The Effect of the New Part B Drug Payment Proposal on Medicare Advantage and Part D
It’s no secret drug costs have skyrocketed in the past decade, and drug payment policymakers face an uphill battle in figuring out how to curb this exponential growth. The Centers for Medicare & Medicaid Services (CMS) has already taken a beating on its proposal to test a new alternative payment design to pay for drugs covered under Medicare Part B, calling into question whether this new methodology will go through looking anything like originally proposed. Part B spending is just a fraction of drug spending in Medicare, covering the drugs administered by a physician or hospital outpatient department. A major question for our industry is what effect this new proposal will have on Medicare Advantage (MA) and Part D plans if implemented.
Part B spending on drugs has increased annually by 7.7% since 2005. Currently, most Medicare Part B drugs are paid using the Average Sales Price (ASP) plus a statutorily mandated 6% add-on. This creates an incentive to prescribe more expensive drugs due to the higher payment amount. Under the new model, Medicare Part B would pay the ASP plus an add-on of 2.5% and a flat fee of $16 per drug per day. The lower add-on and inclusion of the flat fee would decrease the incentive to provide more expensive drugs as the revenue for the drugs would be more evenly distributed. CMS will then roll out the second part of the experiment in which they will test several other pricing methodologies currently utilized by commercial health plans and pharmacy benefit managers, such as discounting or eliminating cost-sharing, providing feedback on prescribing patterns and decision support tools, basing pricing on a drug’s clinical effectiveness, and setting benchmarks for a group of therapeutically similar drug products.
The industry was quick to respond, arguing the proposal will lower incentives to give beneficiaries access to vital drugs due to the cost, leading to a reduction in patient outcome as well as patient satisfaction. Some physician groups threatened, if this new payment methodology doesn’t adequately cover the cost of the drug, a physician would opt not to prescribe the more expensive, even if more appropriate, medication. The proposal is also facing much scrutiny from both sides of the aisle in Congress, although some Democrats did offer their support. The House and Energy Committee will hold a hearing on the demo on May 17, 2016, along with a bill aiming to quash the demo entirely.
We probably won’t see a similar proposal under Part D, as CMS argued it is actually using some of the principles of Part D to inform their payment methodology in Part B. However, as America’s Health Insurance Plans (AHIP) pointed out in their comments to CMS, this proposal would likely have some significant downstream effects on MA and Part D plans. AHIP noted the historical tendency of a reduction on pharmaceutical prices in one market segment to lead to cost-shifting practices by manufacturers, such as setting higher prices for new drugs and higher drug price increases for existing drugs. MA and Part D also lose out because they lack the flexibilities of the new value-based tools proposed under Phase II that could also benefit MA and Part D plans. The rollout of the new model could also the affect MA and Part D bid process for 2018, due to the cost-shifting effect of the proposal.
CMS has already noted it will seriously consider making changes to the proposal. For example, CMS announced it will re-examine whether certain types of practices would not be adequate enough to cover certain types of drugs — such as small rural oncology practices. We could also see CMS propose an alternative tiered approach instead of the ASP and add-on formula. CMS is also considering excluding the new oncology care model from this proposal. Despite these changes, questions as to the effect on the remaining Medicare drug programs remain.
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