Arasnep are down amid safety concerns, which likely depressed the baseline of total biologics spending in the U.S. and thus the entire OMB projection.

The Office of the Actuary prepared multiple estimates, using various policy scenarios, and OMB settled on the seven-year, no-ever-greening option.

For CBO and OMB, the difference is small potatoes. Both the OMB and CMS officials said their numbers are close enough to CBO’s. The 10-year savings might be slightly less than $9 billion, slightly more than $13 billion, or somewhere in between.

The White House wants its health care reserve fund to top $630 billion. The difference between OMB and CBO’s estimates for generic biologics is the difference between that policy making up 0.015 and 0.02 percent of the total fund. (On the other hand, the difference alone — never mind either actual estimate — is nearly twice FDA’s annual budget.)

April 10, 2009