Medicare Part B Drug Trends and Payment Dynamics
In 2021, Medicare spending for Part B drugs was $43 billion and Part B drug spending has grown 9% per year on average since 2009. These trends have come to the attention of The Medicare Payment Advisory Commission (MedPAC), an independent congressional agency established to advise the US congress on issues affecting the Medicare program.
MedPAC has noted in previous reports that the largest driver of drug spending growth in Part B is the average price of a Part B drug. These prices reflect the launch of newer high-priced products, post-launch price growth, and a shift in drug mix. As the baby boomer generation continues to age into Medicare, the absolute numbers of Medicare beneficiaries continue to grow which compounds the impact of Part B drug prices.
Medicare Part B drugs are currently reimbursed under the average sales price, or ASP methodology. In the current system, Medicare has limited tools to impact drug price as each Part B drug has its own specific ASP rate to which Medicare adds a standard 6% add-on payment rate (the 6% payment rate is subject to sequester reductions as are other Medicare payments). Given the lack of tools available to impact Part B drug prices, MedPAC has been exploring potential Medicare Part B drug payment policy options which would strike a balance between the need for innovative new therapies and affordability for Medicare beneficiaries and taxpayers.
MedPAC issued a series of proposed Medicare Part B payment policy reforms in 2023. While no current legislative changes are currently pending, the recommendations from MedPAC provide insight as to what potential future changes to Part B drug payment might look like.
Proposed Policy Options
To address the concerns noted about Part B drug price trends, MedPAC has developed three policy options which are detailed below. While these policies are simply recommendations at this point, biopharmaceutical manufacturers should be aware of what is being proposed and track any developments which might signal a shift from policy recommendation to actual legislation.
- Policy 1: apply a payment cap on Medicare’s payment of Part B accelerated approval drugs
- Policy 2: establish a single ASP-based reimbursement rate for groups of drugs and biologics with similar health effects
- Policy 3: reduce add-on payment for drugs and biologics paid ASP and eliminate the add-on payment for drugs paid wholesale acquisition cost, or WAC
Policy 1 is intended to address the uncertainty associated with the clinical benefit of accelerated approval drugs. In this case, MedPAC is proposing a payment cap based on the clinical benefit and cost of the drug as it relates to the standard of care. Once the drug’s clinical benefit is verified, payment would revert to current law. Details as to the actual payment cap rate have not been disclosed.
In Policy 2, MedPAC has proposed a single ASP based payment rate for drugs with “similar health effects.” In this scenario, each drug could remain in its own billing code and payment would be based on the volume-weighted ASP’s of all products in the reference group. Reference based pricing would initially be targeted to biosimilars and originator biologics, 505(b)(2) drugs and related brand products, and drugs for which reference pricing has been implemented or considered previously. The goal of this policy option would be to increase price competition among the target group of drugs.
Finally, Policy 3 would look to reduce add-on payments for “costly” Part B drugs. The approach would be to maintain the 6% add on for “lower-priced” Part B drugs while reducing payments for mid and high-priced Part B drugs. The alternative payment option proposed would be to offer the lessor of 6%, 3% plus $24, or a $220 flat payment. The policy would also eliminate WAC-based payments which are currently paid for drugs prior to the establishment of a brand specific ASP rate. The goal of this policy option is to improve financial incentives associated with Part B drug payment. Left unsaid is to how MedPAC would define price thresholds to clearly identify mid and high-priced Part B drugs.
Implications
As stated previously, the actual current business risk resulting from the Part B drug payment proposals is hypothetical at this point given their status as recommendations. However, the proposals do represent an important Medicare market trend which biopharmaceutical manufactures should have on their radar for monitoring purposes.
Manufacturers of drugs which are expected to have material utilization in Medicare Part B and have received an accelerated approval designation should be diligent in monitoring for potential changes in legislation. A cap on Medicare payment could potentially impact market uptake as buy & bill providers are unable to receive adequate payment to cover drug costs. This could in turn raise payer costs for some drugs as buy & bill providers direct Medicare patients to higher cost centers of care such as hospital outpatient sites.
For biosimilar and their reference brand manufacturers of drugs with Medicare Part B utilization, the option 2 policy which introduces reference pricing would be expected to have a material impact on their markets. Medicare payment rates would be beyond the control of a single manufacturer as their brand payment rates are subject to price actions taken by competitors in their reference groups. Projections of brand market demand could be complicated by a dynamic payment rate whose fluctuations are outside the control of one manufacturer.
Policy 3 would affect those manufacturers whose Part B drugs are identified as mid or high priced once those thresholds are established. As with the other reforms, this would potentially reduce Part B drug payment rates for mid and high-priced brands. For manufacturers of low-price drugs, the payment change could potentially lead to differences in net cost recovery by providers that would help shift demand to these agents.
Beyond the direct effects on Medicare payment, any new Medicare payment legislation may also have indirect spillover effects to commercial payment rates which would also need to be evaluated.
BluePath has executed multiple Medicare related projects for our clients. Our access to the CMS 100% claims Medicare database helps inform client tactics and strategies for this important segment of the US market.
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