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Alternative, Value Based Payment Models Reach Part B Drugs

The Centers for Medicare & Medicaid Services (CMS) released a proposed rule on March 8, 2016 (published in the Federal Register on March 11, 2016) which could fundamentally change the way in which drugs administered in the physician office or hospital outpatient department settings (generally referred to here as Part B Drugs) are reimbursed by the Medicare program.

If finalized, the Proposed Rule would represent the most dramatic change in Part B Drug reimbursement since the enactment of the Medicare Modernization Act and has the potential to significantly redistribute and potentially reduce the $20 billion in reimbursement currently available to physicians and hospitals that furnish such drugs. Just as importantly, the Proposed Rule is yet another example of CMS’ commitment to placing value-based purchasing (VBP) tools and concepts at the forefront of agency priorities, and as a result, inserting VBP concepts into the physician/patient relationship. 

CMS believes the current reimbursement methodology for Part B Drugs – payment at average sales price (ASP) plus a statutorily mandated 6% add-on – incentivizes providers to use more expensive drugs. Under the Proposed Rule, CMS would roll out a new payment model, referred to as the Part B Drug Payment Model (or, the Model), under the auspices of the Center for Medicare and Medicaid Innovation (CMMI). The CMMI is authorized under Section 1115A of the Affordable Care Act to test innovative payment models to reduce Medicare program expenditures while preserving or enhancing the quality of care furnished to program beneficiaries. CMS is actively seeking industry input on virtually all aspects of the Proposed Rule, especially those involving the use of VBP tools. Manufacturers, providers, patient advocates and others impacted by the utilization of Part B Drugs should use this opportunity to share any concerns or thoughts with CMS. Comments on the Proposed Rule are due to the agency on or before May 9, 2016.

The proposed Part B Drug Payment Model consists of two separate “phases.” The first phase would focus solely on the methodology used to reimburse Part B Drugs (Phase I). The second phase would introduce various VBP tools that could complement or further impact reimbursement (Phase II). The entire Part B Drug Payment Model would be in effect for five years, with Phase I beginning in the fall of this year (or 60 days after the Proposed Rule is finalized). Phase II could begin no earlier than January 1, 2017, but likely would start in 2018 or even later because of the time needed to fully develop the VBP tools. Unlike other experiments with payment models, the Part B Drug Payment Model would not be voluntary: all providers and suppliers who furnish Part B Drugs included in the Model and located in specified geographic areas would be subject to one of the experimental payment methods being studied under the Model.

Participation in the Model

While most Part B Drugs would be included in the Model, the following categories of Part B Drugs would be explicitly excluded: (i) contractor-priced drugs, including drugs that do not appear on the quarterly national ASP price file; (ii) influenza, pneumococcal pneumonia, and hepatitis B vaccines paid for as a preventative benefit for Medicare beneficiaries; (iii) drugs infused with a covered item of durable medical equipment (DME) in Phase I; (iv) separately payable ESRD drugs; (v) blood and blood products; and (vi) drugs that otherwise would be included in the Model, but are reported by the FDA to be in short supply.

To eliminate bias, the Proposed Rule would apply the Model to all providers and suppliers furnishing a Part B Drug included in the Model (except those in Maryland, which operates its Medicare program under a unique all-payer model). Providers and suppliers would be randomly assigned to either a “control” arm or a “study” arm based on the Primary Care Service Area (PCSA) in which they are located. PCSAs are clusters of zip codes assembled by CMS to reflect patterns of Medicare Part B primary care services. Only those providers randomly assigned to the control arm would continue to receive reimbursement for Part B Drugs subject to the Model based on the current 106% ASP payment methodology. During Phase I of the Model, all providers assigned to the study or payment alternative arm of the Model would be reimbursed using a single new alternative payment methodology, but during Phase II, providers will be randomly assigned to different arms of the Model, some of which could incorporate VBP tools with either the current 106% ASP payment methodology, or alternative payment methods.

Phase I: Change in Reimbursement Methodology

Currently, Medicare pays for most Part B Drugs (typically drugs that are injected or intravenously infused) administered in a physician’s office or a hospital outpatient department at the rate of 106% ASP (effectively, 104.3% ASP under sequestration). CMS suggests in the Proposed Rule that the current reimbursement methodology “encourage[s] the use of more expensive drugs because the 6% add-on generates more revenue for more expensive drugs,” and points out that the current payment method does not evaluate clinical effectiveness or relative costs of other Part B Drugs that could be used to treat the patient.

Under Phase I of the Part B Drug Payment Model, for providers in the study arm of the Model, the add-on percentage will be significantly reduced, but supplemented with a flat fee payment per drug administration. Specifically, the Proposed Rule recommends a new reimbursement methodology of ASP with an add-on of 2.5% (effectively 0.86% under sequestration), plus a flat fee of $16.80 per drug per day administered during the first year of the five-year demonstration. The 2.5% add-on would remain constant during all five years of the Model, but the flat fee would be subject to adjustment each year based on the percentage change in the CPI-Medical Care for the most recent 12-month period.

