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Administration Drug Pricing Proposals Could Reduce Provider Payments

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As the Trump Administration moves forward with proposed policy changes to address high drug prices, a common theme is emerging: a number of the proposals have the potential to reduce Medicare reimbursement to hospitals and physicians.

In May, the Administration released a blueprint to lower drug prices and reduce out-of-pocket costs. Since then, the Department of Health and Human Services (HHS) has solicited feedback through a request for information (RFI) on potential policy options suggested in the blueprint. The comment period for feedback on the RFI closed in July. (See Baker Donelson's summary of the blueprint and RFI.)

Much of the Administration's focus is on reducing drug spending, rather than drug prices, particularly related to costs incurred by federal health care programs and beneficiaries. As a result, many of the proposals on the table would affect Medicare payments to health care providers.

HHS is proposing to address drug costs through several Medicare payment rules, including the 2019 hospital Outpatient Prospective Payment System (OPPS) proposed rule and the 2019 Medicare Physician Fee Schedule (MFS) proposed rule. Hospitals and other providers should consider submitting comments in response to these proposed rules to share their concerns about reductions in reimbursement, particularly those providers offering infusion services to treat conditions such as cancer, rheumatoid arthritis, and multiple sclerosis. Comments on the PFS proposed rule are due by September 10, 2018. Comments on the OPPS proposed rule are due by September 24, 2018.

Below is a summary of key proposals that could reduce Medicare payments to providers.

Competitive Acquisition Program

The blueprint discussed possible use of a Competitive Acquisition Program (CAP) in Medicare Part B as an "immediate action" the Administration plans to take that could reduce federal drug spending. The blueprint also solicited feedback on a series of questions related to how a CAP could reduce drug spending.

In the 2019 Outpatient Prospective Payment System (OPPS) proposed rule, published in the Federal Register on July 31, 2018, the Centers for Medicare and Medicaid Services (CMS) includes a new RFI dedicated to the CAP and requests feedback on whether CMS should test a CAP-like drug purchasing model using the CMS Innovation Center.  

Purchasing and paying for Medicare Part B drugs through a CAP could be a substantial change from the current model with potentially significant financial implications for providers. Specifically, CMS is considering testing a new payment model to address concerns that the current average sales price (ASP)-based payment methodology for Part B drugs incentivizes providers to use more expensive drugs than necessary. Medicare Part B pays physicians and most hospitals for separately payable Part B drugs at ASP plus six percent. Medicare pays certain hospitals participating in the 340B drug pricing program under the OPPS at ASP minus 22.5 percent. CMS is concerned that paying providers at ASP plus six percent could result in a provider choosing a more expensive drug when a cheaper alternative is available in order to receive a higher add-on payment that is based on a percentage of the higher drug cost. CMS is also concerned that the current payment rates do not take into account the effectiveness of a drug.

To address these concerns, CMS requests feedback on testing a CAP-like model that could allow for value-based arrangements to improve beneficiary access and quality of care, while reducing Medicare spending.

Congress initially provided CMS with the authority to implement a CAP in 2003, and CMS ran a voluntary CAP program for physicians from July 2006 to January 1, 2009, as an alternative to ASP-based drug reimbursement. CMS suspended the original CAP because of low physician enrollment and challenges negotiating better prices. In its June 2017 Report to Congress, the Medicare Payment and Advisory Commission (MedPAC) recommended the creation of a new CAP under Medicare Part B, called the Drug Value Program (DVP), that would include hospitals in addition to physicians.

CMS is asking for feedback on how to structure a CAP-like model, including whether it should be similar to the structure of the original CAP or more like MedPAC's DVP. The original CAP involved a vendor buying drugs from manufacturers at negotiated rates and shipping the drugs to physicians. Medicare paid the physicians for administration of the drugs and paid the vendor for the drugs. Under the DVP recommended by MedPAC, providers would continue purchasing drugs through current distribution channels, but at rates negotiated by DVP vendors.

CMS is also considering how the CAP-like model could include other payers, such as Medicare Advantage organizations, state Medicaid agencies, and Medicaid managed care organizations (MCOs). CMS also asks for feedback on whether certain providers should be excluded from the model and whether certain drugs and biologicals or drug classes should be excluded.

Moving drug purchasing and reimbursement away from the ASP-based system and into a CAP-like model could have the potential to reduce payments to providers, to the extent that CAP vendors are able to negotiate lower rates than the current ASPs. Hospitals and physicians may want to submit comments on how a CAP-like model would affect their drug purchasing and use, particularly if providers were to continue purchasing drugs under the model but were paid at reduced rates. 

Moving Drugs from Medicare Part B to Part D

The blueprint also noted that, as an immediate action, HHS would be sending a report to the President on whether lower prices on some Medicare Part B drugs could be negotiated for by Medicare Part D plans. In addition, HHS solicited feedback in the RFI on moving payment for Part B drugs into Part D as a possible future action. In particular, HHS asked about which drugs would be good candidates and the potential impact of moving drugs to Part D.

Currently, Medicare pays hospitals and physicians for most drugs administered in outpatient settings, such as infusion and injectable products, under Medicare Part B, whereas self-administered drugs dispensed by retail pharmacies are generally paid under Medicare Part D. Part B pays for drugs under an ASP-based methodology, whereas Part D plans negotiate drug prices with manufacturers. Moving high-cost drugs from Part B into Part D could reduce reimbursement to hospitals and physicians for these products, if Part D plans are able to negotiate prices below current ASP rates.

