Last week, the Medicare Payment Advisory Commission (the “Commission”) debated a package of policy reforms that would change the way Medicare reimburses physicians for Medicare Part B drugs. In the midst of calls to lower drug prices, the Commission has been developing its Part B reform package over the last two years and now, finally, appears poised to move forward with a vote at next month’s meeting.

Medicare Part B drugs are a multi-billion dollar benefit and typically include higher cost specialty drugs that are administered in a physician’s office on an outpatient basis. Drugs covered under Medicare Part B are reimbursed through a so-called “buy and bill” approach. That is, the physician buys the drugs and bills Medicare for their use. Medicare pays the provider the average sales price (“ASP”) of the drug plus a markup of 6% of the ASP. The 6% markup is generally considered compensation to physicians for the storage, handling, and other administrative costs associated with these specialty drugs.

The way physicians are reimbursed for Part B drugs has long been on the Commission’s radar as in need of an overhaul. As support for its position, the Commission points to the fact that Medicare spending on Part B drugs in 2015 was $26 billion – up from $23 billion in 2014 – and has grown an average of 9% per year since 2009. Additionally, the Commission believes that the current Part B “buy and bill” payment system with its 6% markup provides incentives for physicians to use higher-priced drugs.

The Commission’s proposed package calls for reforms on a variety of fronts to be implemented over a four year period between 2018 and 2022:

  • Enhanced ASP Data Reporting. Currently, only drug manufacturers with Medicaid drug rebate agreements are required to submit ASP data on Part B drugs. Under the Commission’s proposed package, beginning in 2018, manufacturers would be required to report ASP data for all Part B drugs. Additionally the package calls for an increase in penalties for non-reporting.
  • Modifications to Payment Rate for Drugs Paid at WAC. Under the current Part B drug reimbursement system, new single-source drugs and the first biosimilar to a reference biologic can be paid at the manufacturer’s wholesale acquisition cost (“WAC”) + 6% for the first three quarters because ASP is based on the first full quarter of data and there is a two-quarter lag due to data reporting. Because manufacturer discounts are not incorporated into WAC, Medicare can end up paying more for the same drug when WAC-priced vs. ASP-priced is used. Under the proposed package, the payment rate for WAC-priced drugs would be reduced by 3 percentage points (i.e., WAC + 3%) in 2018. The WAC add-on would be further reduced if the ASP add-on is reduced so as to maintain parity between WAC-priced and ASP-priced drugs.
  • Manufacturer ASP Inflation Rebate. The Commission’s proposal would also require manufacturers to pay Medicare a rebate when the ASP for their product exceeds an inflation benchmark (e.g., CPI-U), and tie the Medicare beneficiary’s cost-sharing and the ASP add-on to the inflation-adjusted ASP. Under the current system, there is no limit on how much a manufacturer can increase the ASP for a Part B drug. The Commission found that between 2010 and 2017, nine of the top 20 highest-expenditure drugs had annual ASP growth of 5% or more.
  • Consolidated Billing Codes. Under the proposed package, Medicare would be required to use a common billing code to pay for a reference biologic (the branded drug) and its biosimilars. The Commission noted that, currently, Medicare does not have maximum competition for single-source drugs and reference biologics because they are each paid under their own billing codes. The Commission believes that Medicare should pay similar rates for similar care as this would result in physicians being more likely to choose the most appropriate product.
  • Drug Value Program (“DVP”). A centerpiece of the Commission’s recommendations is the creation of a voluntary market-based program in which private vendors would negotiate prices with manufacturers on behalf of physicians. The DVP would begin in 2022 with a small number of private vendors and a subset of drug classes. Other drugs would be phased in over time. Under the DVP, Medicare would reimburse physicians based on the vendor-negotiated price. The vendors would receive an administrative fee and have the opportunity to participate in the shared savings. Once the DVP is up and running, the 6% add-on would be reduced to encourage physicians to enroll in the DVP. DVP prices would be excluded from the manufacturer’s ASP. The Commission noted that the DVP is not the first time Medicare has tried this approach. A previous incarnation, known as the competitive acquisition program, experienced low enrollment and ultimately died in 2008. The Commission maintains, however, that the proposed DVP is different. Unlike the previous program, the DVP is intended to offer vendors more bargaining leverage, such as through the use of a formulary, which is expected to spur price competition among products with therapeutic alternatives.

Not surprisingly, drug manufacturers and oncology practices objected to the draft recommendations, citing decreased patient access for Part B drugs and the detrimental impact on physician practices by accelerating the shift of care from physicians’ offices to hospitals.

The Commission will vote in April on whether, and in what form, to send the recommendations to Congress in June. Regardless of the package that is ultimately approved by the Commissioners, it remains to be seen what, if anything, Congress and the Trump administration will do with the recommendations. One thing is certain, however, the drug pricing debate is not going away any time soon and manufacturers, payors, and health care providers should begin preparing for what could potentially be dramatic shifts in how drugs are reimbursed in the coming years.