7/29/2019 Administration Outlines Plan To Lower Pharmaceutical Prices In Medicare Part B | Health Affairs

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Administration Outlines Plan To Lower

Pharmaceutical Prices In Medicare Part B
Rachel Sachs

OCTOBER 26, 2018 DOI: 10.1377/hblog20181026.360332

Yesterday, the Trump Administration outlined a plan that, if implemented, could

signi cantly lower the prices of pharmaceuticals through Medicare Part B. The plan
contains three key elements: substituting private-sector pharmaceutical vendors for the
current Part B “buy and bill” practice, changing the Part B Average Sales Price plus 6

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percent reimbursement system to a at fee, and implementing international reference

pricing.  The rst two of these were attempted – and failed – in previous administrations.

The model would take the form of a randomized controlled trial, exposing half of the Part
B fee-for-service program to the “treatment” beginning in 2020 and phasing it in until
2025.

Many questions remain about the administration’s proposal, including whether and when
it would actually move forward, whether the administration can withstand the political
pressure it will face, and whether the plan’s elements would be extended (where relevant)
to Medicare Part D or other payment systems.  For now, its rollout seems timed to prop
up the administration’s record on drug pricing going into the midterm elections. 

In this post, I review the key elements of the plan and put it in context with the
administration’s efforts on drug pricing so far. Since the proposal is quite lengthy, at
times I will refer to page numbers for readers who would like to make quick reference to
particular points.

Reforming The Part B “Buy And Bill” System

The rst element of the proposal would fundamentally alter the Part B reimbursement
structure, replacing many of the functions currently performed by physicians and
provider groups with private-sector vendors. At present, physicians are able to purchase
Part B drugs (often from a distributor or specialty pharmacy) and then bill Medicare for
the average sales price (ASP) of those drugs plus 6 percent. The proposal notes the
many drawbacks to the current system, including for providers themselves, who must
take on up-front nancial risk.

The plan envisions these functions now being performed by private-sector vendors,
rather than by physician groups. The vendors would purchase the drugs and supply them
to physicians, and the vendors would compete for physician business based on a
number of different factors (see p. 15-16). The vendors would then bill Medicare for the
administered drugs (at a rate discussed below).

Why Will This Work Better Than The Last Time It Was Tried?
Yet as the administration notes, a very similar strategy has been tried before – and it
failed. The Medicare Modernization Act of 2003 created the Competitive Acquisition
Program (CAP), which similarly provided an alternative to the ASP structure by allowing
physicians to contract with private-sector vendors who would supply them with the
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relevant pharmaceuticals. Although CAP was implemented, it was not a success and
was abandoned within a few years. Few physicians signed up, and only one company
signed a contract to become an approved CAP vendor.

So why does the administration think this idea will work this time? The proposal argues
that physicians will be more likely to enter the program today, as they face increased
nancial risks under today’s buy-and-bill system. Perhaps, although the physicians who
signed on to CAP were generally solo practitioners or small-group practices, and given
the pace of provider consolidation over the last decade there may be even fewer of those
around today. Moreover, the administration does not explicitly argue that vendors will be
more likely to participate today than they were previously. One might even suppose that
an administration that has spent the last two years seeking to stoke uncertainty in the
Affordable Care Act’s private marketplaces might be less likely today to nd willing
private-sector partners for a proposal that will be implemented over the next seven years
(see p. 7).

Changing The Part B Reimbursement

Methodology
The second element of the administration’s plan would reform the current method of
pharmaceutical reimbursement under Part B. Today, as noted above, drugs are
reimbursed on an “ASP+6” basis, in which physicians administering drugs under the
program are reimbursed at the average sales price of the drug plus 6 percent. The
administration notes that this creates incentives for providers to prescribe higher-cost
drugs (see p. 6), which may be harmful for patient care and is also of concern for cost-
control efforts.

Instead, the proposal would pay physicians a set amount (based on 6 percent of
historical costs) for administering drugs, on top of what vendors would be paid for the
drugs themselves. Ideally, this would remove or at least mitigate both providers’
incentives to prescribe higher-cost drugs and pharmaceutical companies’ incentives to
establish higher list prices.

