Competition not the answer to restraining Medicare drug costs

Competitive bidding, an attempt to bring down Medicare costs, might lead to higher out-of-pocket costs for patients.

In its quest to keep US government drug costs under control the Trump administration has come up with a proposal to subject Medicare-covered drugs administered by physicians to the price controls of private health plans.

While the proposals are somewhat ill-defined, the aim is to move some of these drugs, which receive a fixed fee from the programme, into competition with self-administered drugs, the prices of which must be negotiated with a private payer. But if this goes ahead it will have to be done with great care to avoid sticking beneficiaries with higher out-of-pocket medical bills. 

Whether the proposal would save any money at all is up for debate, since the number of drugs that could be moved into price competition is limited, and in many cases these agents are not significantly more expensive than those with negotiated payment rates. Nevertheless, the administration believes that competition is the best option to achieve lower prices and reduce cost growth, and thus this looks likely to become official policy.


Medicare pays for beneficiaries’ drugs in two different ways. When a drug is administered in a doctor’s office “part B” of the programme is the source of reimbursement. This takes the form of a fixed fee equal to the drug’s average sales price (ASP) plus 6% to compensate physician practices for acquisition, storage, handling and delivery. Products covered by part B are typically biological agents that must be infused intravenously.

When Medicare patients administer drugs – usually pills or subcutaneous injections – themselves they are covered by “part D”, which was added to the programme for the elderly and disabled in 2006, 40 years after part B. Instead of a fixed fee coming from the government, drugs in part D are paid for under private insurance plans patients must take out, even though they are covered by Medicare.

These plans are then reimbursed by Medicare and, crucially, have the power to negotiate drug prices with pharma companies. Under the current rules, for example, rheumatoid arthritis patients taking Remicade or Tysabri, part B drugs, pay a lower percentage of the bill than those taking Humira or Xeljanz, both of which are part D.

For drug companies the current rules mean that those whose top-selling drugs fall under part B’s fixed-fee schedule face less price competition than those whose major products are part D. Part B’s use of ASP as a benchmark provides some restraint, but Medicare pays above that and in many cases has incomplete ASP data to rely on; the government believes that, after some drugs are moved to part D, tough negotiators in the private sector could achieve a price below the ASP.

It would be a monumental task to merge parts B and D completely – even altering reimbursement for physician-administered drugs has proven to be a problem because of doctors’ reluctance (Vantage view – Why competitive bidding will be a hard task in Medicare, May 24, 2018).

But the Trump administration’s drug price blueprint seems focused on shifting some drug classes from B to D.

Which drugs?

Of the 10 agents on which Medicare part B spent most in 2016, four are in oncology. Still, moving these to part D would likely have little effect. Part D has several protected classes: oncology, immunosuppressants used in transplant surgery, anticonvulsants, antidepressants, antipsychotics and antiretrovirals. Medicare must cover all of these medications, so insurers’ negotiating power is minimised.

However, Remicade’s position at number four on the list with $1.3bn in spending, and Orencia at number 10 and $587m, suggest that rheumatoid arthritis and related autoimmune disorders could be a potential target for part B/D consolidation. This could also pull in the RA spending on Rituxan, number two on the list, by increasing competition in the sector.

Top 10 Medicare part B drugs by total spending, 2016
Brand Company Therapy area Total spending ($m) Avg spending per beneficiary
Eylea Regeneron Ophthalmology $2,208 $10,497
Rituxan Roche Oncology/rheumatology $1,666 $23,815
Neulasta Amgen Oncology $1,376 $14,336
Remicade Johnson & Johnson Rheumatology $1,339 $22,925
Avastin Roche Oncology $1,112 $5,360
Prolia Amgen Muscoloskeletal $1,087 $2,592
Lucentis Roche Ophthalmology $1,044 $9,814
Herceptin Roche Oncology $704 $34,000
Prevnar 13 Pfizer Infectious diseases $669 $170
Orencia Bristol-Myers Squibb Rheumatology $587 $25,636
Source: Centers for Medicare and Medicaid Services.

Further down the rankings, Xolair in asthma and Tysabri in multiple sclerosis (MS), ranked 14th and 15th with $328m and $306m in spending respectively, might also be candidates for shifting to part D. Most asthma and MS drugs are self-administered, and there is a clear temptation to subject the infused agents to the same competitive pricing process. 

What savings?

However, it is not entirely clear that migrating drugs into Medicare part D would save money.

On the one hand, an analysis conducted for the Centers for Medicare and Medicaid Services in 2011 suggested that shifting four drug classes – cancer and supportive treatments, nebuliser inhalants, pumped insulin and immunosuppressants – could save $133m a year. This would require the CMS to revoke protected class status for oncology and immunosuppresive drugs, something that would surely provoke a backlash from patients.  

Conversely, Cowen analyst Rick Weissenstein estimates that in 2016 Medicare spent about the same amount per beneficiary on the RA drugs Humira and Enbrel, part B agents, as on part D Remicade, so it cannot be said that competitive negotiation necessarily leads to lower prices than fixed fees.

Bernstein analyst Ronny Gal, meanwhile, suggests that a part-B-to-D shift could be a way to drive uptake of biosimilars, such as those for Remicade and the MS drug Copaxone. Providers now have greater power than plans to dictate the use of specific agents when it comes to physician-administered drugs, and Johnson & Johnson has used discounting and bundling of multiple products to guard against Remicade biosimilar erosion.

If Remicade were under part D, payers would have greater power and would likely seek to substitute biosimilars, Mr Gal wrote – although it is not altogether clear that biosimilar Remicade would save any money if J&J has already slashed its price on the branded product.

Eylea, the biggest-ticket drug item in Medicare Part B, could also be under threat in this scenario, Mr Gal wrote, since Lucentis biosimilars are due in 2021.

What about the beneficiaries?

Of course, government expenditures are only one aspect of this proposal. Another is what beneficiaries pay, and shifting drugs from part B to D could mean that they pay more.

Firstly, part B has a lower deductibles and coinsurance than part D. Secondly, so-called “Medigap” insurance plans that cover beneficiary cost-sharing obligations can reduce patients’ bills for physician-administered drugs. Part D has no such protection.

An analysis by the consulting group Avalere found that for beneficiaries prescribed new cancer therapies in 2016 the average out-of-pocket cost for drugs covered by part D was $3,200, compared with $2,400 for drugs covered by part B.

President Trump has made reducing the price of prescription drugs a major thrust of his administration. In the end, however, Medicare beneficiaries’ chief concern will be how much they pay, not how much a drug costs overall. Any policy that saves the government money but costs beneficiaries more would not be popular.

Shifting drugs from part B to part D would need to be done carefully to ensure that the effect on patients’ medical expenses is, at the very least, neutral.

To contact the writer of this story email Jonathan Gardner in Virginia at or follow @ByJonGardner on Twitter

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