CMS Requests Comment on Potential International Pricing Index Model for Part B Drugs

McDermott Will & Emery

[co-author: John Warren]*

In Depth

The backdrop for this ANPRM is the American Patients First Blueprint, a plan to lower drug prices and reduce beneficiary out-of-pocket spending on drugs in the Medicare program, released by President Trump on May 11, 2018. The Blueprint builds upon a trio of documents released earlier in 2018 that together provide the framework for a multi-faceted approach that the administration believes can reduce spending on prescription drugs in the United States while continuing to encourage growth and innovation. In the Blueprint, President Trump attempts to determine why prescription drug pricing continues to rise, and questions why the United States pays more for prescription drugs than its international allies. The Blueprint directs the US Department of Health and Human Services (HHS) to develop demonstration projects to test innovative ways to encourage value-based care and lower drug prices.

The ANPRM’s proposals are preliminary, and it remains uncertain whether any will ultimately become implemented. If CMS determines to move forward with the IPI Model after reviewing public comments to the ANPRM, CMS would presumably publish a proposed rule that could modify the initially proposed IPI Model (discussed in-depth below). The proposed rule would offer the public another opportunity for comment, and CMS may ultimately determine not to finalize the proposals even after publishing a proposed rule. Alternatively, CMS could modify the proposals set forth in the proposed rule before it becomes finalized. In sum, public responses to the ANPRM and any subsequent proposed rule, as well as various political and regulatory considerations, have the potential to impact whether or how its proposals become implemented.

If the IPI Model were finalized as initially proposed, participating physicians, hospital outpatient departments and entities that CMS may decide to include following review of public comments (collectively, Participants) would no longer purchase and bill Medicare for Part B drugs and biologicals. Instead, they would enroll with “model vendors” to obtain Part B drugs and biologicals that they administer to patients. Medicare would continue to pay Participants for the administration of the drug and would pay an additional “add-on” payment for drugs and biologicals furnished to beneficiaries, but the add-on payment amount would be intended only to cover lost revenue and limited administrative costs. Model vendors would enroll with Medicare as suppliers and negotiate contracts with manufacturers to purchase drugs and biologicals to distribute to Participants, and Participants would hold distribution contracts with model vendors. Under the IPI Model, Medicare payment rates for included Part B drugs and biologicals would be adjusted using an indexing formula, such that domestic Medicare payment rates would more closely match international prices for each Part B drug or biological covered by the model.

Model Vendors

The model contemplates that commercial entities such as GPOs, wholesalers, distributors, specialty pharmacies, individual or groups of physicians and hospitals, manufacturers, Part D sponsors and/or other entities would be eligible to enroll as model vendors. These model vendors would negotiate the acquisition prices for drugs and biologicals and take title of the drugs and biologicals, but they would not be required to take physical possession of the products. Model vendors would enroll Participants and establish mechanisms to receive compensation from Participants for their services. Model vendors would enroll in Medicare in a manner similar to other Medicare suppliers. The model vendors would submit claims to Medicare for included drugs distributed to Participants and furnished to Medicare beneficiaries. Periodically, CMS would ensure that payment to model vendors for administered drugs was substantiated by the Participant-submitted claims. CMS intends to select three or more model vendors, each of which would be required to be able to work with all Participants regardless of geographic location, so that Participants have several options and model vendors compete on the basis of customer service and cost.

Model Participants, Selected Geographies and Compensation

Model participants would include all physician practices and hospital outpatient departments that furnished the model’s included drugs in the selected model geographic locations. CMS is seeking comments on whether to include in the model durable medical equipment (DME) suppliers, Ambulatory Surgical Centers (ASCs), or other Part B providers and suppliers that furnish the included drugs. Medicare anticipates that the spending on Part B drugs and biologicals in selected geographic areas would reflect 50 percent of Medicare Part B spending on separately payable Part B drugs. CMS is considering a randomized design with randomization of geographic areas to intervention and comparison groups. CMS is considering Core Based Statistical Areas (CBSAs) as the primary geographic unit of analysis in the model; however, CMS is also considering aggregations of CBSAs, such as metropolitan statistical areas or combined statistical areas, as alternative approaches.

Under the model, Participants would continue to be paid for drug administration services and receive an additional “add-on” payment to help cover the costs of drug ordering, storage and handling, and other costs associated with furnishing these drugs to Medicare beneficiaries. The add-on payment is proposed as a set amount, paid either per encounter or per month for an administered drug; the payment amount would not vary based on the payment amount for the drug itself. CMS contemplates calculating the add-on payment amount by each class of drug, physician specialty or physician practice (or hospital). The final payment amount would be calculated annually based on 6 percent of ASP revenue that model participants would have garnered without sequestration in the most recent year of claims data.

