CMS Proposes Far-Reaching Pilot to Test Alternative Drug Payment Models Under Medicare Part B

March 10, 2016

By David C. Gibbons & Alan M. Kirschenbaum –

On March 8, 2016, CMS issued a proposed rule to test new models for payment of drugs and biologicals under Medicare Part B (“Proposed Rule”). Medicare Part B covers limited categories of drugs, including (1) those provided incident to a physician’s services that are usually not self-administered (e.g., injectables); (2) those administered in conjunction with an item of durable medical equipment covered under Part B (e.g., infusion pumps or nebulizers); and (3) specific types of drugs enumerated in the statute. The preamble explains that, while payments for drugs account for a relatively small proportion of total Part B expenditures, CMS made approximately $22 billion in payments for separately reimbursed drugs in 2015, a figure that is about double what was paid in 2007. Id. at 8.  

The statutory payment methodology for most drugs under Medicare Part B is the Average Sales Price (“ASP”) reported by the manufacturer plus six percent. The six percent add-on generates more revenue for more expensive products, and therefore, in CMS’s view, may incentivize the use of such products. Id. at 10. CMS proposes to test whether alternative drug payment designs will reduce Medicare drug expenditures while preserving or enhancing quality of care. Id. at 9. The proposed five-year pilot would be conducted under authority of Section 1115A of the Social Security Act, which authorizes CMS’s Center for Medicare and Medicaid Innovation to test innovative payment models to reduce program expenditures.

The Model includes two phases. In phase I, which would begin 60 days after publication of the final rule, all providers and suppliers in certain, randomly-selected geographic areas (primary care service areas, or PCSAs) would receive Part B drug payments under the current ASP + 6% methodology (the control group), while all providers and suppliers in other selected PCSAs would receive payment under an alternative methodology of ASP + 2.5% plus a flat fee of $16.80.   Id. at 43. The reduction in the add-on percentage would reduce the revenue benefit of more expensive drugs, while the flat fee would provide proportionately greater revenue for less expensive drugs. A CMS Fact Sheet provides the following example:   

Illustrative Example: Drug Payment under Current Policy and Proposed Medicare Part B Drug Payment Model

Average Sales Price (ASP) per Drug

Current Add On Payment Rate (6% ASP)

Proposed Add On Payment Rate (2.5% ASP + $16.80)

Current Add On Payment Rate as a Percentage of ASP

Proposed Add On Payment Rate as a Percentage of ASP





















Phase II, which would begin no earlier than January 1, 2017, would test the effect of four value-based pricing (“VBP”) methods: 

  1. Reference pricing, which sets a standard payment rate for a given drug based on a benchmark rate that has been set for a group of drugs. The benchmark rate would be set based on the average price for drugs in a group of either therapeutically-similar drugs, the most clinically effective drug in a group, or some other pricing threshold. Id. at 50-51.
  2. Indications-based pricing, which may be used when a drug is used for more than one indication, but where its effectiveness varies by indication. Such a drug would be reimbursed at a higher rate for indications for which it has demonstrated greater effectiveness and a lower rate for indications for which it is less effective. Id. at 52. Indication-based pricing would be used “where appropriately supported by published studies and reviews or evidence-based clinical practice guidelines . . .” Id.
  3. Outcomes-based risk-sharing agreements between CMS and manufacturers, under which the final price of a drug would be tied to clinical outcome targets among specific patients. Should a product not meet its agreed-upon outcomes targets, manufactures would be required to provide rebates, refunds, or other price adjustments. Id. Manufacturers themselves would provide outcome targets based on “competent and reliable scientific evidence.” Id. at 53.
  4. The reduction or elimination of patient cost-sharing obligations to provide incentives for the use of products determined to be of high-value. Id. at 54-55.

CMS also proposes to develop, for implementation in phase II, clinical decision support (CDS) tools consisting of “timely clinical information at the point of care” so that healthcare providers can access up-to-date scientific and medical evidence to inform treatment decisions, and claims data reports to provide feedback to providers and suppliers on their prescribing patterns. Id. at 58, 60-61.  

In order to robustly test the elements of the Model described above, CMS proposes to require the participation of all Part B providers and suppliers in every state except Maryland. Id. at 34-35. Geographic areas will be assigned to control or test arms of the Model according to Primary Care Service Area (“PCSA”). The 7,048 PCSAs in the U.S. (excluding Maryland) would be randomly assigned to one of four randomized groups that would test elements of phase I (ASP+6% versus ASP+2.5%+flat fee) and phase II (No VBP tools versus VBP tools) simultaneously. Id. at 15, 35.

In addition to comments regarding the proposed revised payment methodology, VBP strategies, and use of CDS tools, CMS is specifically soliciting comments on three other approaches: value-based purchasing agreements, reviving the Part B drug competitive acquisition program (which was discontinued in 2009), and episode-based or bundled pricing for Part B drugs. Comments are due no later than 5:00 p.m. on May 9, 2016.

Categories: Health Care |  Reimbursement