Amid heightened focus on drug pricing among policymakers, Congressional interest in substantive legislative reforms has also been galvanized, with both House and Senate committees working on legislative packages to be debated in the coming months. Specifically, the Senate Finance Committee is drafting a Medicare drug pricing package that, among other things, might focus on changing the reimbursement methodology for Part B drugs in Medicare.

This follows a renewed focus placed by the Trump Administration to reduce spending on physician-administered drugs in Medicare. In particular, Health and Human Services (HHS) issued an advance notice of proposed rule-making related to an International Pricing Index (IPI) Model, which if formally proposed and finalized would fundamentally change how physician-administered drugs are purchased, distributed, infused to patients, and paid for under Medicare Part B. The IPI proposal elicited strong negative reactions from stakeholders, but both HHS Secretary Alex Azar and Centers for Medicare & Medicaid Services (CMS) Administrator Seema Verma continue to signal that Part B reform is a priority, necessitating strong engagement in developing consensus on viable alternatives.

Tiered Physician Percentage Based Add-on

Physician administered drugs in Part B are currently reimbursed at the drug’s manufacturer-reported Average Sales Price (ASP) +6%.¹ The Medicare Modernization Act of 2003 first instituted the methodology to ensure that providers were appropriately reimbursed for important overhead costs, including expenses associated with working capital, proper storage, compliant compounding and preparation, among others. The add-on was also developed in part to accommodate the nature of the price proxy of ASP, which means some providers will be paying more than average and some will be paying less than average. In addition, percentage-based reimbursement was considered to be more flexible than a flat fee payment in keeping up with medical inflation and the overhead relating to the increasing complexity and requirements around innovative drugs and biologics.

However, some argue that the 6% provider add-on may be influencing physician behavior to favor high-cost Part B drugs over less expensive alternatives. While various studies have examined the link between drug utilization and payment rates and have found no meaningful correlation, the perception has driven a range of proposals intended to mitigate the perceived relationship between provider reimbursement and prescribing behavior.

One potential way to reform Medicare Part B drug payment is to introduce a “tiered” formula where the add-on payment for providers varies based on drug prices. CMS would continue to use ASP as a basis for reimbursement, but the percentage-based add on would be tied to specific pricing thresholds. Those thresholds could be set using a specific price per administration or based on drug price percentiles.

Impact on Providers

Previous proposals to change provider reimbursement, such as the Part B demo that was subsequently withdrawn, would have disproportionately impacted specialties and hospitals who administer large volumes of physician-administered drugs. Prior Avalere analysis found that revising the reimbursement formula across all drugs as outlined in Phase 1 of the demo would have resulted in significant payment cuts for ophthalmologists, oncologists, and rheumatologists, leading to potential access challenges and shifts in sites of patient care. In contrast, a tiered ASP add-on approach could be structured in a way that does not result in payment cuts to specialty providers. Specifically, payment tiers could be structured to maintain aggregate provider payment levels whereby reduced reimbursement for high cost drugs is offset by increased payment for lower cost drugs, while also allowing more flexibility than a flat fee to match medical inflation over time.

Impact on Medicare

A tiered ASP could potentially impact the Medicare market in the following ways:

1. Tiering the ASP add-on would likely lessen the perception of misaligned incentives and encourage providers to use less expensive therapies when clinically appropriate
2. While there are numerous factors that affect drug value and price, with all other aspects held constant, a tiered ASP add-on payment approach may also impact manufacturer pricing decision-making, specifically as a product’s price nears either side of the tiering thresholds. As a result, the tiered reimbursement approach could influence future launch prices and ongoing pricing behavior, driving the opportunity for additional savings
3. A tiered ASP approach may also incentivize the use of lower priced alternatives when available, and provide a workable alternative to other proposals such as third-party utilization management, which could potentially lead to access challenges and negative consequences for patients and the physicians who treat them

Impact on Beneficiaries

Since patient cost-sharing is tied to the Medicare drug payment, if such a policy were successful in increasing uptake of lower-cost drugs and generics when appropriate, beneficiaries, especially those without supplementary insurance , could also benefit.² To the extent that a tiered ASP add-on policy were to have a mitigating effect on drug prices, patients could also see a positive impact on their out-of-pocket (OOP) costs. Finally, a tiered ASP add-on payment may provide a feasible alternative to more disruptive proposals and therefore protect providers’ ability to maintain drug inventories for just-in-time administration, reducing potential issues with access and outcomes.

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Notes

1. A product’s ASP is calculated as the volume weighted average of all sales of a drug to all purchasers in the United States in a calendar quarter, net of all rebates, discounts, and other price concessions. The reimbursement formula is ASP+4.3% when accounting for the effects of sequestration.
2. Supplementary health insurance could include Medigap, employer sponsored, Medicare Advantage, Medicaid or other coverage that offsets in full or in part beneficiary cost sharing for Part B drugs. Avalere estimates that more than 90% of beneficiaries have supplemental coverage for most of the months they are enrolled in Part B.