On March 11, 2016, the Centers for Medicare & Medicaid Services (CMS) published in the Federal Register a proposed rule that establishes a demonstration to test alternative drug payment approaches under the Medicare Part B program. CMS intends for the proposed demonstration to incentivize providers to prescribe the most effective drugs and to link payments with patient outcomes. 

Drugs covered and paid for under the Medicare Part B program generally fall into one of three categories: (1) drugs furnished incident to a physician’s services; (2) drugs administered via a covered item of durable medical equipment (DME); and (3) drugs specified by statute. Currently, most drugs covered under Part B are reimbursed at a rate equal to the average sales price (ASP) plus 6 percent. 

CMS proposed a five-year demonstration that would be mandatory and nationwide. It would be based in 7,048 Primary Care Service Areas (PCSAs) around the country. Maryland, as an all-payer state, would be excluded from the demonstration. The demonstration would have two phases. Phase I would begin on or after August 1, 2016, and phase II would begin on or after January 1, 2017. 

Phase I would encompass a control group and a separate model arm to begin the assessment of a new payment structure for drugs covered under Medicare Part B. Providers in PCSAs assigned to the control group would continue being paid for Medicare Part B drugs at the current ASP plus 6 percent rate. However, providers in PCSAs assigned to the alternative arm would be paid for Medicare Part B drugs at a rate equal to ASP plus 2.5 percent plus a flat fee drug payment, which initially would be $16.80 per drug per day administered. In the aggregate, phase one is expected to be budget neutral based on 2014 drug expenditures. Importantly, this does not mean that every provider would receive the same amount of reimbursement as in 2014. Rather, total drug payments as a whole should roughly approximate 2014 expenditures. 

Phase II would add value-based purchasing tools to the payment structures assessed under phase I. It would have four arms: (1) a control group receiving payments equal to ASP plus 6 percent; (2) a group receiving payments equal to ASP plus 6 percent plus the imposition of value-based purchasing tools ; (3) a group receiving ASP plus 2.5 percent plus the flat fee drug payment (initially set at $16.80 per drug per day administered); and (4) a group receiving ASP plus 2.5 percent plus the flat fee drug payment (initially set at $16.80 per drug per day) with value-based purchasing tools. Phase II would not be budget neutral. Rather, CMS strives to achieve savings in this phase. 

CMS is considering and soliciting comments on the following value-based purchasing tools:

• Reference pricing: Provide equal payments for therapeutically similar drug products. The benchmark rate could be set at the average price for the set of drugs, or at the price of the most clinically effective drug in the group, or based on some other consideration.
• Indications-based pricing: Payment could vary for a given drug based on its varying clinical effectiveness for different indications.
• Outcomes-based risk-sharing arrangements: Permit CMS to contract with manufacturers to link health outcomes with payment. The manufacturers would agree to provide rebates, refunds or price adjustments if the product does not meet clearly-defined targeted outcomes.
• Reducing or eliminating beneficiary co-payments: Co-pays could be reduced or eliminated for drugs that are determined to be high in value, so as to create more incentives for the use of such drugs.

CMS proposes to implement certain tools for specific HCPCS codes after soliciting public input by posting a proposal on CMS’ website. CMS proposes to exclude certain drugs from the demonstration, including ESRD drugs that are bundled into ESRD payments, blood and blood products, contractor-priced drugs, and influenza, pneumonia and hepatitis B vaccines. In addition, drugs infused with a covered item of DME would not be included in phase I of the demonstration, but would be included in phase II. There is some uncertainty as to whether DME-covered infusion drugs would be subject to ASP pricing in Phase II, or whether the base reimbursement (subject to value-based purchasing initiatives) would continue to be 95% of the average wholesale price as of October 1, 2003. 

Even though there is bipartisan support for controlling spending on prescription drugs, the proposed rule was met with skepticism from several Senators and Congressmen. In addition, it is already facing opposition from the pharmaceutical industry and an array of healthcare providers. Stakeholders may submit comments on the proposed rule until May 9, 2016. 

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