New Medicare Drug Payment Scheme Will Need Help From Doctors

Roel Smart/

The Obama administration’s latest proposal to rein in prescription drug costs relies on doctors and their price savvy. It is, in essence, a gamble that they will be more thrifty in their treatment of patients.

A proposed rule, unveiled Tuesday, aims to change the way the federal government pays for prescriptions administered by Medicare doctors. Although it comes after months of railing against the cost of drugs, it would most directly impact doctors and outpatient facilities if it isn’t changed before it is finalized.

Prescription drug costs top the list of voters’ health care concerns, and the concern has been reflected both on the presidential campaign trail and in congressional hearings. The Obama administration held a forum on the issue in the fall.

The new payment proposal fits into the Center for Medicare and Medicaid Services’ broader goal of tying health care payments to value. It marks a major change to the way Medicare now pays doctors, but it’s unclear whether it will be effective in lowering costs. Already, there is a lot of complaining about it.

“There are a lot of very dramatic changes proposed here, many of which are likely to be strongly opposed by the pharmaceutical industry as well as, potentially, providers,” said Caroline Pearson, a vice president at Avalere Health, an independent consulting firm.

On Wednesday, for example, the Community Oncology Alliance sent a scathing letter to CMS calling its proposal “inappropriate, potentially dangerous, and [a] perverse experiment.”

The proposed rule has two major pieces. The first piece would change the structure of drug reimbursement payments under Medicare Part B, which covers drugs administered in a doctor’s office or in a hospital outpatient department.

Currently, Medicare pays doctors and hospitals the average sales price of a drug prescribed to a patient, plus an additional 6 percent. The model the government wants to test would lower the add-on payment to 2.5 percent and offer a flat fee payment of $16.80 per drug per day. This would be a test program at first, including a study group and a control group. It would begin no earlier than 60 days after the final rule is released.

The second piece would test “value-based purchasing tools” and would go into effect no earlier than January 2017. The administration would tinker with different models like varying the payment for a drug based on its clinical effectiveness, setting a benchmark rate for a group of therapeutically similar drug products, and allowing CMS to enter into voluntary agreements with drug makers to link patient outcomes with price adjustments.

CMS said the payment restructuring fits into its larger effort to tie health care payments to value.

“First and foremost, our job is to get beneficiaries the medications they need. These proposals would allow us to test different ways to help Medicare beneficiaries get the right medications and right care while supporting physicians in the process,” said Andy Slavitt, acting administrator for CMS.

Pharmaceutical Research and Manufacturers of America immediately cried foul. “Proposing sweeping changes to Medicare Part B drug reimbursement without thoughtful consideration and stakeholder input is not the right approach and puts Medicare patients who rely on these medicines at risk,” said Allyson Funk, a spokeswoman for PhRMA.

PhRMA argues that the current Medicare drug payment methodology is already effective at controlling costs. The price growth for drugs prescribed under Medicare is below that “overall medical inflation,” Funk said.

The oncologists, for their part, said the thinking behind the rule is “based on an insulting assumption that community oncologists practice medicine solely by financial incentives, not by what is in the best interests of their patients.”

The logic behind CMS’ proposal is that the current system offers doctors an incentive to prescribe and administer more expensive drugs because CMS reimburses more for them. For example, say Drug A and Drug B do the exact same thing, but Drug A costs $5 and Drug B costs $100. Under the current system, a doctor will get paid $.30 for giving Drug A and $6 for Drug B. Under the test model, a doctor would receive $16.93 for Drug A and $19.30 for Drug B.

CMS hopes the flat fee will produce savings through changes in prescribers’ behavior, but for now, officials are considering it a budget neutral change.

“The idea behind the proposal is to test whether the current payment system now gives physicians a disincentive to administer lower-cost Part B drugs, and how alternative approaches might affect prescribing practices, quality and costs,” said Tricia Neuman, a senior vice president at the Kaiser Family Foundation.

If reimbursement moves away from being tied to the cost of the drug prescribed, doctors have less financial incentive to prescribe the more expensive drug. If doctors are prescribing cheaper drugs, the Medicare program saves money overall.

But none of those predictions could come to pass, depending on how doctors and clinics respond to the changes. “Right now, how expensive a drug is influences how much a physician earns for administering the drug,” Pearson said. “This will be a big change. … You’ve sort of restructured the whole reimbursement model, and everyone’s going to have to figure out what it means for them specifically.”

This change in provider behavior would, in theory, impact drugmakers by giving them incentive to make cheaper drugs. It’s a secondary effect, however. Medicare payments are tied to the average price of a drug, meaning the price would have to lower throughout the healthcare system, outside of Medicare as well, to reduce costs.

The changes could leave some doctors in trouble financially, one Republican health care expert said.

“I expect to hear very quickly that [2.5 percent] plus flat fee will leave [doctors] underwater on certain drugs no matter what,” the expert said. The current model allows doctors to be paid for expensive drugs that might cost more to administer. The test payment system would significantly reduce the amount paid for high-cost drugs.

Congressional Republicans were also quick to rail against the proposal. On Wednesday, several top GOP healthcare leaders in the House and the Senate issued a joint statement condemning it.

“[CMS’] proposed experiment on seniors stands to limit access to the critical care the sickest Medicare beneficiaries rely on, as well as disrupt how health care providers serve patients in the future. The model could ultimately result in seniors’ receiving different standards of care based solely on where they live in the country,” said House Ways and Means Committee Chairman Kevin Brady (R-Texas), House Energy and Commerce Committee Chairman Fred Upton (R-Mich.) and Senate Finance Committee Chairman Orrin Hatch (R-Utah).

The effectiveness of the plan is highly dependent on prescribers’ behavior. If doctors start prescribing lower-priced drugs, this could have a ripple effect on the market, reducing the cost of drugs overall. That’s exactly what the administration is hoping for.

“It provides incentives for drug manufacturers to price appropriately based on value. And rising drug costs are driving growth in overall health care costs,” said Topher Spiro, vice president for health policy at the Center for American Progress.

Morning Consult