The Centers for Medicare & Medicaid Services is making waves with some new ideas for paying for physician-administered drugs under Medicare Part B.

The proposal offers several ideas for strategies to implement value-based pricing in Part B – though the actual, immediate first step would simply test an alternative formula for the existing “buy-and-bill” model.

As a starting point, the demo proposes to test a formula of Average Sales Price plus 2.5% plus a flat fee ($16.80) and see whether physicians choose more cost-effective therapies than they do under the existing ASP+6% formula. But it is really the (proposed) second phase of the demo that has people taking notice: CMS is suggesting a whole list of additional models, including indication-specific pricing, risk-sharing agreements, co-pay waivers and reference pricing. ([A#14160308007])

Not surprisingly, stakeholders invested in the “buy and bill” model are pushing back. CMS has already received numerous letters urging it to drop the proposal, including ones from manufacturers and providers. ([A#00160314017])

The demo “is nothing more than a perverse experiment on cancer care provided to seniors,” the Community Oncology Alliance declared in a letter that captures the feedback.

Clearly not everyone is very comfortable with the idea of CMS getting creative in how it pays for prescription drugs.

And, just as clearly, those people were not the target audience for a March 8 forum on drug pricing sponsored by the Johns Hopkins Bloomberg School of Public Health. That event – which wrapped up just before CMS announced the Part B demo – looked at even more far-reaching proposals to address prescription drug costs.

And, rather than focus on Part B – the one aspect of prescription drug coverage where Medicare actually pays directly for pharmaceuticals (albeit to the provider, not the manufacturer) – the Hopkins event looked at Medicare and Medicaid spending overall.

The forum focused on “outside the box” proposals to tackle the issue -- and on CMS’ thinking about those ideas. The discussion included proposals, such as bundled payments in Part D, that make any changes to Part B look insignificant by comparison.

But it also included discussion on the barriers to those sweeping changes, reinforcing the reasons why CMS is focusing first on Part B. For pharmaceutical companies, the March 8 discussion is important both to understand where new policy ideas for controlling drug costs may lead in the years to come – and to recognize the limits inherent in any Administrative action to tackle the issue without radical changes to the health care system as a whole.

Bundled Payments In Part D

The symposium was part of a year-long centennial celebration of the Bloomberg School of Public Health, and included a series of presentations on different strategies to address the rising cost of prescription drugs and biologics.

The idea of bundled payments for Part D was put on the table at the Bloomberg School of Public Health forum by one of the academic thought leaders on drug pricing, Health Policy & Management Professor Gerard Anderson, PhD. Deputy Administrator Sean Cavanaugh spoke next, and essentially dismissed the notion that bundled payments for Part D are a viable near-term idea to control spending on prescription drugs.

The dynamics of that discussion are important from biopharma companies on both sides.

First, for the pharmaceutical industry, applying a bundled payment system analogous to the Part A hospital model to the outpatient setting would be a worst-case scenario – arguably even worse than a direct, central price-setting authority.

Hospitals moved into bundled payments in the 1980s, and biopharma companies essentially moved out of that sector as a result. The model essentially caps payments based on past utilization, leaving little-to-know room for higher priced therapies to enter – unless they are demonstrably cost effective to the hospital as purchaser.

Thus, Cavanaugh’s dismissal of the idea is important and reassuring – with the caveat that his position essentially amounts to picking the lower hanging fruit first.

Cavanaugh argued that there are better, less complicated ways to control drug costs. He described bundling as relatively easy to envision in Medicare Part B – where CMS pays providers directly – but as difficult in the Part D setting, where CMS can’t track the size of the federal payment for any given beneficiary, given the role of insurance intermediaries.

Cavanaugh made his comments just hours before CMS proposed the demonstration program for alternate payment systems for drugs covered by Medicare Part B. The proposal includes a request for comments on approaches to bundled payments under Part B.

In proposing Part D bundling, Anderson acknowledged all the challenges inherent in such a proposal: drug regimes change easily, prices increase for existing drugs, new drugs are approved, drug shortages occur and drugs go off patent. But he noted that hospitals are already managing bundled payments, and Medicare Part B has successful managed payment programs in joint replacement and oncology care. Furthermore, Anderson said, the economic and clinical rationale for Part D bundling should prompt CMS to consider it as a cost-saving measure.

“It’s not surprising that drugs are the last things to happen in these bundles. There are a lot of technical issues and a lot of challenges to overcome. But the economic rationale and the clinical rationale for including drugs in the bundled payments are so strong that I think this should be the next step in the bundled process,” he said. “I know it’s hard. But this is a solvable problem.”

