Government Intervention into Drug Pricing: Part 3

Herspiegel Blog Post

This is our third post examining government intervention into drug pricing. If you missed either of our previous posts, you can check them out here: First post and second post. In this post, we discuss facets of modern Medicare and review relevant policy involving the international indexing of drug prices.

Medicare Modernization Act

Enacted in 2003, the Medicare Modernization Act (MMA) vastly overhauled the Medicare system by establishing new Medicare Advantage plans and expanding employer participation. Importantly, the MMA also established Medicare Part D with a specific clause, aptly named the “noninterference” clause, prohibiting HHS from interfering in rebate or other drug pricing negotiations between manufactures, pharmacies, and prescription drug plan (PDP) sponsors. Today, ~56% of all lives covered under Medicare Part D are enrolled in stand alone PDPs.

The MMA simultaneously introduced the average sales price (ASP) +6% reimbursement system for drugs prescribed under Medicare Part B, Medicare’s “medical benefit.” This reimbursement system was designed to coincide with the financial liability providers incur when acquiring Part B drugs, since they generally buy the drug in advance and then request reimbursement after using the product. As a result, many fear that the ASP+6% model incentivizes prescribers to use higher-costing drugs to receive greater reimbursement.

Policy proposals seeking to leverage an international drug price index attempt to lower Medicare drug costs by enabling CMS to negotiate prices while referencing an established index. Below we discuss two such proposals: House Speaker Nancy Pelosi’s Lower Drug Costs Now Act (H.R. 3) and the CMS-issued advanced notice of proposed rulemaking (ANPRM) for an International Price Index (IPI).

Lower Drug Costs Now Act

House Speaker Pelosi’s proposed bill seeks to enable CMS to negotiate maximum prices for certain drugs, including insulin products and no less than twenty-five single source drugs contributing significantly to spending under Medicare. An average price index which includes Australia, Canada, France, Germany, Japan, and the United Kingdom acts as a reference where maximum CMS-negotiated prices cannot exceed 120% of said reference. The prices negotiated under this policy would apply across Medicare and even enable Medicare Advantage and Part D to negotiate even lower prices. Reaching beyond Medicare, manufacturers would be required to offer the prices negotiated by CMS in commercial markets as well.

ANPRM: International Pricing Index Model for Medicare Part B Drugs

The ANPRM for and IPI model put forth by CMS focuses more narrowly on Medicare Part B drugs, but also seeks to draw down costs using target prices derived from a multi-country average price of drug index across Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands, and the United Kingdom. Additionally, the ANPRM seeks to shift financial liability from physicians to manufacturers by eliminating the “buy and bill” model. Instead, drug manufacturers will adopt the risk associated with provider acquisition of the drugs and billing CMS. Alleviating providers from this financial responsibility removes the necessity for the ASP add-on reimbursement and allows for alternative incentive proposals. Given many providers’, such as cancer centers, reliance on buy-and-bill, this proposal may hurt hospitals and physicians at least as much as pharma and biotech manufacturers.

In our next post, we will conclude this series by providing our sentiments on the drug pricing policy landscape and the growing importance of cooperation across all stakeholders for the sustainable provision of pharmaceuticals.

-Luke Coburn & Michael Koskulics with help from Victor Cotton

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