MedPAC Tackles Part B Drug Payments in Latest Report to Congress

July 07, 2015

McDermott+Consulting

The Medicare Payment Advisory Commission’s proposed options for adjusting the Average Sales Price plus 6 percent payment rate would incentivize use of lower cost drugs.

On June 15, 2015, the Medicare Payment Advisory Commission released its June Report to Congress, in which it discussed two Medicare Part B drug payment issues: the Average Sales Price + 6 percent payment for drugs under the Part B program, and payment under the 340B program. This article addresses the first issue; payment under the 340B program will be discussed in a subsequent installment.

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Since 2005, Medicare Part B has calculated the payment rate for most physician-administered drugs using the Average Sales Price (ASP) methodology, under which physicians are paid 106 percent of the ASP for the drugs they administer. The Centers for Medicare & Medicaid Services (CMS) calculates the payment rate by averaging the prices of all sales of a drug at the National Drug Code level, net of discounts and weighted by volume. To this rate, CMS adds 6 percent.

The payment rate under Medicare’s Outpatient Prospective Payment System (OPPS) is set at the hospital’s acquisition cost and adjusted to reflect costs incurred by hospitals in handling the drugs. Currently, Medicare also pays hospitals under the OPPS 106 percent of the ASP for separately payable drugs.

Since March 2013, Medicare payments have been reduced by 2 percent, reflecting the sequestration orders included in the Budget Control Act of 2011. This 2 percent reduction is applied to all Medicare claims, including claims for drugs, after determining coinsurance, deductible and any Medicare Secondary Payment adjustments. Sequestration has the effect of reducing the Medicare payment rate to 104.3 percent of ASP.

In the Medicare Payment Advisory Commission’s (MedPAC’s) view, the 6 percent add-on drives drug choice among providers: as the cost of drugs increases, the actual dollar amount of the 6 percent add-on increases as well, leading MedPAC to believe that providers may be incentivized to prescribe higher cost drugs to treat patients.

In its June Report to Congress, MedPAC examined two policy alternatives intended to address this perceived incentive: changing Medicare payment to 100 percent of ASP plus a $24 fee per administration day, or changing it to 102 percent of ASP plus a $14 fee per administration day. Both options would increase the payment for lower priced drugs and decrease the payment for higher cost drugs, which MedPAC believes would incentivize use of lower priced drugs. MedPAC notes, however, that because these policies include a “per administration” add-on, providers could shift patterns to more frequent dosing in order to maximize the add-on payment. MedPAC further notes that providers who rely on the 6 percent add-on to subsidize their drug purchases could find their ability to purchase drugs with a flat-fee add-on hindered.

The ASP + 6 percent payment rate has long been a target in budget discussions. With Medicare paying almost $13 billion annually to physicians for Part B drugs, and with that amount increasing every year, each percent decrease in the add-on payment could save $100 million or more per year. While any changes to the ASP + 6 percent rate would require congressional action, and the president’s budget has not recommended this specific change, the potential savings from the MedPAC proposal could be attractive during future budget discussions.

For more information, please contact Eric Zimmerman or John Warren.

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