WASHINGTON — Should there be a cap on Medicare’s Part B drug budget? That was one of the options that members of the Medicare Payment Assessment Commission (MedPAC) mentioned here Thursday in a discussion of pricing alternatives.
“I think we have to lay out options that are going to slow the escalation of drug costs: a general cap would be one way to do that and effectively challenge manufacturers to get much more aggressive about how they think about pricing going forward,” said commission member Warner Thomas, MBA, of Ochsner Health System, in New Orleans. “So I would like to see that considered.”
Another idea would be to cap the budget with a certain range, “and we could look at how much savings that could generate for the program,” he continued. “If we have a cap in there on what the price increase [for various drugs] would be, my guess is we will slow that trend of spending overall.”
Thomas was responding to a presentation by MedPAC staff on two alternative ways to price drugs in the Medicare program: reference pricing and binding arbitration. In 2017 — the most recent year for which figures were available — Medicare spent about $32 billion on drugs reimbursed under Part B; these were mostly injectable or IV drugs administered in a physician’s office. Under the current system, Medicare reimburses physicians an amount equal to the drug’s average sales price (ASP) plus an additional 6% to cover overhead, including drug storage.
Under the reference pricing model outlined by MedPAC principal policy analyst Nancy Ray, payers set a maximum payment rate for a group of drugs with similar health effects, based on the minimum, median, or other point along the range of prices within the drug group. If the provider and beneficiary decide to use a drug costing more than the reference price, the beneficiary pays the difference through higher cost-sharing than usual. This system provides an incentive to choose a lower-priced alternative, while still maintaining access to care, Ray said, adding that a literature review suggests such a system lowers drug prices and reduces spending by payers.
There are two possible approaches to implementing reference pricing, which is used by most European countries as well as Japan and Australia, Ray said. One approach is to use prices from the payer’s own drug pricing data, while the other approach involves using reference pricing based on what other countries pay for the drugs. Medicare actually used a reference pricing model from 1995 to 2000 but dropped it after it was challenged in court, she said, adding that evidence showed the pricing plan did reduce costs for taxpayers and beneficiaries.
The binding arbitration model (known as “baseball arbitration”) could be used for products with limited competition that exceed a specified cost threshold, explained Kim Neuman, also a MedPAC principal policy analyst. Under this model, the Secretary of Health and Human Services could request binding arbitration, which would be conducted by a neutral arbiter or an arbitration panel chosen by a nonpartisan government agency.
Both the secretary and the manufacturer would submit their price offers to the arbiter along with supporting documentation, which could include factors such as the drug’s comparative effectiveness, prices of existing treatments, and affordability. The arbiter would then pick one of the offers. The manufacturer of the product in question would be required to enter arbitration and abide by the decision as a condition of Medicare payment.
Like reference pricing, this model also has the advantage of potentially lowering prices for beneficiaries and taxpayers, although some people may raise concerns about access to drugs if manufacturers decide not to participate in arbitration, which would mean Medicare couldn’t cover the drug. However, “the Medicare’s market size and arbitration design elements would provide strong incentives” for participation, Neuman said.
Commission member Jonathan Perlin, MD, PhD, of HCA Healthcare in Nashville, raised the issue of cross-subsidization — the possibility that if Medicare forced a drugmaker to lower its drug price for Medicare beneficiaries, it would raise the price for other payers. “I think your point is a valid one,” said MedPAC chair Francis Crosson, MD, a retired pediatrician from California. “That’s an issue Congress would have to take up.”
Kathy Buto, a commissioner and consultant from Arlington, Virginia, wondered what would be done about the drug’s price while arbitration was going on. “In Germany, the manufacturer sets the price until the process is played out, and that process can take up to 12 months,” Ray responded.
Buto also asked for more information on the estimated cost impact to Medicare under each method. “if we don’t think it’s significant, there might be easier ways to slow the growth of spending on drugs, or more straightforward ways,” she said. “Both of these [proposals] involve infrastructures that don’t exist today.”
Commission member Paul Ginsburg, PhD, chair of health policy studies at the Brookings Institution, a left-leaning think tank here, said binding arbitration “is potentially useful in [Medicare] parts B, D, and A for similar reasons across the board,” especially because Medicare itself is a very interested party in the negotiations, so it might be good to have a neutral arbiter.
With the reference pricing option, “there is some real danger in treating similar drugs for payment purposes as equivalent for effectiveness and side effects, so I want to be clear there’s an ability to provide appropriate treatment,” said Buto. Although there is limited information on outcomes in this area, one extreme example is New Zealand, “where the country established the lowest statin rate as the rate it would pay and cholesterol levels increased in the population,” she said.
“Reference pricing is going to reduce [research and development] on incremental innovation,” she added. “Some people think that’s a good thing; I don’t.”
The commission did not take any vote on the drug pricing proposals; commission staff will continue working on the issue and it may appear in MedPAC’s June report, a spokesman said.