Again, A Less-Than Auspicious-Precedent

This proposal may also sound familiar to longtime drug pricing policy watchers, as it is
similar to the Part B demonstration project advanced by the Obama administration in
2016. Recognizing these same pharmaceutical prescribing incentives created by the
ASP+6 system, the Obama administration proposed to move to a system of ASP+2.5
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percent+a at fee, hoping that this would “remove any excess nancial incentive to
prescribe high cost drugs over lower cost ones.” The Part B demo was criticized
extensively, particularly by the oncologists that prescribe many of the relevant drugs and
by the pharmaceutical companies that make them, and the administration did not move
the proposal forward before it left o ce. The Trump administration formally withdrew the
program in October of last year.

When Secretary Azar was asked how this proposal differs from the Obama
administration’s Part B demonstration project, he told at least one reporter that it was
“more radical,” “more revolutionary,” and “more on point.” To be sure, there are differences
in terms of which entities in the system would take title to pharmaceuticals and bear the
relevant nancial risk. But whether it will also be more able to withstand the criticism
from these groups that has already begun to appear is a separate question.

Adopting International Reference Pricing

The third element of the proposal is in some ways the most interesting, but in other ways
it is also the most problematic. In short, the administration is hoping to use international
reference pricing to begin aligning Part B reimbursements with international prices. The
amount Medicare reimburses the private sector vendors envisioned in the rst element
of the proposal would be tied to an international reference price, referred to as the
“International Pricing Index” or IPI. The IPI would be based on a basket of sixteen other
countries (see p. 44 for a list). This indexing would be phased in over time, from 2020 to
2025 (see p. 40-41 for an explanation). Although astute observers noted that the Obama
administration’s Part B demo also would have included a reference pricing component, it
never received as much attention as the percentage-to- at-fee change.

Implementation Challenges
Unfortunately, it is not at all clear from the proposal how – or even if – this approach
would work to lower drug prices in Part B. Here is the problem: At present, Part B
provides coverage for whatever is “reasonable and necessary for the diagnosis or
treatment of illness or injury.” Part B cannot refuse to provide reimbursement if it believes
a drug is simply priced too high. This means that, now, pharmaceutical companies have
great leverage to set prices in Part B. The administration’s new proposal, by contrast,
envisions that vendors will only be reimbursed at the relevant phased-in international
benchmark price.

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But what if pharmaceutical companies won’t sell their products to the vendors at the new
reference price? What happens if they insist on their current, higher price? One possible
answer: nothing. Medicare is still required to cover the product, nothing in the proposal
explicitly uses CMMI’s authority to waive this requirement, and perhaps companies
would use balance billing or other creative arrangements to recoup the relevant
expenditures. If that were the case, though, the program would simply fail to lower drug
prices, and the administration has told us that the proposal will have real impacts in that
area.

Another possible answer is that vendors would simply cease providing certain drugs to
physicians, if the pharmaceutical company is unwilling to make su cient concessions to
render the benchmarked Medicare reimbursement worthwhile for the vendor. If that were
the case, though, patients would lose access to some, or even many, Part B products –
and the administration has told us that the proposal will operate “without any restrictions
on patient access” (something the pharmaceutical industry disagrees with). So far, the
administration has not explained how exactly this proposal would avoid each of these
pitfalls.

I would note here an additional argument from Professor Fiona Scott-Morton, who
argues that the proposal could fail to have any effect for a different reason. As she notes,
the pharmaceutical company and the relevant foreign countries could work together “to
set a US-level invoice price and offset it” with a number of other possible factors,
meaning that although the international reference price would quickly rise to meet the US
level, other countries would be no worse off. The pharmaceutical industry is endlessly
creative, and it will attempt to come up with a solution to any proposal that threatens its
bottom line. The administration’s request for comments about data sources in this area
indicates a desire to plan for this possibility, but they may not be able to fully prevent it.

