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Medicare Drug Payment Demonstration Should Move Forward

Medicare’s proposed demonstration project to test new ways to pay for drugs covered by Part B has generated considerable controversy.  A largely Republican House group has urged the Centers for Medicare & Medicaid Services (CMS) to withdraw the proposal, while AARP and other consumer groups have endorsed it.  Here’s why it should go forward.

The current payment method encourages health care providers to use higher-priced drugs.  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 drug’s average sales price (ASP) plus 6 percent (then reduced by a 2-percent sequestration cut imposed by the 2011 Budget Control Act).  As a result, doctors and hospitals make more money if they administer more expensive drugs.

Doctors and hospitals can sometimes choose between more and less expensive drugs.  Researchers at Memorial Sloan Kettering Cancer Center have identified treatment options for some common cancers that vary greatly in price but are medically equivalent.  In each case, choosing the more expensive option raises Medicare’s costs by more than $10,000 for a course of treatment, with correspondingly higher profits for doctors and hospitals.  Beneficiaries without supplemental (Medigap) coverage would face more than $2,000 in added cost-sharing — a big financial burden that may impede access to care.  Similarly large differences exist between high- and low-cost treatments for macular degeneration and other diseases.

Despite charges to the contrary, the demonstration wouldn’t cut total Medicare drug payments unless physicians responded to the changed incentives.  Phase 1 of the demonstration would pay providers the ASP plus 2.5 percent plus a flat amount of about $17 per dose.  For drugs with an ASP of about $480, this 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.  Physician specialties that use few Part B drugs (such as primary care) would gain revenue, while those that heavily use expensive drugs (such as oncologists and ophthalmologists) would lose revenue, although they’d still make a profit.  If physicians didn’t change their prescribing practices, total spending would be unchanged, CMS estimates.  But if they prescribed less expensive drugs, savings could result.

The demonstration wouldn’t reduce patients’ access to drugs.  The demonstration wouldn’t affect Medicare’s coverage of any drug; doctors could still prescribe the drugs with the greatest clinical benefits to their patients.  But it would remove the perverse incentives encouraging physicians to choose more expensive drugs even if they aren’t more effective.  Although CMS should carefully monitor the demonstration for unintended consequences, the new payment model offers the promise of reducing drug costs to Medicare and its beneficiaries while maintaining or improving the quality of care.