The Peril of Drug Pricing Silos for Part B


Do you want to buy a steering wheel?  Or do you want to buy a car?

The answer may seem obvious – buying the whole car is a lot more efficient and makes it much easier to evaluate the final product – but that’s not how we pay for health care: We buy almost everything a la carte, including pills, surgeries, and expensive scans.  As a result, no one has any incentive to ask which combination of treatments delivers the best health, at the lowest cost, for the patient.  In fact, doctors and hospitals are often financially rewarded for doing more and penalized for doing less, even when doing so could produce better outcomes or lower costs.

Across the country, that is starting to change. Private insurers are routinely experimenting with value-based payment designs that pay more for better outcomes. Even in Medicare, long considered the third rail of American politics, these changes are starting to proliferate.

Medicare’s Part B program (which covers medicines delivered in a doctor’s office or hospital) is responsible for paying for high cost, high impact medicines for cancer, arthritis, or multiple sclerosis—but patients also pay 20 percent of the bill out of pocket.

Under current rules, doctors are paid the average sales price of a medicine (net of rebates) plus 6 percent.  But, when two drugs are basically equivalent, for the same indication, like Avastin (which is cheap) and Lucentis (which isn’t), doctors sometimes prescribe the higher priced medicine, with patients paying more out of pocket as a result.  Doctors are also reimbursed more for the higher priced medicine.

In March, the Centers for Medicare and Medicaid Services (CMS) proposed a new approach to paying providers for Part B drugs (those administered in the outpatient setting like chemotherapy drugs). This new model would pay providers the average sales price (ASP) of the drug plus 2.5 percent along with a fixed fee of about $17. This would represent a somewhat welcome departure from how Part B drugs are typically paid for.

But that doesn’t mean it’s free of problems.  Medicare doesn’t have a good record of playing whack-a-mole with individual drug prices, especially when it’s the total costs and outcomes that matter.  Historically, providers have found ways around set payment formulas.

The current ASP-plus-6-percent formula originated with the Medicare Modernization Act of 2003. Prior to that, doctors were reimbursed at 95 percent of the so-called “average wholesale price” (AWP), sometimes known as “ain’t what’s paid.” The AWP is typically a list price for a drug that no one actually pays, and as it turned out, providers routinely obtained drugs for significantly less than 95 percent of AWP.

While there isn’t much research on the subject, studies do suggest that physicians respond to financial incentives. One analysis by Jacobson et al found an increase in the use of higher-margin chemotherapy drugs for lung cancer, and a reduction in drugs facing payment cuts—exactly what you’d expect with financial incentives at play. Similarly, after “least costly alternative” policies were rescinded for certain prostate cancer drugs, HHS’s Office of the Inspector General found an increase in use of higher-cost drugs.

The core idea behind CMS’s new proposal—and it’s one that has support from the Medicare Payment Advisory Commission (MedPAC)—is to reduce the role that reimbursement differentials might play in physician prescribing habits. A fixed fee encourages the use of less expensive drugs, while a flat percentage fee encourages the use of more expensive drugs. A combination of the two falls somewhere in the middle.

But we’re still not tracking total outcomes and costs. Some pricier medicines may end up being more cost-effective in the long run. Physician’s practices facing payment cuts under Part B could join hospital systems to compensate for lost revenues. Hospital-based services for cancer treatment are much more expensive; such a response could thwart the whole point of the experiment.

Finally, CMS is expending enormous political capital on a change that might not change very much of anything. Even if we do see savings from this experiment, they’re likely to be relatively minor; with Part B drug spending totaling around $18 billion, small savings on the order of $1 or $2 billion could even be offset with other unforeseen responses.

A better approach is to focus attention on bundling payments, and episode-of-care-based payments.  The Center for Medicare and Medicaid Innovation (CMMI) already has the authority to initiate other bundled-care arrangements—potentially for many other illnesses including diabetes and cardiovascular diseases—that could combine payments for Parts A and B of Medicare. If drug costs are included in a bundle with other hospital and physician services for an episode of care, the cost of the drug becomes less important than the total effect on downstream costs and outcomes.

Oncologists often treat patients with multiple problems beyond cancer, like heart disease or diabetes, and it makes sense to reward them for taking more responsibility for the overall care of those patients.

CMS’s Oncology Care Model, for instance, includes care coordination payments and performance-based payments. Working to get more practices involved in more innovative approaches, perhaps by exempting these practices from Part B, would encourage more providers to embrace holistic care management.

The challenge is that not all practices might be set up to become an oncology based medical home overnight, so targeted financial incentives should encourage them to invest in the systems needed to get there. CMS should also be careful to risk adjust payment bundles for patients who are particularly sick, so we don’t provide incentives for doctors to avoid complex, expensive cancer cases.

CMS should be lauded for trying to improve a system that is fractured, and that may incentivize the use of more expensive drugs where they aren’t needed. But regulators and policymakers should refocus their efforts around incentives for delivering better health, and away from drug spending silos.

Yevgeniy Feyman is a fellow and deputy director of Health Policy at the Manhattan Institute.  Paul Howard is a senior fellow and director of Health Policy at the Manhattan Institute.  

Morning Consult