Trump's plan to cut drug spending: Let Medicare pay the same prices as international buyers

Read Advisory Board's take: What providers need to know

President Trump in a speech Thursday at HHS unveiled a potential new Medicare Part B drug pricing model intended to bring provider reimbursements for such drugs in line with the lower prices paid in other countries.  

Proposal details

The Trump administration is considering proposing that CMSCenter for Medicare & Medicaid Innovation (CMMI) pilot an International Pricing Index (IPI) model in certain regions of the United States, which would represent 50% of the United States overall. Participation in the IPI model would be mandatory for physician practices and hospital outpatient departments in the selected regions.

Under the model, CMMI would test:

  • Allowing private-sector vendors to negotiate prices for drugs covered under Medicare Part B;
  • Bringing down Medicare payment amounts for certain Part B drugs to more closely align with international prices; and
  • Changing Medicare's payment formula for Part B drugs as a way to discourage providers from prescribing higher-priced drugs when there are lower-priced alternatives available.

The IPI model would apply to Medicare Part B drugs, which includes those administered in outpatient hospital departments and physician offices, such as more costly cancer and injectable treatments. It would not have an effect on the prices of most prescription drugs that consumers purchase at pharmacies, Politico reports. The model could include other drugs in the future, CMS said.

CMMI under the IPI model would set Medicare payments for certain Part B drugs based on an international price index, which would be benchmarked against drug prices in other countries. Currently, Medicare payments for Part B drugs are based on the average sale price (ASP) of a Part B drug, plus 6% of the ASP as an add-on payment. However, the ASP in some cases is higher than the international price for a drug. Under the IPI model, CMMI would use the international price index to determine Medicare payments for drugs that currently have an ASP higher than the international price. CMS estimates using the international price index in place of ASP would result in a 30% savings in total spending for Part B drugs subject to the change.

In addition, CMMI under the model would use private-sector vendors to supply certain Part B drugs to physician practices and hospital outpatient departments. Those private-sector vendors would be permitted to negotiate drug prices with drugmakers. The vendors then would bill Medicare for the drugs. This marks a change from the current process, under which providers and health systems often lead drug price negotiations.

CMMI under the model also would change the way it calculates provider payments for Part B drugs in an effort to discourage providers from prescribing higher-priced drugs when there are lower-priced alternatives available. Some observers have argued that Medicare's current method of paying providers ASP plus 6% creates an incentive for physicians and hospitals to use higher cost drugs so they receive higher Medicare payments. To address that issue, CMMI under the model would implement a flat add-on payment rate that equals 6% of historical drug costs, instead of tying the add-on to ASP. According to the Wall Street Journal, the model would not reduce overall Medicare payments to physicians and hospitals, because payments for some drugs would decrease, while payments for others would increase.

CMMI would phase in changes under the model over five years, beginning in 2020 and ending in 2025. In the first year, 80% of Part B drug payments would be based on current ASP and 20% would be based on the international price index. In the second year, those proportions would change to 60% and 40%, respectively.

HHS estimated that the changes would result in "overall savings for American taxpayers and patients projected to total $17.2 billion, with out-of-pocket savings potentially totaling $3.4 billion." For instance, HHS said a Part B beneficiary, "who receives an eye medicine that currently costs Medicare $1,800 a month but other countries just $300, would see their co-insurance drop from $4,400 a year to $900 a year after full implementation of the proposal."

CMS has not yet proposed rules to implement the initiatives, but the agency is accepting public comments on the proposals for the next 60 days.

Proposals receive mixed reactions

Trump said, "With the action I am unveiling today, the United States will finally begin to confront one of the most unfair practices ... that drives up the cost of medicine in the United States. We're taking aim at the global free-loading that forces American consumers to subsidize lower prices in foreign countries through higher prices in our country."

But the proposals got mixed responses from policymakers, as well as industry experts and stakeholders.