The Proposed Rule provides an example of how the new payment methodology would work in practice:

In the Part B Drug Payment Model, application of the flat fee would result in the following: a primary care provider would receive $33.60 ($16.80 per drug) for two model drugs given during an office visit in addition to 2.5 percent of the ASP for each of the drugs. If another practitioner, such as a rheumatologist, saw the patient later in the day, and administered one model drug, that practitioner would receive $16.80 in addition to 2.5 percent of the ASP for the prescribed drug.

Although CMS expects revised payments for Part B Drugs reimbursed under the study arm of the Model to be budget neutral under Phase I, it acknowledges that “physician specialties that heavily utilize drug therapy would see a decrease in drug revenues while specialties that utilize fewer drugs like primary care would see an increase in drug revenue.”

CMS believes that the revised payment methodology should incentivize physicians to utilize higher value drugs, and that “changing the add-on amount from a percentage that applies in all circumstances to a lower percentage plus a flat fee that is limited could minimize the potential for underpayment or overpayment across the entire range of prices for Part B drugs.” However, indicating its continuing concern about the possible overuse of expensive drugs, CMS is specifically seeking comment on “whether additional measures should be taken to limit add-on amounts, especially for very low cost drugs, or whether an alternative approach to calculating the percent and flat fee should be considered, such as an additional one to three tiers of decreasing flat dollar amounts that would provide lower flat fees for very inexpensive drugs, while still maintaining overall budget neutrality.”

Phase II: Introduction of Value-Based Purchasing Tools

Citing the successful use of VBP tools in the Medicare Part D and commercial insurance sectors, CMS proposes to implement one or more similar strategies during Phase II of the Model. It should be noted that while the methodology and details surrounding implementation and operation of Phase I of the Model are set forth in great detail in the Proposed Rule, the details surrounding Phase II are much less concrete, offering significant comment opportunity for stakeholders. Although CMS clearly expects VBP tools to cut Medicare spending on Part B Drugs, it acknowledges it will need more information before it can project the potential savings from Phase II of the Model.

The Proposed Rule cites five main VBP tools that could be rolled out during Phase II of the Model: (i) reference pricing; (ii) indications-based pricing; (iii) outcomes-based risk-sharing agreements; (iv) discounting or eliminating the patient coinsurance amount; and (v) clinical decision making tools. The Proposed Rule is careful to point out that not all VBP tools would apply to all Part B Drugs, and that the parameters of a particular VBP tool for certain Healthcare Common Procedure Coding System (HCPCS) drug codes would only be finalized after soliciting public input on each proposal during a 30-day comment period. The Proposed Rule does set forth a “pre-appeal” mechanism by which providers, suppliers, and beneficiaries could dispute a pricing decision made during Phase II of the Model before the Part B Drug claim is submitted. The various VBP tools mentioned in the Proposed Rule are discussed further below.

Use of reference pricing. Providing equal payment for therapeutically similar drug products (or “reference pricing”) is one VBP tool that CMS proposes to roll out in Phase II of the Model. Under this tool, CMS would set a “benchmark based on the payment rate for the average price for drugs in a group of therapeutically similar drug products, the most clinically effective drug in the group, or another threshold that is specifically developed for such drug products, like a specified percentile of the current price distribution. Then, all drugs from the group would be paid based on the benchmark amount.” It is CMS’ belief that reference pricing could provide stronger incentives for providers to evaluate outcomes and cost together when determining treatment regimens, but stakeholders may consider this type of tool to more practically encourage “least costly alternative” prescribing behavior by providers. Unlike the situation under some commercial versions of reference pricing, CMS would prohibit balance billing of the beneficiary for any difference between the reference price and either the statutory payment amount or the cost for the applicable drug.

Use of indications-based pricing. Under this VBP tool, CMS proposes to vary reimbursement for a given drug based on its clinical effectiveness for different indications that are covered under existing Medicare authority and existing national and local coverage determinations. This approach is often referred to as “indications-based pricing,” since some drugs may be indicated for more than one condition, but also may be more effective in treating one condition than others for which it is indicated. CMS would use indications-based pricing “where appropriately supported by published studies and reviews or evidenced-based clinical practice guidelines, such as the [Institute for Clinical and Economic Review] reports, to more closely align drug payment with outcomes for a particular clinical indication.”

Outcomes-based pricing arrangements with manufacturers. Under this VBP tool, CMS would be allowed to enter into voluntary agreements with Part B Drug manufacturers to link health care outcomes with the ultimate price that Medicare pays for a Part B Drug. “Outcomes-based” contracts typically relate the final price of a drug to results achieved by specific patients based on a clearly defined outcome goal. The manufacturer would agree to provide rebates, refunds, or price adjustments if the product does not meet targeted outcomes based on agreed upon clinical parameters and data. CMS proposes that “manufacturers [would] provide all competent and reliable scientific evidence to create an accurate picture regarding clinical value for a specific drug; and […] provide outcome measures for any outcome-based risk-sharing pricing agreement.” The Proposed Rule fails to address the potential Best Price issues under the Medicaid Drug Rebate Program that could be associated with certain outcomes-based pricing arrangements.