In other words, it appears that CMS is proposing to use the most recent year of available claims data to calculate the total amount of add-on payments a Participant would have received over the course of a year under the standard payment model absent sequestration (ASP plus 6 percent), and to divide that amount by 12 (if CMS moves forward with a per-month payment structure) or the anticipated number of patient encounters (if CMS moves forward with an per-encounter payment structure), to calculate a per-month or per-encounter add-on payment rate for Participants. CMS acknowledged in the ANPRM that total model payments to Participants would vary based on utilization under an encounter-based model, and CMS intends to monitor drug utilization carefully throughout the model “to ensure beneficiary access to drugs is not compromised.”

Included Drugs and Biologicals

As proposed, the model would initially cover single source drugs and biologicals (including biosimilars) administered incident to a physician’s services. CMS explained that it selected these categories of drugs because they encompass most of Medicare’s Part B drug spending (approximately 84 percent, or $23.6 billion, based on 2016 data). CMS provided a few examples of included drugs, such as cancer drugs and adjunct therapy for cancer and related conditions, biologicals used for the treatment of rheumatoid arthritis and other immune mediated conditions, and drugs used to treat macular degeneration. For purposes of the model, CMS stated that it would also include HCPCS codes that contain only products with a single manufacturer, even if they are multiple source drugs. Notably, CMS intends to broaden the scope of included drugs beginning in year three of the model.

CMS also stated that it is considering excluding (1) drugs that are identified by the US Food and Drug Administration (FDA) to be in short supply, and (2) drugs paid under miscellaneous or “not otherwise classified” (NOC) codes, such as J3490, because of the operational complexity of identifying whether drugs paid under the NOC codes are included model drugs. 

Payment Methodology

CMS is considering testing an alternative payment rate for included drugs based on international prices, except where the ASP is lower. Medicare payment for separately payable Part B drugs is typically based on ASP of a given drug, plus 6 percent of the ASP as an add-on payment. For the IPI Model, CMS proposes to calculate the model payment to model vendors for included drugs through a multi-step process that considers the “average international price” in certain countries for each Part B drug included in the model, the volume of included drugs reimbursed by Medicare, and an unspecified “factor” that would “more closely align Medicare payment with international prices.” More specifically:  

  • CMS would calculate an average international price for each Part B drug included in the model based on a standard unit that is comparable to that in the drug HCPCS code.
  • CMS would then calculate the ratio of Medicare spending using ASP prices for all Part B drugs included in the model to estimated spending using international prices for the same number and set of drugs by multiplying Part B volumes by the ASP prices and then by the international prices. The resulting ratio of Medicare spending under ASP versus Medicare spending under the international prices holding volume and mix of drugs constant would represent the IPI.
  • CMS would also establish the model target price for each drug by multiplying the IPI by a factor that would more closely align Medicare payment with international prices, and then multiplying that revised index (IPI adjusted for spending reduction) by the international price for each included drug. CMS would calibrate the revised index to account for any drugs with ASP below the target price.

CMS proposes to phase-in the target price over the five years of the model, as a blend of ASP and the target price. For each calculation, if ASP is lower than the target price for an included drug, CMS proposes that the model would set the payment amount to the ASP for that drug. As with current Part B drug payments, CMS stated that it would plan to update the model payment amount for each drug periodically based on new ASP and international pricing data.

Interaction with Other Federal Programs 

CMS described several potential interactions with other federal programs in the ANPRM and seeks comment on how to avoid unintended consequences arising from such interactions, listing potential impacts on (1) manufacturer’s best price and resulting increase Medicaid rebates, (2) the average manufacturer price, and (3) the 340B program. Interestingly, CMS only acknowledges the potential for an impact on 340B ceiling price calculations and does not address the lost opportunity for 340B purchasing or the potential conflict with the group purchasing arrangement prohibition.


Recent experience suggests that sweeping administrative changes to Part B drug reimbursement will be met with fierce public opposition that may ultimately defeat implementation. As recently as March 2016, CMS proposed a demonstration model that would have effected significant changes to Medicare reimbursement for Part B drugs. The model was withdrawn prior to finalization in response to widespread concerns relating to the model’s impact on Part B drug accessibility and adverse implications for industry stakeholders, among other concerns. At this time, it is unclear whether any of the ANPRM’s proposals will ultimately be implemented, considering their potential sweeping implications. However, the ANPRM and statements from President Trump and Secretary Alex Azar on October 25, 2018, suggest robust political interest in the implementation of the ANPRM’s proposals.