Since the Administration first floated these changes, stakeholders have expressed a number of concerns with moving drugs from Part B to Part D, particularly related to the impact on beneficiaries. For example, some have suggested that beneficiaries could see higher out-of-pocket costs for the same drug under Part D, as compared to Part B, because coinsurance rates can be higher in Part D than in Part B. Although many Part B beneficiaries have supplemental insurance that covers coinsurance costs, they do not have the same coverage under Part D. Others have also noted that a number of Part B beneficiaries do not have Part D coverage.

340B Drug Pricing Program Changes

The blueprint raised a number of questions related to the 340B drug pricing program and whether growth in the 340B program has increased drug prices. The 340B program requires drug manufacturers to sell outpatient drugs at discounted rates to certain public and non-profit hospitals that treat high volumes of low-income patients or are located in rural areas and other safety net providers that receive federal grant funding. Hospitals participating in the 340B program include large academic medical centers, public institutions, community hospitals, and small rural facilities serving remote locations.

The RFI accompanying the blueprint solicited feedback on whether changes to the 340B program could reduce drug prices, including changes to the rules governing which individuals may receive 340B-purchased drugs, which hospital facilities may use 340B drugs, and how providers may enter into contractual arrangements with pharmacies to dispense 340B drugs. In each of these cases, changes to these rules could limit the ability of hospitals and other providers from using 340B drugs, thereby reducing access to program savings. (See Baker Donelson's article on possible 340B program changes to reduce prices.)

Comments in response to the RFI were due by July 16, 2018. Providers noted that 340B is such a small share of the market, it cannot plausibly cause manufacturers to increase drug prices. On the other hand, drug manufacturers and others submitted comments encouraging the Administration to alter program rules in ways that would shrink the program and reduce hospital savings.

The Administration also addresses the 340B program in the 2019 OPPS proposed rule. CMS proposes to continue in 2019 payment cuts that first went into effect January 1, 2018, which reduced Part B drug reimbursements under the OPPS to certain 340B hospitals by nearly 30 percent, from ASP plus six percent to ASP minus 22.5 percent. CMS also proposes to extend the payment cuts further to cover 340B drugs administered in new off-campus departments that are subject to reduced site-neutral payments. CMS estimates that extending the payment cuts to these additional locations would save Medicare $48.5 million. (See Baker Donelson's Payment Matters article on the Medicare payment cuts to 340B hospitals.)

Hospitals participating in the 340B program should consider submitting comments expressing concern with Medicare's 340B payment policy. Reducing payments to 340B hospitals is counter to the purpose of the 340B program, which is to provide a financial benefit to safety net hospitals by allowing them to purchase drugs at reduced prices but continue to be paid by insurers, including Medicare, at standard rates. Hospitals should share feedback with CMS regarding the impact of the payment cuts on their ability to treat hospitals, including specific services that hospitals have cut as a result of the payment reduction.

Reductions to Add-On Payments for New Drugs

In a pair of recent proposed payment rules, CMS has signaled plans to reduce how much Medicare pays hospitals and physicians for new drugs that do not have ASP data when they first come on the market. In the 2019 Medicare Physician Fee Schedule (PFS) proposed rule, published in the Federal Register on July 27, 2018, Medicare proposed to reduce Part B drug payments to physicians for single-source drugs without ASP data from WAC plus six percent to WAC plus three percent. Similarly, in the 2019 OPPS proposed rule, CMS proposes to reduce Part B payments to hospitals for drugs without ASP data from WAC plus six percent to WAC plus three percent. In both cases, CMS notes concern that the six percent add-on payment could incentivize providers to use more expensive drugs than necessary to take advantage of a higher add-on payment.

In response to these proposals, providers may want to share examples of new drugs that have recently come to market and the exorbitant costs providers have incurred to purchase these products and ensure patients have access to the latest therapies. 

Stakeholder Implications

Providers that are currently paid by Medicare Part B for drugs administered in outpatient areas should closely monitor the Administration's proposals to address drug prices, as the proposals have the potential to significantly impact provider reimbursement. These policies are particularly relevant to the administration of high-cost infusion products, such as specialty treatments for cancer, rheumatoid arthritis, and multiple sclerosis, among other conditions. 

Of particular relevance to providers is one of the policy rationales put forward by the Administration to support its proposals to reduce drug costs. The Administration notes that, because beneficiary coinsurance obligations under Medicare Part B are based on a percentage of the Medicare payment amount for a drug, reducing drug reimbursement to providers would reduce out-of-pocket expenses for beneficiaries. However, while reducing the drug payment rate may lower beneficiary costs, the change would also lower reimbursements to providers, potentially impacting their ability to treat patients.

Hospitals and physicians may want to share these concerns and others by submitting comments in response to the RFI on testing a CAP-like model for drug purchasing under Part B, proposals related to altering 340B hospital drug payments, and proposed reimbursement changes for new drugs. Comments in response to the Medicare PFS proposed rule are due by September 10, 2018. Comments in response to the OPPS proposed rule are due by September 24, 2018. Baker Donelson policy advisors and attorneys are available to assist clients with the drafting of comments.

If you have questions regarding the content of this alert, please contact Jeff Davis, or any member of Baker Donelson's Health Law Group.

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