Medicare Drug Proposal Is Roundabout Way to Lower Prices, Groups Say

Hospitals and doctors are upset about HHS's new Medicare payment proposal. Photo by Richard J. Simonsen

The only thing currently making some lobbyists in the Washington health care world angrier than rapidly rising prescription drug prices is the Obama administration’s proposal for how to lower them.

In March, the Centers for Medicare and Medicaid Services announced a proposed rule to change the way the government reimburses doctors and hospitals for the drugs administered under Medicare. The administration wants to to change about half of providers’ Medicare reimbursement from its current rate of 106 percent of the drug’s average sales price to 102.5 percent of the drug’s average sales price, plus a flat fee of $16.80.

The goal is to reduce any incentive doctors may have to prescribe expensive drugs, but a diverse group of powerful lobbying groups is loudly opposing the rule. They are joined by lawmakers on both sides of the aisle. Senate Finance Committee Republicans have outright rejected the proposal, while Finance Democrats have called for changes before they’ll support it. Several House Democrats have joined with the GOP to oppose it.

Groups such as the American Medical Association and the American Hospital Association say that while escalating drug prices are a big problem, reducing prices through doctors and hospitals is not the solution. The Pharmaceutical Research and Manufacturers of America is also opposed to the proposal.

The proposal is a CMS demonstration project, which is essentially an experiment on how to improve the federal health care programs. These demonstrations are developed and funded by the Centers for Medicare and Medicaid Innovation, a new agency was established under the Affordable Care Act.

“This demonstration project shows that Pharma and [doctors] still have plenty of sway on Capitol Hill,” said Jim Manley, a former aide to Senate Minority Leader Harry Reid, about the pushback to the proposal.

The protest from drugmakers and medical care providers sets up an election-year showdown among powerful interest groups amid public outrage over prescription drug prices, which consistently poll as voters’ number one health care concern. It’s unclear how the administration will respond to the strong criticism and whether the broader issue will become a campaign issue later this year.

“Americans from all walks of life have felt the impact of the high cost of prescription drugs, and it continues to be a prime driver of spending across the healthcare system,” said Aaron Albright, a CMS spokesman. “The administration’s [Medicare] proposal seeks to deliver better value for consumers and Medicare, while ensuring that doctors and patients continue to have access to life-saving drugs. Nothing in this proposal will prevent doctors or other clinicians from prescribing the treatment their patient needs.”

The administration’s proposal also has several big supporters, including AARP and patient advocacy groups such as Families USA.

Insurers don’t appear to be as outraged as providers. America’s Health Insurance Plans, which represents a major chunk of the insurance industry, submitted relatively neutral comments.

The provider groups’ opposition to the proposal was made clear in comments submitted to CMS earlier this week. They worried about reducing patients’ access to care, and they said administration officials missed the boat if they were trying to reduce drug prices.

“The AMA strongly urges the Administration to focus on the causes of high drug prices which, though multifactorial and complicated, are less complex and offer a more direct approach to address the problem, rather than this proposed [Medicare] model that focuses instead on the physicians who must purchase these drugs,” wrote James Madara, executive vice president and CEO of the AMA, in its comment letter to the agency.

Thomas Nickels, executive vice president of the AHA, touched on similar ideas in his letter to the agency. “The AHA supports finding ways to rein in rapidly rising drug prices. However, the responsibility for unsustainable drug pricing ultimately lies with drug manufacturers, not with hospitals,” he wrote.

Making the rule even more controversial is the dispute over whether it will be effective at lowering drug costs, something experts disagree on.

“When you cut through it all, this is basically a reallocation of revenue from oncologists to primary care physicians and pain specialists,” said Dan Mendelson, CEO of Avalere Health, an independent consulting firm. Avalere’s separate analysis found that the rule would decrease Medicare reimbursement for drugs costing more than $480 per day and increase payment for drugs costing less than $480.

“It does not establish competition among drugs for a given illness. It does not create a competitive dynamic to reduce costs for consumers. It’s a reallocation,” Mendelson said. “Who likes it and who doesn’t is kind of predictable based on what happens to their revenues.”

Mendelson’s argument centers on the fact that medication offered by certain specialists, like oncologists, is generally more expensive (and above the $480 threshold) than medicine administered by primary care doctors. Thus, certain doctors would end up losing money as a result of the rule.

A second component of the proposal would transition the Medicare payment system toward value-based payments for drugs, although the specifics of that idea are vague. This is generally a popular policy idea among all stakeholders.

Some experts argue that doctors do, in fact, prescribe more expensive drugs based on the reimbursement rates, and the rule would cut down on excessive prescribing of expensive drugs. Others say hospital outpatient programs make money on drugs anyway by obtaining them at prices lower than the average sales price but then being reimbursed for more than that.

“While this doesn’t go to prices per se, it certainly goes to costs and over-utilization of the most expensive drugs,” said John Rother, who heads the Campaign for Sustainable Rx Pricing and personally supports the administration’s proposal.

Rother said the administration’s proposal will not become a campaign issue because the current cost of prescription drugs is dominant, and the outrage over the proposed rule is “limited to insiders at this point.”

Regardless of the back-and-forth over the merits of the CMS proposal, it’s clear that there are more popular policy ideas, such as increasing pricing transparency and encouraging marketplace competition through FDA reforms, to get at this problem. Other popular solutions, such as allowing drug importations from abroad, must be done legislatively. But the administration could, in theory, have chosen a less controversial way to experiment with lowering drug prices.

“It’s an area long identified by MedPAC as an area in need of reform. I believe spending is growing faster here than in other areas,” said Ed Lorenzen, a senior policy advisor at the Committee for a Responsible Federal Budget.

But, he said, lowering drug costs might not be the only reason the administration chose this area of focus. Another reason might have been to flex the muscles of CMMI.

“I also think it is an effort to establish the precedent of using the authority of CMMI to make major changes in how Medicare operates. With the administration winding down, they needed to act soon if CMMI was going to push a significant change, and this was the area with strongest basis for going forward with a major change in payment policy,” he said.

In other words, Lorenzen posits, the rule might be about more than just Medicare drugs. It could be a “test case for how far CMMI can go in changing how Medicare operates,” he said.

Clarification: The Campaign for Sustainable Rx Pricing, as a coalition, has not taken a formal position on the CMS rule, although individual members of the group have expressed positions.

Morning Consult