Medicare’s Coming Battle Over Drug Reimbursement

By Zack Buck

Following months of news coverage highlighting how American drug prices are “out of control,” the Centers for Medicare and Medicaid Services (CMS) seems to have been spurred into action. Last week, CMS proposed a new reimbursement regime for drugs paid for by Medicare Part B (drugs administered on an outpatient basis).

Addressing the concerns that the existing reimbursement formula may encourage physicians to rely on more expensive drugs, the proposal calls for testing new payment models designed to save money. The most striking of these changes calls for altering the “average sales price plus 6 percent” reimbursement formula (the amount Medicare pays doctors to reimburse them for drugs) to a formula which would pay doctors the average sales price plus 2.5 percent, plus a fee of $16.80 per drug per day. Further, the proposal also calls for testing indications-based and reference pricing. If implemented, all of these tools would be likely to produce cost savings for Medicare Part B, which spends $20 billion annually on drugs.

According to the New York Times, the proposal “touched off a tempest,” as physicians, politicians, and drug manufacturers criticized  the proposed changes. The American Society of Clinical Oncologists decried the “heavy-handed” government intervention that would adversely affect seniors’ quality of care. Senator Orrin G. Hatch (R-UT) implied that the change would allow “unelected bureaucrats” to usurp medical judgment, with negative effects on access to care. And a statement from the Pharmaceutical Research and Manufacturers of America (PhRMA) noted that the proposal “puts Medicare patients who rely on these medicines at risk.”

The proposed formula begins to move away from basing the physician’s reimbursement amount on the underlying cost of the administered drug, but retains some measure of it. As reported, “CMS officials say that change would mostly eliminate the incentive to choose a high priced drug over one that may be more appropriate.” But without moving to a fully flat reimbursement formula (a reimbursement formula that takes no account of the cost of the drug itself), CMS has not completely removed the wasteful incentives. Instead, it is seeking to blunt them.

Nevertheless, prescription drugs have become a major piece of Medicare’s annual budget, and the new proposal seeks to move toward removing incentives that encourage physicians to use more expensive prescription drugs. To this point, without any legal limitation on the costs of these drugs, nor any ability to negotiate with drug manufacturers, Medicare has embraced reimbursement policies that put its own financial stability at stake. At long last, this is a sign of CMS’s desire to begin the necessary work of reining in Medicare spending; whether the efforts result in real change remains an unanswered question.