Although the ANPRM proposes only general frameworks and solicits comments that indicate that even these basic frameworks may shift, the ANPRM raises a variety of potential implications, unintended consequences and concerns for industry stakeholders and policy makers to consider. From a general financial standpoint, a reduction in Medicare reimbursement for Part B drugs and biologicals furnished by model participants could unintentionally require a counterbalancing of prices for drugs and biologicals not purchased and furnished as part of the model. The ANPRM provides an opportunity for manufacturers, providers, GPOs and other interested parties to explain to policy makers the variety of adverse unintended consequences that could flow from the model’s implementation, while at the same time signaling that industry stakeholders may need to engage in robust strategic planning to successfully navigate implementation of the IPI Model.

The model makes a number of presumptions about pricing behaviors in both domestic and international markets that are untested. While many have studied prices in the international drug market, information about those international markets is still incomplete. For instance, it is unclear if the prices set under a single-payer system can or should be compared to prices set under a multi-payer system.

Beyond pricing implications outside of the model, the model would generate a variety of compliance considerations for manufacturers and model vendors. The ANPRM suggests drug and biological manufacturers may be required to report international drug sale information on a quarterly basis, although the specific requirements for these reports are yet to be determined. Model vendors would be required to enroll in Medicare as suppliers and presumably meet the myriad compliance requirements and risks associated with Medicare enrollment and billing Federal Health Care Programs for Designated Health Services (e.g., direct liability under the federal Anti-Kickback Statute, Stark Law, False Claims Act, and other federal fraud and abuse statutes). The ANPRM indicates that CMS would regularly ensure that payment to model vendors is substantiated by physician- and hospital-submitted claims, drawing scrutiny to model vendor tracking system and record accuracy.

The IPI Model also has significant implications for the 340B Program. First, because the IPI Model removes Medicare payments to hospitals for Part B drugs subject to the IPI Model, it removes the opportunity for hospitals to generate a substantial portion of 340B revenue previously generated from purchasing and furnishing such drugs. Second, because the 340B Program statutory prohibition on group purchasing arrangements applies to “obtaining” drugs (not purchasing drugs) through any arrangement where prices are negotiated for more entities than just the 340B participating hospital, HHS could interpret the IPI Model as creating a group purchasing arrangement for Part B drugs. If this were to occur, hospitals required to participate in the IPI Model and subject to the 340B Program prohibition on obtaining covered outpatient drugs through a group purchasing arrangement could be forced to terminate participation in the 340B Program. As noted above, CMS only acknowledges the potential for an impact on 340B ceiling price calculations and does not address the lost opportunity for 340B purchasing or the potential conflict with the group purchasing arrangement prohibition.

Appendix A

The ANPRM has requested comments on the following:

Model Concept Design
CMS seeks feedback on:
  • What limitations would be in place on the entities that could participate as vendors (e.g., pharmacies, manufacturers, providers themselves)?
  • Which countries should be included in calculating an international pricing index?
  • How frequently should international data be updated?
  • What should be the schedule for phasing in the spending target?
  • Should CMS introduce health care provider bonuses to incentivize reductions in cost or utilization relative to a benchmark?