Better Approaches For Part D

Cavanaugh, however, looks at the issue differently. He noted problems above and beyond those listed by Anderson – and argued that there are easier and better ways to accomplish the same goals by giving managed care plans more leverage in extracting pricing concessions.

Unlike other parts of Medicare, Cavanaugh noted, drugs and biologics are paid for under Part D with dollars from a variety of different sources: insurance premiums and deductibles/co-pays from the patient; reinsurance subsidies and catastrophic coverage from the federal government; and rebates and donut hole discounts from manufacturers. Unwinding those payments for an individual patient would be a complex – if not impossible – process.

Rather than wade into all of those complex issues, Cavanaugh pointed to two initiatives included in President Obama’s fiscal year 2017 budget: 1) increased risk-sharing among managed care plans, and 2) having the federal government negotiate prices for very high-cost drugs.

“If we are going to stick to this model where Part D plans are our agents…can we give them more tools so that they can actively manage the benefit?” Cavanaugh said. Noting that Part D plans frequently complain that CMS is hindering their ability to generate savings – especially in protected classes like antipsychotic drugs – he suggested there are a number of things CMS could do to give the plans more authority.

One key implication of Cavanaugh’s remarks is that the inability to create a Part D bundle also makes it harder to drive savings with a Part B bundle – since there are often alternative therapies covered by Part D.

Cavanaugh acknowledged that the impact of any Part B bundling models will be “limited” by the reality that some Part B drugs (like those for rheumatoid arthritis) have analogues in the Part D world. So long as there are only financial incentives to constrain costs on one side, he said, you can “create leakage.”

“We really don’t care about prescription drug costs, we care about the total cost of care to the patient,” Cavanaugh said. “As long as you are carving out pharmaceutical drugs on the Part D side, it’s still a significant flaw in the model. There’s no benefit for the physician or the patient to choose drugs wisely.”

Bundling is already taking place in the Part B setting for joint replacement and oncology care, and in Part A (in-patient), where hospitals are generally paid a lump sum based on a patient’s diagnosis, without regard to a specific drug or other individual treatment costs. Cavanaugh referred to drug coverage under Part A as the “ultimate bundle,” and a good example of why bundling works well to control costs and deliver quality patient care.

The in-patient setting “is the area where you don’t hear people complaining about prescription drug costs. They exist there, and it’s something that needs to be focused on, but when you look at hospital bundles…a lot of the problems go away, because you have strong incentives for providers who are really close to clinical care to be able to make informed decisions and choose drugs wisely.”

Hospitals don’t necessarily see it that way. Indeed, much of the pricing pushback against companies like Valeant Pharmaceuticals has been driven by hospitals that have been forced to absorb the outsize price increases for some older brands.

Cavanaugh ended his presentation by noting that a few drug companies have been exploring value-based agreements with health plans in response to a CMS request for volunteers to pilot different pricing models. He did not mention any manufacturers specifically, but Eli Lilly & Co. and Anthem Inc. recently signaled an interest in exploring different options. Also see "Lilly, Anthem Singing Same Tune On Value-Based Pricing, Communication Policy" - Pink Sheet, 9 February, 2016.

Even those deals have challenges, Cavanaugh said. “The problem with pursuing that is that a lot of these outcomes are things that happen over 3,5 or 6 years, when you see whether the beneficiary has really benefited clinically. Our current arrangement with the Part D plans is an annual settlement around what happens in that year. So we’re exploring – and we’ve had a number of proposals that have come in – if is there a way to integrate value-based purchasing that might have a longer time horizon, and different terms.”

Vaccine For Children Model?

Former FDA Principal Deputy Commissioner Joshua Sharfstein, MD, offered a different model to tackle specific disease areas where breakthrough therapies are coming to market – like in hepatitis C. His proposal: mimic the existing federal purchase-for-access model that has been successful in encouraging the use of pediatric vaccines,

The vaccine model is an existing public health approach to broad dispersal of effective treatments: Balancing greater price control for payers in exchange for a much larger guaranteed market for manufacturers. The vaccine approach is to treat more patients at a lower price, rather than fewer patients at a higher price, Sharfstein noted.

After leaving FDA in 2011, Sharfstein served as the Secretary of the Maryland Department of Health and Mental Hygiene. He is now associate dean for public health practice and training at Johns Hopkins.

The high launch prices for hepatitis C drugs have forced payers to restrict access, in some cases to the sickest of patients. Just 2.7% of Medicaid hepatitis C patients and 15% of patients covered by the Department of Veterans Affairs are receiving treatment with new therapies, according to one Hopkins presentation at the symposium.

