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The Proposed Medicare Drug Rules & Senior Health

Author: Matthew Davis

The federal government is looking for a solution to the high and rising prescription drug prices that Medicare and seniors who use Medicare Part B pay. In 2015 the government's share of these costs – in other words, the taxpayers' share – was $20 billion. Medicare Part B pays for certain anti-cancer and respiratory drugs, as well as infusable and injectable drugs and biologics that patients receive in their doctors' offices or hospital outpatient departments.

Described by medical professionals as life-saving and life-changing, these drugs are paid for up front by doctors and hospitals, with Medicare reimbursing them for the average sale price plus 6%, a practice industry insiders call buy and bill. Patients also pay part of the cost, usually 20% of the Medicare-approved amount, after they meet a deductible, which is $166 in 2016. Under the existing system, Medicare officials say, doctors don't have enough reason to offer their patients the least-expensive effective treatment and may prescribe unnecessarily costly drugs instead, as doctors earn more by prescribing pricier drugs.

Let's take a look at the new proposal from the Centers for Medicare and Medicaid Services (CMS) that could lower Medicare's prescription drug spending and patients' costs. We'll also consider how it could affect seniors' health and how likely the changes are to become law. (For more, see Medicare 101: Do You Need All 4 Parts?)

The Proposal

Six new ways to pay for Part B prescription drugs are on the table. Medicare could require certain doctors and hospitals in different parts of the country to test them out over five years. One option would base Medicare's payments to drug companies on patient outcomes (CMS calls this risk sharing). Another would offer drug companies the same payment rate for all therapeutically similar drugs, a system called reference pricing. A third proposal would require patients to pay less for their share of drug costs than they do now.

A proposal to tell doctors how their prescribing patterns compare to those of other doctors could help them choose the best drugs for their patients. A fifth option, called indications-based pricing, would offer providers a higher reimbursement rate when a drug is prescribed to treat a condition for which it is highly clinically effective and a lower reimbursement rate when a drug is prescribed to treat a condition for which it is less clinically effective.

Finally, cutting the payment that providers currently receive for the Part B drugs they prescribe – from 6% of the average sales price to 2.5% plus a flat fee of $16.80 per drug – is a proposal intended to lower the incentive to prescribe pricier drugs. This change would reduce providers' reimbursements by $18.20 for every $1,000 in drug sales. Physicians would still be allowed to choose which drug they think is best for their patients under these proposals.

During the five-year testing period, CMS would collect data on prescribing patterns, drug delivery locations, hospital admissions and more to see whether Medicare Part B spending goes down and whether patients see the same or better results. There would be both experimental and control groups; CMS would decide which providers participate in each of the various proposed tests based on zip code.

Right now we're only talking about a proposed rule for proposed tests. The public can comment until May 9. Giving feedback on a proposed rule isn't like commenting on an online article, however. The opinions to which the government gives the most weight are not mere reactions from stakeholders but substantive analyses based on a sound understanding of economics and the regulatory process. Anyone who wants to submit a comment should research how to do it effectively.

None of the proposed tests will be effective until after the government weighs the responses and decides whether to modify or scrap any of the proposals. At the earliest, the reimbursement change would kick in 60 days after the rule is finalized, which will probably take until late 2016. The other five changes would not go into effect before January 1, 2017.

Potential Impact on Seniors' Health

CMS says that the purpose of the experiment is to improve quality of care and deliver better value for Medicare beneficiaries. Nevertheless, patients and doctors are worried that changes in the current system could prioritize saving money over giving patients the best treatment, especially those who are very sick and rely on expensive drugs, such as cancer drugs that can cost $100,000 or more per year. One concern is that some patients could wind up without access to pricier drugs, because independent physicians with smaller practices may not be able afford to offer them under the different reimbursement structure.

