Drug Pricing Reform and the Biden Administration
Today, the Center for American Progress (CAP), a moderate think tank aligned with the Democratic Party, released an outline of several drug pricing reform strategies that a theoretical Biden Administration could undertake without Congress. The proposal essentially rehashes ideas that have been floated in the past by the Trump (pass-through of Part D rebates) and Obama (reform of Part B drug payment) administrations. Notably, it does not include government negotiation of prescription drug prices in Medicare Part D, a zombie policy reform idea that refuses to die, no matter how many times the Congressional Budget Office points out that it is unlikely to work without establishing a restrictive national formulary or other price cap.
What I will be interested to see is pharmaceutical manufacturers’ and providers’ approach to policy from here on out. Knowing what they know now, would manufacturers have been willing to take the 2016 Obama Medicare Part B proposal in exchange for resolving the issue and not having to worry about 4+ years of uncertainty, potentially resulting in a policy even more drastic? Are providers more willing to entertain the model in the face of growing Medicaid eligibility and rates of uninsurance?
Of the three policies outlined below, the treatment of “spread pricing” with regards to medical loss ratio (MLR) calculations is the proposal that intrigues me the most. This is probably the cleanest administrative proposal (i.e. least likely to be challenged in court or become politically radioactive). And for better or for worse, pharmacy benefit managers (PBMs), who would stand to be the biggest “losers” under the proposal, have less public sympathy than manufacturers and health plans.
Let’s take a deeper dive:
Revive the Obama Administration’s proposal to reduce Medicare payment for Part B prescription drugs. In 2016, the Obama Administration proposed to lower Medicare Part B payment rates for physician-administered (i.e. medical benefit) drugs from 106% of average sales price (ASP, or “ASP+6%”) to 102.5% of ASP, plus a flat administrative fee. A second part of the proposal would introduce utilization management into the Medicare fee-for-service program. The proposal was unpopular with just about everyone, including Democrats in Congress, and was abandoned before the end of the year.
The Obama proposal would need some adjustments before it could be rolled out again. At a minimum, the issue of sequestration (by which Medicare payments are reduced across the board by approximately 1.7%) would need to be addressed and accounted for in the model. Sequestration was in effect when the proposal was initially released, and it’s impact would have had the effect of reducing the lower payments to close to acquisition cost. Sequestration has been suspended through the end of 2020, but is scheduled to take effect again in 2021. That circle needs to be squared.
Another issue is the way the Obama proposal was designed: it would assign physician practices into groups by zip-codes, not metro areas. It would be relatively easy for a large physician practice with multiple locations to triage patients towards locations that were either in or out of the model to maximize revenue.
It would be interesting to see, now that international index pricing is on the table, whether pharmaceutical manufacturers would be more willing to engage the administration on something like this rather than a more drastic overhaul. It is clear some sort of prescription drug pricing is coming down the pike, and the industry may prefer to cut their losses in order to get something slightly more favorable.
Implement Reference Pricing in Medicare Part D. This suggestion was interesting for me, mainly because the examples that were cited in the report used “reference pricing” in a way that is different that what most people probably thought when they read the sentence. Recently, reference pricing has referred to capping prescription drug prices at a level tied to the prices other countries paid.
However, CAP cites two studies showing the budgetary impact of therapeutic reference pricing, in which plans limit payment to the cost of a preferred (less expensive) therapy within a class with multiple options. The other therapies are still available to patients, but the patient is responsible for paying the difference in price between the preferred and non-preferred options. The two studies cited showed cost savings with no decline in utilization.
This is not the reference pricing we have been discussing recently. In fact, this is pretty similar to what Part D plans do already with tiered formularies, where they steer beneficiaries to preferred options with lower cost-sharing. It is not clear to me how much of an opportunity the reference pricing cited in the CAP report offers over what Part D plan sponsors are currently doing. This also only works in therapeutic classes with multiple options that have similar therapeutic outcomes.
Rebate Pass-Through. The proposal also reinvigorates the idea of requiring rebate pass-through in Part D. The paper acknowledges that this would likely reduce out-of-pocket costs for beneficiaries taking high-cost drugs, but also lead to higher-premiums. I quibble with the rhetorical *hand waving* with this issue: we need to figure out what the potential magnitude of the premium increases would be before we can dismiss the increase as insignificant. That’s not to say that we can’t solve the problem – the Trump Administration initially proposed to “phase in” the resulting premium increases over several years through increased premium subsidies – but I am concerned that people may assume this is a policy choice with few trade-offs and I haven’t seen proof of that.
Exempt Spread Pricing from the Definition of Medical Expenses for Medical Loss Ratio (MLR) Purposes. “Spread pricing” is when a PBM charges a health plan more for a prescription than the PBM pays the pharmacy, with the PBM keeping the difference. This proposal would discourage that by prohibiting health plans from treating the “spread” as a medical expense in their medical loss ratio (MLR) calculations. Fewer medical expenses can decrease the plan’s MLR and can lead to rebates at the end of the plan year. The proposal notes that this practice is already banned in Medicaid managed care plans, and Massachusetts has implemented a similar policy for commercial health plans.
In theory, this reform encourages plans and PBMs to shift to a model where plans pay PBMs a fixed administrative fee per-prescription, so the PBM nets the same revenue regardless of the price of the underlying drug. This then removes any incentive that may exist for the PBM to prefer higher-cost drugs in order to maximize revenue.
As I stated at the top of the post, this proposal intrigues me the most out of all those included in the proposal. Unless the government gets buy-in from manufacturers and providers, any Part B payment reform is likely to be immediately challenged in court. The Part D rebate pass-through issue leads to increased premiums in just about any scenario and there are few politicians willing to take an increase in Medicare premiums right before beneficiaries (aka voters) head to the polls. But spread pricing seems to be an issue that could slip in: the administration has clear authority to define MLR expenses and it targets PBMs, even less popular than manufacturers or health plans.
