Prescription drugs are a large and growing segment of Medicare spending. In addition to the more than $90 billion spent each year for the pharmacy drug benefit of Medicare part D, MedPAC reports that the government and beneficiaries spent about $29 billion for drugs and biologics under part B in 2016. Most part B spending goes to pay physicians for office visits and outpatient care, but the costs of part B drugs are rising rapidly – growing by approximately 9.5 percent a year, greater than the overall part B growth rate of 2.7 percent from 2010 – 2017. Even considering that part B growth was temporarily slowed due to ACA payment reforms, the effect of part B drug costs cannot be overlooked for ACOs and others concerned with Medicare cost drivers.  

Cost Growth Outpaces Medicare Overall

The growth in part B drug costs is largely due to increasing prices, a growing Medicare population, and newly available treatments with no lower cost option. As an element of the fast price growth, MedPAC points to the lack of price competition for these mostly injectable medications administered in an office or outpatient setting, many of which are for serious conditions such as cancer. Many of these drugs cost upwards of $10,000 per year and have no suitable alternative.

 In 2017, MedPAC recommended restructuring the payment formula for part B drugs to reduce what it terms “excessive reimbursement rates.” Medicare’s payment structure for part B drugs has also been called inflationary, as it pays physicians and hospitals the average sales price of the drug plus six percent, with no negotiation between Medicare and drug manufacturers (and no intermediary organizations such as drug plans or prescription benefit managers playing the same role). 

How this Affects ACOs

All Medicare providers, including those in Caravan Health ACOs, have seen this fast growth in prescription drug costs, even with the population health management measures that have been so successful in keeping cost growth under control.  Between the beginning of 2016 and mid-2018, part B drug costs grew at nearly three times the rate of overall Medicare fee-for-service costs. Unlike drugs dispensed in retail pharmacies, spending for part B drugs does count against spending benchmarks against which Medicare ACOs are judged, meaning that fast growth in this category pressures other parts of the system.

New Proposal from the Administration Open for Comment Now

On Thursday, October 25, 2018, HHS announced a proposal to reform payment for Medicare part B drugs. The agency issued an advance notice of proposed rulemaking (ANPRM) that is open for public comment until December 31, 2018. The stated purpose of the ANPRM is to bring some drug prices for Medicare in line with the prices available in 16 other economically similar countries - Austria, Belgium, Canada, Czech Republic, Finland, France, Germany, Greece, Ireland, Italy, Japan, Portugal, Slovakia, Spain, Sweden, and United Kingdom. HHS analysis showed that U.S. drugs costs were 1.8 times higher than these other countries on average. 

What is in the New Proposal 

The proposal would change the benchmark for drug reimbursement under Medicare part B. Medicare currently pays 106 percent of the average sales price (ASP) of a medication administered by the provider. ASP accounts for sales from manufacturers to all purchasers in the country, taking into account various rebates and discounts. When ASP is higher than international prices, the proposed methodology would reimburse providers based on a new International Pricing Index (IPI), based on prices available in foreign countries. A Target Price based on the IPI would be 126 percent of the average price available in these foreign markets. The ANPRM proposes phasing in this new methodology, starting with the highest-cost single source, biological, and biosimilar medications. CMS estimates 30 percent savings in spending on the drugs subject to the new reimbursement model. 

The ANPRM proposes a few other changes for part B drugs: 
  • HHS wants to explore using private sector vendors for part B drugs. These vendors would acquire the drugs, supply them to physicians and hospitals, and bill Medicare in order to take the risk of drug purchasing away from the individual provider. 
  • HHS is also considering updating the 6 percent “add-on” payment, which has been affected by budget sequestration. 

What Happens Next

This new proposal is in the earliest stages. HHS plans to issue a proposed rule in Spring 2019 and start the new reimbursement formula as a five-year demonstration in 2020. It’s important to note that this proposal addresses only drug costs reimbursed under Medicare part B. Medicare part D, Medicaid, and other payers account for a large percentage of total drug spending and would be unaffected by these changes. ACOs and others doing the day-to-day work of bringing down Medicare spending while maintaining quality will be watching closely to see the public reaction and the resulting proposed rule.  

Speak with a Caravan Health expert to learn more.

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