Model Vendors

  • Agreements between the vendors and physicians/hospitals would establish the terms of their arrangements and would include appropriate guardrails to protect all parties, including beneficiaries and the Medicare program. CMS seeks feedback on whether CMS should be a party to and/or regulate these agreements, and whether the agreements should specify obligations to ensure the physical safety and integrity of the included drugs until they are administered to an included beneficiary; how drug disposition would be handled; and data sharing methods, confidentiality requirements and potentially other requirements.
  • CMS is interested in ways to minimize any potential concerns that could arise from allowing a broader set of entities to be vendors, and how health care providers operating as vendors might be able to operate in all geographic areas included in the model. CMS seeks input on the types of entities that would be allowed to be model vendors, the potential for perverse incentives that could be introduced by potentially allowing health care providers to be model vendors and/or allowing model vendors to charge health care providers for distribution-related activities, and whether there should be guardrails in place to prevent perverse incentives.
  • CMS seeks feedback on options for model vendor payment, including whether payment should include an administration fee from CMS and whether vendors’ agreements with physicians and hospitals could include provisions for delivery fees and other vendor costs.
  • CMS invites public comment on the factors that would be necessary to allow CMS to identify entities that would most likely perform the responsibilities of a model vendor efficiently and effectively with minimal start-up time.
  • CMS seeks information about the types of entities that could serve as national vendors for the model. Should CMS require model vendors to enroll any included health care provider? If included physicians and hospitals could be model vendors, should they be required to be vendors for other health care providers, and should they have to operate on a national basis? Should any vendor be required to provide services on a national basis?
  • CMS also seeks public comment on potential guardrails that would be appropriate if manufacturers and/or health care providers could serve as model vendors. Also, should CMS receive shared savings based on the difference between a model vendor’s negotiated price and CMS’s payment amount? If so, how would CMS operationalize this shared savings approach?
  • What should be the potential responsibilities of model vendors and model participants (including physicians, hospitals, and potentially other providers and suppliers) under the model? Specifically, are there ways that vendors and model participants could collaborate to enhance quality and reduce costs?
  • What would be the ability of the potential types of entities that could be model vendors to negotiate for drug prices that would be at or below the IPI Model payment? Would certain types of entities have advantages or face additional challenges?
  • Are there processes that model vendors could use to increase their price negotiation leverage with manufacturers and lower their potential loss exposure without increasing burdens on beneficiaries, physicians and hospitals?
  • Are there unsurmountable challenges related to physicians and hospitals paying for distribution costs, and to continuing to collect beneficiary cost-sharing, including billing supplemental insurers?
  • Should physicians and hospitals receive bad debt payments if beneficiaries fail to satisfy cost-sharing obligations?
  • Is there a need for the model to include billing and dispute resolution support, and if so, what should such support include?
  • Should CMS pay the model vendors, or should providers pay the model vendors for the responsibilities associated with taking title to drugs and distributing drugs? What incentives are established if CMS pays the model vendors?
  • What should be the reasons for excluding entities from serving as a model vendor or terminating a model vendor agreement, as well as appropriate conflict of interest requirements?
  • Should the role for the model vendors include entering into value-based payment arrangements (for example, indication-based pricing or outcomes-based agreements)? And if so, should there be requirements around these arrangements?

Model Participants, Compensation and Selected Geographic Areas

CMS welcomes input from stakeholders on the potential approach for defining model participants, selecting geographic areas and calculating an alternative to the ASP add-on for the IPI Model. Specifically, CMS would like to receive information on which alternative add-on option is preferable and how the specific payment methodology might be designed. For example:

  • The exclusion of certain types of physician practices and/or hospital outpatient department (HOPDs) from the model. For example, should CMS consider excluding small physician practices/HOPDs (e.g., those with three or fewer physicians) from the model, or establish a low-volume threshold that would exclude those physician practices and HOPDs that fall below the threshold from participating in the model? How could CMS analyze an appropriate threshold?
  • The inclusion of additional Part B providers and suppliers that furnish and bill for any of the model’s included drugs, as well as the inclusion of providers that are paid on a cost basis, such as PPS-exempt cancer hospitals, children’s hospitals or critical access hospitals.
  • The potential approach to selecting geographic areas for the intervention and comparison groups in the model. Are there particular regions of the country that would need adjustments or exclusions from the model (for example, rural areas)?
  • How should CMS operationalize the model for large provider networks that cover some regions that are included and some that are excluded?
  • Should class of drugs, physician specialty or physician practice determine the payment amount? Are there other characteristics that should determine the alternative add-on payment amount?
  • How should a per-month alternative add-on payment be determined? How and how often should a beneficiary panel size be determined?
  • Should a bonus pool be included in the model? If so, how should the model participant bonus pool be constructed to meet the goals of the model to incentivize the use of lower-cost drugs and clinically appropriate utilization? How could a bonus pool be constructed to best protect and enhance quality under the model? How should CMS handle variable low-volume estimates and missing data values when assessing performance for purposes of a bonus pool?
  • The potential phase-in of an alternate provider compensation. Should CMS phase-in a change from percentage-based add-on payments to set payment amounts, or should set payment amounts be implemented in year one of the potential IPI Model?
  • How should CMS implement an administrative process to account for beneficiary cost-sharing for drugs that is collected by model participants?

Included Drugs

CMS seeks information on the following:

  • Whether the data that CMS uses to determine the inclusion of drugs and biologicals should be limited to claims from the physician’s office and hospital outpatient department settings, or whether other settings should be included.
  • The drugs to include in the model. Specifically, CMS seeks information on how to incorporate multiple source drugs.
  • Whether to include Part B drugs in all settings in which they are separately payable, or only in certain settings.
  • Whether quarterly updates for HCPCS codes included in the model are feasible. Feedback from the perspective of potential model participants and vendors is especially encouraged.
  • The best way to include new drugs in the model as they become available.
  • Whether to determine inclusion of drugs based on on-label (FDA approved) indications only, or whether CMS should consider on-label and off-label use (if supported by clinical guidelines and/or compendia).
  • CMS seeks comment as to whether aspects of mandatory participation would require physicians and hospitals to have an agreement with a single vendor or would require physicians and hospitals to obtain all drugs included in the model via a single vendor.