Reduction or elimination of patient coinsurance. For “services deemed to be high in value,” CMS proposes to reduce beneficiary cost sharing (currently set at 20%) to some amount less than 20% or to eliminate the obligation completely. CMS clarifies that this proposal would not impose manufacturer-specific or National Drug Code (NDC)-specific cost sharing obligations on manufacturers, nor would it require individual providers to reduce or waive coinsurance. Rather, the proportion of the allowable amount that Medicare pays for a particular drug would increase, “while maintaining the total allowed charges for the drug.” The Proposed Rule does not define “high value.”

Development of clinical decision support tools. Though this VBP tool would not directly impact reimbursement of a Part B Drug, CMS nevertheless proposes to develop a two- component clinical decision support (CDS) tool that would give physicians access to educational information about Part B Drugs and provide a feedback loop that would compare a physician’s Part B Drug claims with local or national data. The educational component would “provide information on prescribing for specific indications that reflects up-to-date literature and consensus guidelines” via an online site or decision tree and links to evidence-based guidelines and updated drug safety information. The feedback component “could be utilized nationally or within specific geographic areas and could provide feedback on how an individual physician’s drug claim patterns compare with local or national data or even recommended guidelines” to encourage “mindful prescribing.” Use of the CDS tool would be completely voluntary, and each individual physician would determine how, or if, the information presented in the CDS tool is incorporated into their daily practice.

CMS is specifically seeking comment and input on its approach for identifying high-quality evidence and allowing for public feedback on the evidence basis; the online format of the CDS tool; the most effective method for physicians to access their reports on prescribing patterns; and identifying what content should be included (for example, claim payment/prescribing patterns, resource use, clinical and cost domains, patient clinical and demographic information, information about drug-drug and drug-disease interactions, and clinical support guidelines for these interactions, among other factors).

Even More Payment Reforms Could Be on the Horizon

CMS is seeking industry comment regarding additional payment reforms that could be added to the Part B Drug Payment Model in the future (but seemingly would not impact the proposed parameters of Phase I and Phase II of the Model as presented in the Proposed Rule). CMS wants to hear from stakeholders about the feasibility of incorporating VBP arrangements directly between CMS and drug manufacturers into the Model, such as a “try before you buy” rebate arrangement for patients that ultimately do not benefit from a particular drug therapy. CMS also wants to know whether there is sufficient interest among stakeholders to revive the Part B Drug Competitive Acquisition Program (CAP), an alternative to the ASP methodology for paying for Part B Drugs, which has been suspended since January 2009. Finally, CMS wants input from the industry regarding the use of episode-based or bundled payment methodologies that could allow for the exploration of an “initial framework that could promote greater incentives for improved patient outcomes and financial accountability for episodes of care surrounding particular courses of treatment using particular Part B drugs.”


Despite CMS’ concerns about significant increases in Part B Drug prices and Medicare expenditures for them, the current reimbursement methodology does allow providers unbridled flexibility to design treatment regimens for their Medicare patients. It seems inevitable that comments on the Proposed Rule will highlight concerns about physicians’ independent clinical judgment being overshadowed by efforts to control Medicare spending and raise questions about the potential impact of the Model on patient care.

Comments from patient advocacy groups, such as the National Council on Aging (NCOA), point out the need for balance in a VBP-focused reimbursement scheme.  From the NCOA’s perspective, taking into account the value of drug treatments and controlling Part B costs – which includes controlling beneficiary cost-sharing – can be a positive development, but any payment methodology that does so must also be calibrated to protect patient access to needed therapies at a time that is increasingly moving toward personalized medicine.

The Chairmen of all three of the Congressional Committees with jurisdiction over Medicare have already promised “aggressive oversight” and in a joint statement called the Proposed Rule “a proposed experiment on seniors [that] stands to limit access to the critical care the sickest Medicare beneficiaries rely on, as well as disrupt how health care providers serve patients in the future.”

Since most of the Part B Drugs that would be subject to the Proposed Rule are used to treat cancer, it is not surprising that comments from the Community Oncology Alliance (COA) and the American Society of Clinical Oncology (ASCO) have been equally harsh. COA has calledthe proposal “inappropriate, dangerous and perverse.” ASCO indicated that it is “inappropriate for CMS to manipulate choice of treatment for cancer patients using heavy-handed reimbursement techniques.”

CMS, on the other hand, argues that the proposed Model does not put dollars ahead of patients. Rather, it believes the Proposed Rule will facilitate physicians choosing medications for beneficiaries based on the best available evidence, the unique needs of the patient, and what best promotes high quality care.

Given CMS’ commitment to VBP, its demonstrated willingness to use the statutory authority available to the CMMI to test new payment methodologies, and its obvious awareness of the likely objections to such a major change in Part B Drug reimbursement, manufacturers, distributors, physicians, hospitals, and patient groups would be prudent to submit comments on the Proposed Rule that go beyond questioning the wisdom of the proposal. Commenters should detail the challenges they believe CMS will face in designing meaningful VBP tools and include constructive suggestions on ways to adjust Phase I of the proposed Model and flesh out Phase II so as to ensure safe and effective patient care without crippling a provider’s ability to stay in business.


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