Medicare opens limited front in US pricing war

Medicare is following the lead of its private-sector counterparts as it puts limits on reimbursement for drugs administered in outpatient settings.

The two-part proposal would first trim the mark-up that physicians can claim for complex agents that require professional supervision, but in the longer view promises an evolution into a value-based payment system. It responds to political pressure to act on pricing as well as following sector trends toward performance-based reimbursement, although physicians have already expressed opposition.

Medicare’s buy-and-bill payment system for office administered drugs – reimbursed as part of the programme’s part B covering care in many non-hospital settings – has been under a microscope because of incentives for physicians to use more expensive drugs. Many of these are the complex speciality agents used to treat severe diseases that have been a target of pharma critics for several years.

Buy and bill, or game the system?

Physicians are now paid the average selling price (ASP) plus a 4.5% add-on for a dose of these drugs, an approach justified by a hope that it would give practices an incentive to negotiate for lower prices. However, government advisers argue that it also gives physicians an incentive to choose higher-cost drugs since the add-on is greater. Demonstrating their concerns, spending on this category rose to $22bn in 2015, doubling in just eight years.

Following on the recommendations of the Medicare Payment Advisory Commission, the Centers for Medicare and Medicaid Services as a first step are knocking the mark-up to 2.5% but adding a flat fee of $16.80, an approach that would significantly boost reimbursement for cheaper drugs but squeeze the margin at the top end. Reimbursement for a drug with an ASP of $10 would be more than double at $27.05, but for a $5,000 agent it would be $5,142, a 3% mark-up.

Some practices would remain on the ASP-plus-4.5% payment scheme to help CMS analyse the effect of the new reimbursement. This proposal would be effective in autumn 2016.


The second half of the proposal, to be implemented no sooner than January 2017, would be to compare the current ASP-plus-4.5% reimbursement with the flat fee approach or the use of value-based purchasing techniques similar to those used by health plans, employers and pharmacy benefit managers. These include reference pricing, indication-specific pricing, outcomes-based risk sharing arrangements or patient coinsurance reductions.

All practices will be randomised into one of four groups – two receiving mark-ups of either 4.5%, or 2.5% plus a flat fee, and two receiving one of those two payments plus implementation of value-based purchasing techniques.

The experimental nature of the plan was one of the objections raised by ASCO, which said CMS was manipulating treatment choices in a “heavy-handed” manner.

In embracing value-based pricing, CMS is following the private sector, which notably has seen Novartis recently agree to outcomes-related discounts with insurers Cigna and Aetna for new heart failure drug Entresto (Big pharma pushes pricing debate around a corner, February 1, 2016).

Those outcomes-based payments would aim to test whether in real clinical practice the $4,500 pill can reduce hospitalisations by 21%, as happened in trials (ESC – Novartis heart failure pill scores big, August 30, 2014).

It also comes as the federal agency declined congressional requests to issue guidance on the use of so-called “march-in” rights, an even more heavy-handed approach than value-based pricing that would revoke patents on drugs that are unreasonably priced.

The government has not moved as nimbly as the private sector, given that commercial payers are already taking action while the CMS experiments. Yet the entry of the feds into the pricing debate is a clear sign that the sellers’ market of two to three years ago is swinging back toward the buyers.

To contact the writer of this story email Jonathan Gardner in London at [email protected] or follow @ByJonGardner on Twitter

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