Analysis: Hot buttons abound in Medicare plan

A broad proposal by Medicare to change the way it pays for some drugs has drawn intense reaction and lobbying, with much of the debate centered on whether federal regulators would have too much power over drug prices.

Among the controversial details is a nationwide experiment that would test various ways to slow spending on drugs provided in doctor’s offices, clinics, hospitals and cancer infusion centers. Scheduled to start in 2017, payments would be more closely linked to how well the drugs work – something that officials say drugmakers, insurers and benefit managers are already trying in the private sector.

One possibility would be for Medicare to earmark “therapeutically similar” medications and set a benchmark that it would pay for anything in that category. The reference price, for example, might be the cost of the drug the agency considers the most effective in the group. The goal would be to narrow the wide variability – often hundreds or thousands of dollars a year – in what is paid for similar drugs.

Such an approach is common in Europe but has long been fought in the United States by conservatives, many economists and pharmaceutical companies. Medicare says it would be applied only to some drugs. The proposal would not affect most prescriptions that patients get through their pharmacies.

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The industry’s “biggest nightmare is that the Obama administration decides to do something like reference pricing,” said Paul Heldman, an analyst with Heldman Simpson Partners. “Then the government would be making a decision that two products are similar and Medicare should reimburse at the rate of the lower-cost one.”

Administration officials say a range of actions is needed to slow spending in the Medicare Part B program, which has grown from $11 billion in 2007 to $22 billion in 2015. Their proposed regulation, which was released in March, also would change the Part B formula for reimbursing doctors and hospitals when they provide chemotherapy and related drugs.

“It’s a pretty explosive document,” said Dan Mendelson, president of the consulting firm Avalere Health. “There’s a hot button in it for everyone.”

And everyone has reacted accordingly. More than 1,300 comment letters were submitted by the deadline earlier this month.

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Organizations such as AARP and the American Academy of Family Physicians support the overall regulation. Other physician groups have spoken out against certain elements, such as the reimbursement change for chemotherapy drugs.

The trade group Pharmaceutical Research and Manufacturers of America submitted a 45-page comment letter objecting to everything from the proposal’s scope to officials’ pursuit of price regulation “based on government value judgments.” And health insurers, who blame rising drug prices for rising premiums, have various views.

Aetna said the proposal would “incentivize providers to choose less expensive drugs when they are able to do so,” but the industry’s lobbying arm, America’s Health Insurance Plans, warned that it might result in costs being shifted to other parts of Medicare.

The reference-pricing approach echoes a money-saving effort tried by Medicare in the late 1990s, when it paid only up to an amount equal to the “least costly alternative” for certain Part B drugs used to treat prostate cancer, respiratory diseases and kidney failure. That ended after a patient won a legal challenge involving Medicare’s authority to do so.

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In the private sector, some employers and insurers have applied similar strategies for surgical treatments or tests.

The California Public Employees’ Retirement System capped payments for joint-replacement surgeries at $30,000. Patients can elect to have their surgeries at any in-network hospital, but those who pick facilities that charge more than $30,000 must pay the full difference in cost out of their own pockets. Over time, CalPERS said, savings have come not only as patients have switched to lower-cost hospitals but also as more-expensive hospitals lowered their prices.

But implementing a reference-price approach for drugs could be more complex than for procedures, since medications can have widely differing effects based on patients’ genetic makeup. Moreover, unlike the California retirement system, Medicare would specifically bar providers from charging patients the difference in cost between any benchmark payment and a drug’s actual sales price.

The bottom line is that critics don’t want Medicare in charge of determining which products are similar. “The last thing I want to see is Centers for Medicare and Medicaid Services trying to make decisions on the relative value of drugs,” said Scott Gottlieb, a resident fellow at the conservative American Enterprise Institute who previously served as a deputy commissioner at the Food and Drug Administration and as a senior adviser to Medicare.

Politics could play a big role in shaping the ultimate provisions. Republicans have already introduced legislation to block the regulation if it were to be finalized. Democrats are split, with those on the powerful Senate Finance Committee asking Medicare to delay and 20 other lawmakers recently issuing a letter that endorsed the proposal and called it “essential” to ensure Medicare beneficiaries get “the most cost effective, appropriate drugs.”

“It’s a grab bag of policy prescriptions related to drug pricing,” Gottlieb said. The administration “threw in some good ideas and some very problematic ideas.”

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Kaiser Health News is a national health policy news service that is part of the nonpartisan Henry J. Kaiser Family Foundation.