Access issues are especially troublesome with an infectious disease like hepatitis, Sharfstein said. High launch prices restrict access of a needed drug to a few patients, the virus is never fully brought under control, and infections continue to escalate. That “vicious circle,” he said, undermines what otherwise could be a huge public health win.

Sharfstein pointed to the Vaccines for Children program as a model that could work for markets like hepatitis C. The government negotiates a bulk purchase of product each year and promotes widespread vaccine use. Vaccine manufacturers must negotiate prices with the federal government, but in exchange they get a guaranteed market and public health recommendations.

Similarly, private payers could go beyond traditional formulary management and be more active in promoting widespread, appropriate use of hepatitis C drugs, in exchange for pricing concessions. In the public sector, companies would give the government more control over prices in exchange for a guaranteed market and a major outreach campaign.

“Drug pricing itself may be too narrow a lens to look at this issues – we need to look at price and access at the same time,” Sharfstein said. “This isn’t just about the sticker price, it’s also about the access policies that both public and private payers have. If you bring those together, perhaps you are more likely to find a spot that could be in the end, better for the health of the population.”

The Vaccines for Children approach also has some political resonance: it is one of the few adopted legacy approaches to drug pricing from the Clinton health care reform effort of the early 1990s and was closely associated with the work of Hillary Clinton as head of that effort.

Value-Based Pricing For Medicaid

Challenges specific to the Medicaid program have made it difficult to strike value-based negotiations in areas like hepatitis C; there are significant legal hurdles and manufacturers also say the cost to implement the programs often far outweighs the savings. But it’s a clear area of interest for the Centers for Medicare & Medicaid Services, which is looking for volunteers for programs on value-based purchasing as one of a series of piloted approaches to address drug prices.Also see "“Frank” Talk On Drug Pricing: HHS Official Sees Value-Based Pricing As Area Of Common Interest" - Pink Sheet, 12 January, 2016.

During the Hopkins forum, CMS Division of Pharmacy Center for Medicaid and CHIP Services Director John Coster, PhD, acknowledged there are certain “structural impediments” to value-based pricing – like the need for safe harbors for CMS “best price” rules and anti-kickback provisions – but he believes those challenges can be addressed. “When does the industry have some skin the game with respect to pricing?” he asked. “When do they take on some of the risk of the pricing of these drugs?”

Coster says he hears from state Medicaid programs every day on escalating drug costs. “We have to find new and innovative ways to help states pay for drugs. We have to get more manufacturer skin in the game, and we have to build on the success the states have had with the rebate program and the supplemental rebates. And we have to find a way to expand the value-based health purchasing in Medicaid.”

CMS has encouraged hepatitis C drug manufacturers to consider a wider range of approaches to payment. In response to protests from state Medicaid agencies, CMS Acting Administrator Andy Slavitt wrote letters to manufacturers asking for solutions to allow for innovative pricing and payment programs to make the drugs more affordable. (Coster was the point of contact on those letters.)

At the same time those letters went out, CMS told state Medicaid agencies that they needed to stop using overly-restrictive coverage policies for hepatitis C drugs, such as limiting access to patients with advanced signs of liver disease. Instead, CMS encouraged states to use existing cost-control measures, like joining Medicaid purchasing pools to leverage supplemental rebates with manufacturers (the last time the agency resorted to such a directive was 20 years ago over state restrictions to HIV drugs.) ([A#2015500126])

Since then, CMS has been looking at how states have responded in terms of opening access. The arrival of the next wave of new hepatitis C drugs has helped: AbbVie Inc.’s Viekira Pak and more recently, Merck & Co. Inc.’s Zepatier. Merck has been especially aggressive in working with Medicaid purchasing pools to trade supplemental rebates for preferred formulary positions, to challenge Gilead Sciences Inc.’s Harvoni, which has the lion’s share of the market.

Market competition may be helping states to improve patient access to hepatitis C drugs, Coster said. But competition can only go so far: “the states have limited ability, as does Medicare Part D, to affect the launch prices of the drugs,” he said.

Expanded Medicaid purchasing pools might help. The Obama Administration’s HHS budget proposal for fiscal year 2017 includes a provision that would give CMS the authority to facilitate drug negotiations with manufacturers on behalf of the states for “high-cost drugs.”

“We have three good purchasing pools going on right now – we don’t run them; the supplemental rebate contractors do,” Coster said. “But we feel like if you combine the [managed care organization] Medicaid lives and the fee-for-service Medicaid lives, that would create a huge purchasing pool. The proposal “could help states leverage better prices with manufacturers by creating larger negotiating units,” he said, and save an estimated $5.8 billion over 10 years.

Thinking Outside The Box On Rx Pricing: From Vaccines To Part D Bundling

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