Let’s Try Out New Ways to Pay for Medicare Part B Drugs

The Centers for Medicare & Medicaid Services (CMS) is proposing a nationwide five-year demonstration project to test new ways to pay for drugs covered by Medicare Part B.  The goal is to reduce costs to Medicare and its beneficiaries while maintaining or improving the quality of care.  We think it’s worth a try.

Medicare Part B covers some drugs and vaccines, mainly those that patients receive by injection or infusion in doctors’ offices and hospital outpatient departments.  Medicare pays doctors and hospitals a fee to administer each drug, plus a separate amount to cover the cost of the drug itself.  That payment generally equals the average sales price (ASP) of the drug plus 6 percent (though then reduced by a 2-percent sequestration imposed by the 2011 Budget Control Act).

Most Part B drugs are inexpensive, but a few costly ones account for most spending, according to the Medicare Payment Advisory Commission (MedPAC).  The top ten drugs, for example, cost from $1,200 to $5,200 per dosage and account for half of Part B drug spending.

MedPAC has expressed concern that the 6-percent add-on to the ASP creates an incentive for health care providers to use higher-priced drugs.  To determine the extent to which that’s true, CMS has proposed to undertake a randomized controlled trial of an alternative payment formula developed by MedPAC. 

In its first phase, the demonstration project would pay providers the ASP plus 2.5 percent plus a flat amount of about $17.  For drugs with an ASP of about $480, the new formula would generate the same payment as the current one.  For less expensive drugs, the add-on would be greater; for more expensive drugs, smaller.  If physicians didn’t change their prescribing practices, total spending would be unchanged.  If physicians responded to the change in financial incentives by prescribing less expensive drugs, savings could result.

Medicare now generally overpays for Part B drugs, according to a MedPAC analysis.  Unlike a proposal to lower Part B reimbursements in the President’s 2017 budget, this demonstration project wouldn’t significantly reduce total overpayments.  At the same time, it could generate underpayments to some small providers for certain expensive drugs, and CMS should be alert to this possibility.

In the demonstration’s second phase, CMS proposes to test ways to relate drug payments to value.  These could include paying the same for therapeutically similar drugs, varying a drug’s price based on its clinical effectiveness in different situations, and reducing cost-sharing for high-value drugs. 

The demonstration project represents another step towards a health care system that provides better quality at lower cost.  It would reduce the financial incentive for doctors to prescribe more expensive drugs.  At the same time, beneficiaries in traditional Medicare could still choose their doctor and hospital, and doctors could still choose the drugs that are best for their patients.  We agree with AARP, Families USA, the Boston Globe, and the Washington Post that the demonstration has promise, and CMS should go forward with it.