Model Payment Methodology for Vendor-Supplied Drugs

  • CMS is interested in better understanding the extent to which existing data sources for international sales completely capture drug information in every international market that CMS is considering for inclusion in its payment methodology and how private market drug sales are included in countries that provide drugs through public insurance.
  • CMS seeks comment on the potential use of existing data sources and new data sources to establish the IPI and the target price.
  • CMS seeks comment on whether to examine the international pricing data and recalculate the IPI and target prices on a quarterly, annual or other basis. CMS also seeks feedback on the mechanism for reporting of international sales, and on any additional requirements that would be necessary to ensure a feasible process to collect valid international sales information for the countries that would be included in the IPI. CMS also seeks comment on ways to ensure confidentiality of reporting of international drug pricing to CMS.
  • CMS seeks comment on the countries included in its analysis to establish the IPI, target price and model payment amounts.
  • CMS seeks comment on options for calculating the model payment for new drugs that may not yet have international sales.

CMS welcomes input from stakeholders on the potential approach for establishing model payments for included drugs based on international pricing. For example:

  • What sources of international pricing data capture drug information for the international markets that should be included in the payment methodology?
  • Are there particular data sources to establish payment amounts based on international pricing that would best support this effort?
  • How should private market drug sales included in countries that provide drugs through public insurance be included? How should CMS protect manufacturer-reported international pricing information?
  • What is the appropriate frequency for updating the international pricing information that CMS uses in calculating the Part B payment under the model?
  • How should manufacturers report international pricing information? Are there specific issues with data reporting processes that stakeholders would like CMS to consider, especially mechanisms that could reduce burden?
  • How should CMS define “manufacturer” to ensure that all relevant entities that sell single source drug products, biologics, biosimilars and, if applicable, multiple source drugs report under the model?
  • Are there areas of concern in data collection and reporting that could lead to inaccurate price calculations?
  • Which countries should be included in CMS’s international price index calculations? Should the countries vary? What characteristics should CMS consider to analyze these countries?
  • Are there specific considerations in the comparison of international and ASP prices that CMS should address?
  • How should CMS standardize data collection and reporting? What should be the target reduction to ASP payment (i.e., target price), and what should be the schedule for phasing down to the target savings amount?
  • How would such a change in payment policy affect incentives in the market? How could using international reference pricing affect innovation incentives in the biopharmaceutical market?

Potential Foreign Market Considerations

CMS welcomes input from stakeholders on the potential considerations related to foreign markets and the potential model payment approach that would rely on international sales data. For example:

  • What foreign market considerations should CMS consider in developing the potential IPI Model?
  • How should CMS monitor for changes in foreign markets that could affect the IPI Model?
  • What are ways to address changes in foreign sales that could affect model payment calculations?

Beneficiary Impact and Model Monitoring

  • CMS invites public feedback on the appropriate beneficiary outcomes to monitor and how to monitor and measure such outcomes, as well as patient experience, in a way that minimizes burden on included health care providers and beneficiaries.

Interaction with Other Federal Programs

  • CMS seeks comment on how to avoid unintended consequences from the interaction of the IPI Model with other federal programs.
  • CMS seeks public comment on how manufacturers would respond to these factors as they relate to model vendors and Medicaid drug rebates.
  • Authority for implementing innovative payment and quality models under 1115A of the Act does not completely include Title XIX waiver authority, and thus, such waiver authority does not extend to the Medicaid Drug Rebate Program, which is authorized under Title XIX at section 1927 of the Act. CMS welcomes public feedback, including from State Medicaid programs, on this issue.

Quality Measures

  • CMS seeks information on the categories and types of quality measures CMS can incorporate in the model that are targeted and judicious, while still capturing key indicators of patient experience, access and medication management. CMS welcomes recommendations for specific measures.

Model Evaluation

  • CMS seeks input on the evaluation approach to examine the IPI Model’s impact on Medicare spending and quality of care, including potential alternatives.

Potential Impacts of Implementing the IPI Model

  • The model may affect AMP, ASP, best price and 340B pricing for these affected drugs, reducing both reimbursements as well as rebates. CMS seeks comment on whether it should exempt prices offered under the model from AMP and best price calculations.

*This On The Subject was co-authored by John Warren, Senior Director, McDermott+Consulting.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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