A Path Forward on Medicare Payment Reform for Physician-Administered Drugs

The recent proposal for a large-scale test of payment reforms for Medicare Part B “physician-administered” drugs has generated broad opposition from many patient groups, physician specialty societies and pharmaceutical companies. While many consumer organizations that represent Medicare beneficiaries have expressed support, the future of the proposed reforms is unclear.

Officials at the Centers for Medicare and Medicaid Services (CMS) have stated that the proposal will be modified before moving forward, which we believe is the right response. The core concepts to reform Part B drug payments complement other reforms being implemented by CMS and the private sector. To make these concepts operational, CMS should modify the payment formula changes proposed in Phase 1 to prevent adverse impacts, and develop the pricing-reform ideas in Phase 2 through much more public engagement.    

We are both veterans of previous difficult fights over Medicare drug payment reforms, including the implementation of the current Part B payment formulas in 2005. That reform corrected distorted prices, and resulting overpayments and inefficiencies, in the previous “AWP” system – aligning drug payments more closely with actual net drug prices paid. Then, as now, reforming drug payment should be handled with the goal of avoiding negative financial impact on small practices, or harm to beneficiaries through reduced access to needed drugs.

The CMS proposal reflects the reality that Medicare’s Part B drug payment system has fallen behind payment approaches in other areas. The payment is based on the manufacturer’s average sales price for a drug. Doctors and hospitals earn large fees when they use expensive Part B drugs, regardless of how well they work or their impact on costs of care.  Doctors make only pennies and hospitals receive no reimbursement when they use inexpensive generics, including many generics that are the backbone of proven-effective treatment regimens.  It’s a payment approach that favors more and more expensive drugs, not more valuable drugs, and may exacerbate generic drug shortages too.  

The CMS proposal comes at an important time. Evidence suggests that prescribing shifts when payment and net revenues from particular drugs change. For example, Medicare spending on biologic drugs in cancer rose 335% over the past decade while spending on cancer surgeries was unchanged. While the new drugs have valuable benefits, over the past twenty years, the prices for cancer drugs have risen much faster than the benefits.

CMS proposals in each phase need significant fixes to improve care while providing incentives for innovative drugs.  Phase 1 aims to pay doctors for doctoring, rather than based on the price of the drugs they prescribe. The core principle is that doctors shouldn’t have to generate larger and larger health care bills in order to maintain net practice revenue (what is left after expenses are paid).  

Private sector examples include United Healthcare’s pilot in oncology payment that delinked drug utilization from net practice revenue. Where CMS proposes reducing the percentage-based portion of reimbursement, United removed it entirely. To compensate, CMS proposed to pay an additional “flat” drug fee accompanying each treatment, while United paid a single flat care fee per patient. The flat fee calculation in both models was based on how much of the percentage markup had taken away – but United made sure that oncology practices were not financially worse off. CMS applied a similar calculation across all specialties that use Part B drugs, resulting in a financial loss for physicians in fields that use more expensive drugs. Oncologists would see about a 1 percent decrease in drug-associated Medicare revenue, which is around a 2 percent decrease in the average margin between drug reimbursement and drug costs..  

One fix would be to calculate the flat drug fee for each specialty separately. One of us (Bach) estimated that the flat drug fee in oncology would have to be increased from $16.46 to $23.74 (under sequestration) to keep total spending the same in oncology. An administratively simpler alternative is to raise the flat fee across the board to the level that will keep office-based oncologists whole.  Their practices account for more than half of all Part B spending, and doing so would bring other specialties closer to their baseline. Increasing the flat fee for all specialties would increase costs in the near term, but the payments are very small relative to overall drug and oncology spending, and with evidence suggesting this reform may reduce other costs, it’s a good question to test.  

CMS should reassess the flat fee so that it eventually aligns with payments for care coordination and chronic care management (as proposed for primary care providers), similar to the patient-level payments in the United Healthcare model and in Medicare’s oncology care management pilot or the American Society for Clinical Oncology’s proposals. Further fee changes can reflect such impacts on overall costs, for example by comparison to spending in the regions of the country not subject to the new formula, making it a type of gain share.  

Phase 2 contains many approaches that are being developed by private health insurers and pharmaceutical companies that could also support better care for Medicare patients.  These include indication specific pricing where a drug’s price varies based on its use, an approach being pursued two large PBMs.  It also includes results-based pricing, where higher prices are paid for drugs when their use results in desired clinical and functional outcomes for patients or lower total costs of care, an approach that has also been the basis for new payment arrangements. During Phase 2, CMS could also evaluate whether the flat fees paid per treatment could be rolled up into a flat fee paid per treated patient in conjunction with other physician and hospital payment reforms.

As it moves forward with these Phase 2 ideas, CMS needs to do more to involve specialty groups, patients, practitioners, pharmaceutical companies and Congress to develop these concepts further before trying to implement them. The technical, administrative and scientific issues are challenging but manageable, and could be addressed in a way that these groups can support. CMS needs to start now to get these further ideas on track for effective testing in conjunction with the other physician and hospital payment reforms that are underway.

Peter B. Bach, MD, is a physician and the director of the Center for Health Policy and Outcomes at Memorial Sloan Kettering Cancer Center.  He served as senior adviser to the administrator of CMS in 2005-6.  Mark B. McClellan MD, PhD, is a physician and economist, and the director of the Robert J. Margolis Center for Health Policy at Duke University.  He served as the administrator of CMS from 2004-6, and is an independent director of Johnson & Johnson. The views are those of the authors.

Morning Consult