More generally, the administration’s rhetoric around the motivation for this element is
highly misguided (and contradictory, as the administration’s Drug Pricing Blueprint had
criticized the type of international reference pricing it now seeks to use). The
administration frames this proposal as “cutting down on foreign freeloading,” arguing
that other countries do not pay their fair share of pharmaceutical investment. Yet the
proposal will not clearly raise prices abroad and end the “freeloading.” It simply aims to
lower them here.

And crucially, the United States and the United States alone is responsible for the high
prices we pay for prescription drugs. Other countries have made hard choices to cover or
not cover certain drugs, based on factors including their price and their effectiveness.
Not only have we not made such choices, but we have also legally required our public
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payers to reimburse most and in many cases all drugs approved by the Food and Drug
Administration, a combination which places the leverage over drug pricing squarely in the
hands of the pharmaceutical industry. We could have changed our own policies at any
time. The failure to do so is our own. Arguably, with this proposal we are “freeloading” on
the efforts by other countries to engage in serious cost control.

Signi cant Potential, But Also Signi cant

Questions
Of all the drug pricing proposals the Trump administration has introduced so far – and
there have been many – this is by far the most ambitious. If implemented, it would have a
far more signi cant impact than the direct-to-consumer advertising transparency
proposed rule introduced last week, and it would likely be more broad-based than the (to-
be-issued) output from the FDA’s price-spike-related importation working group. But like
those other proposals, the essential question is whether the administration will actually
move forward with and implement these ideas.

Perhaps we simply haven’t given the administration enough time to do so. But given that
the concepts in this proposal are largely a rehash of strategies that were deployed by
prior administrations, it is not clear that it should have taken the administration nearly
two years to come up with a mere advance notice of proposed rulemaking in this area.
Further, it is always important to note that this proposal is limited to Medicare Part B, and
therefore it would not provide bene ts for Americans with private insurance or Medicare
bene ciaries who have di culty affording their Part D products.

As always, a core problem for Secretary Azar continues to be the mismatch between his
considered, serious policy proposals and the President’s rhetoric. In the President’s
remarks on the announcement, he declared that “at long last, the drug companies and
foreign countries will be held accountable for how they rigged the system against
American consumers,” and that lower drug prices would be “automatic” and “very
substantial.” Yes, that sounds better than “we’re phasing in a demonstration project for
just half of all Medicare Part B fee-for-service bene ciaries over the next seven years,”
but President Trump continues to promise far more than he can deliver.

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Sam • 9 months ago • edited

It takes a lawyer to figure out the whole mess about
medicare anyway. These prices are for big Pharma anyway!
△ ▽ • Reply • Share ›

Are you sure? • 9 months ago

It’s hard to argue with the President’s frank assessment of
the price differential between Europe and the U.S. HA
almost seems to take a political view of this attempt to
achieve more pricing parity. HA does point out some of the
challenges we’ll have in implementing but let’s hope we’re
successful. We all want innovative and we need a model
that shares the cost of innovative across markets.
△ ▽ • Reply • Share ›

Clementine > Are you sure? • 9 months ago

Not hard to argue at all. The US has flatly refused to
respond to market failure in medicines; other
countries consider it a priority. Has it occurred to you
that the prices paid in other countries might at
actually reflect what the drugs are worth to those
payers? Remember price is what you pay, value is
what you get; with medicines there is often a big
mismatch. And ripping of the current generation of
patients to pay for putative future 'innovative' (sic) is
stupid.
△ ▽ • Reply • Share ›

Are you sure? > Clementine • 8 months ago

Please read the article. If your hate of Trump
is the gist of your comment okay, I hear you.
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And yes I am familiar with Michael Porter’s

value definition. The HHS plan, looks to
transition Part B reimbursement to reference

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TOPICS 

Prescription Drugs
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Pharmaceutical Industry
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“Administration Outlines Plan To Lower Pharmaceutical Prices In Medicare Part B, " Health
Affairs Blog, October 26, 2018.
DOI: 10.1377/hblog20181026.360332

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