Aiming to keep costs in check, Medicare is proposing to test different ways to pay for drugs — one of which is similar to CalPERs’ price-control effort for certain surgeries.
The federal government’s plan has drawn intense reaction and lobbying, and much of the debate centers on whether it gives too much power over drug prices to government regulators.
One of most controversial sections would set up a nationwide experiment, scheduled to start in 2017, to test a handful of ways to slow spending on drugs provided in doctor’s offices, clinics, hospitals and cancer infusion centers. The proposal would not affect most prescriptions patients get through their pharmacies.
One of the approaches included in the proposal would allow Medicare to earmark “therapeutically similar” drugs and set a benchmark, or “reference price,” that it would pay for all drugs in that category. That amount might be the cost of the drug the agency considers the most effective in the group, or some other measure. It’s aimed at narrowing the wide variability — often hundreds or thousands of dollars a year — in what is paid for similar drugs.
Such an approach is seen by some as government price setting, a method common in Europe that draws support in the U.S. from the left but has longstanding opposition from conservatives, many economists and pharmaceutical companies.
The drug 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.”
It is similar to 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. The agency halted the program after a patient won a legal challenge regarding its authority to do so.
In the private sector, some employers and insurers are using such pricing-control techniques, although the focus has been on surgical treatments or tests, not drugs.
The California Public Employees Retirement System (CalPERS), for example, 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 came not only as patients switched to lower-cost hospitals but also as more expensive hospitals lowered their prices.
Unlike the California surgery example, the Medicare proposal specifically bars providers from charging patients the difference in cost between any benchmark payment and a drug’s actual sales price.
Implementing a reference-price approach for drugs could be more complex than doing so for tests or procedures, as medications can have widely differing effects based on the genetic makeup of patients. Also, critics note that it would put Medicare — or some other group — in charge of determining which products are similar.
“The last thing I want to see is Centers for Medicare & 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.
Although details are scant in the proposal, Medicare says reference pricing would be applied only to some Part B drugs, not all.
Other aspects of Medicare’s proposal
The reference-pricing experiment is part of a larger proposed regulation issued in March, which the Obama administration said is needed to slow spending in Medicare’s Part B, which doubled since 2007 from $11 billion to $22 billion.
Another part of the regulation would change the formula Medicare Part B uses to reimburse doctors and hospitals when they provide chemotherapy and other drugs, and has drawn opposition from physician groups.
More than 1,300 comment letters were submitted about the proposal before the May 9 deadline.
“It’s a pretty explosive document: There’s a hot-button in it for everyone,” said Dan Mendelson, president of Avalere Health, a consulting firm in Washington. “The biggest thing is that it’s seen as a bow to the government setting prices for drugs.”
The Pharmaceutical Research and Manufacturers of America — the drugmakers’ trade group — submitted a 45-page comment letter citing a variety of objections to the proposal, from its scope to the methods like reference pricing that would be tested.
“PhRMA is disappointed that [Medicare] chose to … pursue imposition of policies for price regulation based on government value judgments,” the letter says.
Support for the proposal has come from AARP, which said it won’t affect patients’ access to medications and might even lower their costs, the Medicare Rights Center and the American Academy of Family Physicians, among other groups.
Health insurers, who blame rising drug prices for causing premiums to go up, have their own take.
Aetna said the proposal would “incentivize providers to choose less expensive drugs when they are able to do so.” America’s Health Insurance Plans, the industry’s lobbying arm, was more qualified. The proposal highlights “a fundamental concern about the affordability of prescription drugs,” AHIP said, but warned that it might result in shifting costs to other parts of Medicare.
Politics could play a large role in the shape of the final directive. Republicans have already introduced legislation to block the regulation if it were to be finalized.
Democrats are split, with 20 issuing a May 9 letter in support of the proposal, calling it “essential” to ensure Medicare beneficiaries get “the most cost effective, appropriate drugs.” But earlier, a letter signed by all Democrats on the powerful Senate Finance Committee strongly warned Medicare to hold off until it resolves their concerns.
Given the controversy, many observers say it’s hard to tell what the final version will look like. In recent weeks, Medicare’s chief medical officer, Patrick Conway, has sounded open to adjusting the overall proposal.
Revisions may be made, but it’s likely something of the broad regulation will remain intact, said Gottlieb. For his part, he would like to see reference pricing removed and the sheer size of the experiment scaled back.
“It’s a grab bag of policy prescriptions related to drug pricing. They threw in some good ideas and some very problematic ideas,” said Gottlieb.
This story was produced by Kaiser Health News, an editorially independent program of the Kaiser Family Foundation.