House Ways and Means Committee Chair Kevin Brady (R-Texas) and House Energy and Commerce Committee Chair Greg Walden (R-Ore.) in a joint statement said, "We commend [Trump] for remaining steadfast in his commitment and appreciate [HHS Secretary Alex Azar's] efforts to encourage lower drug costs for patients." However, Politico's "Pulse" reports that some Republicans have raised concerns about the proposal, comparing it to government price controls.

JC Scott—president and CEO of the Pharmaceutical Care Management Association, which represents pharmacy benefit managers (PBMs), applauded the proposal, saying, "Some of the highest priced drugs are found in Medicare Part B, where PBMs currently do not play any meaningful role. Promoting fair competition is the key to reducing costs for the program and Medicare beneficiaries."

But Rep. Richard Neal (D-Mass.), the ranking member on the Ways and Means Committee, said the proposals "likely won't result in lower prescription prices for seniors, and … may even increase drug costs for some Medicare beneficiaries."

Stephen Ubl, president of Pharmaceutical Research and Manufacturers of America (PhRMA), in a statement said, "The administration is imposing foreign price controls from countries with socialized health care systems that deny their citizens access and discourage innovation." He continued, "These proposals are to the detriment of American patients," adding, "The United States has a competitive marketplace that controls costs and provides patients with access to innovative medicines far earlier than in countries with price controls, and it's why we lead the world in drug discovery and development."

The Biotechnology Innovation Organization said, "The proposal continues a troubling trend towards undermining the Medicare Part B drug program," which "supports the sickest, most vulnerable Medicare patients and accounts for only a small fraction of all Medicare spending." The group added that it "will strongly oppose short-sighted and harmful changes to a program that is so vital to the health and well-being of our seniors."

Chip Kahn, president and CEO of the Federation of American Hospitals, said the proposal does not address the high list prices manufacturers set for drugs. "[A]ctions need to be focused on the real culprit—manufacturers' prices—not the frontline hospitals and physicians who administer and prescribe those medicines," he said, adding, "It is important that the plan aim at protecting patients and does not impede the freedom of physicians to prescribe the precise drug therapies their patients need" (Diamond, Politico, 10/25; Karlin-Smith/Diamond, Politico, 10/25; Swetlitz, STAT News, 10/25; Meyer/Dickson, Modern Healthcare, 10/25; Pear, New York Times, 10/25; McIntire, CQ News, 10/25 [subscription required]); HHS release, 10/25; Firth, MedPage Today, 10/25; Kodjak, "Shots," NPR, 10/25; Armour/Walker, Wall Street Journal, 10/25; CMS release, 10/25).

Advisory Board's take

Lindsay Conway, Managing Director, and Colin Gelbaugh, Senior Analyst

Here's our big takeaway for providers: Trump's proposed pricing model would reduce Medicare Part B reimbursements—although it appears that non-provider players, including wholesalers and drug manufacturers, would absorb the brunt of the cuts.

The proposed model would change provider reimbursements in three key ways:

  1. It would gradually lower Part B drug reimbursements by basing Medicare payments for certain drugs off of an international price index. This index would be based off of prices paid by other countries, where the administration estimated prices are about 44% lower;
  2. It would test paying Medicare Part B providers a fixed rate—a significant change from the current system, which reimburses Medicare Part B providers at a drug's average sales price plus 6%. Many, including the Trump administration, have argued the current system provides an incentive for physicians to prescribe higher cost drugs; and
  3. It would create so-called "model vendors" that would be tasked with negotiating Medicare Part B prices and billing Medicare—thus taking these responsibilities from providers.

It's important to note that, while Medicare Part B drugs account for a relatively small portion of total prescription drug purchases, these are typically high-cost drugs, accounting for about 25% of the typical health system's total prescription drug budget. This means any changes in reimbursement would be significant for providers—particularly as it comes on the heels of a series of reimbursement cuts to 340B-eligibile providers and questions about the future financial sustainability of HOPD infusion centers.

Five ways to control the flow of drug expenditures

Prescription drug expenditures are the fastest growing component of health care spending. And while reducing unwarranted prescribing variation is the single biggest improvement opportunity, there are several other near-term chances to reduce spending and grow revenues.

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