Another possible outcome is that some independent physicians would have to join a larger health system to make the math work. This shift could dramatically increase costs for both Medicare and patients in cases in which hospitals buy out the independent physicians, because Medicare reimburses hospitals much more than it reimburses doctors for the same services. (For example, The New York Times reports that for a heart ultrasound done in an independent physician's office, Medicare pays $189 and the patient pays about $38 (20% of $189). However, when that identical test is performed by a hospital, Medicare pays $453 and the patient pays at least $91 (20% of $453). If more and more independent physicians join large health networks, costs will increase for everyone, not just the government and Medicare patients. Private insurers also tend to have higher approved rates for hospital services.

Some patient advocates don't like the idea of basing reimbursements on effectiveness. They say that providers don't always know which drugs will be most effective for a particular patient, because women and minorities tend to be underrepresented in clinical trials. Payments based on clinical drug effectiveness might end up hurting some groups.

The proposal to reduce or eliminate prescription drug copayments doesn't sound like it would decrease Medicare spending, but it's designed to improve access to drugs for patients who struggle financially. If patients can more easily afford essential medications, we could see better health outcomes and overall cost savings. A program that reduces or eliminates providers' incentive to prescribe pricier drugs could actually help patients in cases in which the less-expensive option would be a better choice for their health and/or wallet.

The flip side, The New York Times editorial board points out, is that if doctors prescribe medications because they're less expensive – whether because Medicare encourages them to or because their patients ask for less expensive medicines – and those drugs are less effective, patients could incur higher costs overall when they need further treatment.

The proposed changes could also affect patients who don't use Medicare. The government accounts for more than 25% of U.S. healthcare spending, according to a report from the American Health Policy Institute, a nonpartisan nonprofit think tank. As the nation's largest payer, the federal government is able to significantly shape and move the health care market, the report states. NPR reports that private insurers and pharmacy benefit managers have been testing similar ideas.

Another possibility is that the changes could hurt the research and development of new drugs. If government policy discourages doctors from prescribing expensive drugs – expensive because of all the money that went into creating them – pharmaceutical and biotechnology companies may have less room in their budgets to innovate. The unseen cost will be that patients who would have been helped by drugs that might have been developed under a different incentive structure will be stuck with existing treatments.

Opponents also say that a key problem with the proposals is that doctors and patients will change their behaviors in response to the new rules, so it won't be possible to tell how effective the changes have been. For example, as the test programs will be implemented in some zip codes but not in others, large practices with several locations can send patients to the location where they think they'll get the best treatment – the one that isn't participating in Medicare's experiment.

For more details, see Medicare's fact sheet for beneficiaries on the proposed rule. You can also read the full text of the rule itself and submit comments at the Federal Register website.

Will the Bill Pass?

After May 9, when the public comment period ends, CMS will review the responses, expert opinions and existing data on reimbursement rules and patient outcomes to decide what the final rule will look like. Any time a government agency makes a final rule, it must conclude that its proposed solution will help accomplish the goals or solve the problems identified, the Federal Register website explains. It must also consider whether alternate solutions would be more effective or cost less.

If the proposals' critics are sufficiently persuasive, CMS could modify the proposals or scrap them altogether. More than 100 organizations representing patients, physicians and drug makers signed a March 4 letter asking the secretary of the Department of Health and Human Services to scrap the proposal. And a March 17 letter from more than 300 organizations asks House and Senate leaders to request that CMS withdraw its proposed rule. The letter says, in part, This type of initiative, implemented without sufficient stakeholder input, will adversely affect the care and treatment of Medicare patients with complex conditions, such as cancer, macular degeneration, hypertension, rheumatoid arthritis, Crohn's disease and ulcerative colitis, and primary immunodeficiency diseases.

When CMS proposed major changes to Medicare Part D in early 2014, there was enough opposition that the agency scrapped several of its proposals. The same thing could happen here, or the government could decide to proceed despite the opposition. (For more, see Medicare Part D Changes in Paying for Drugs.)

The Bottom Line

These six proposals from CMS are intended to address a real problem: making prescription drugs more affordable while maintaining or improving health outcomes. The question is whether they will really help to solve that problem. What might the unintended consequences be? (For more, see When You Can and Can't Delay Enrolling in Medicare and How to Avoid Penalties When Postponing Medicare.)

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