OVERVIEW:Trump's Part B drug price proposal is certainly controversial but it also reflects solid policymaking absent inthe proposal from Obama administration in 2016. We are skeptical that the linkage of Medicare prices to some international price index will survive to the final rule as it has strong political odor making it ripe for scary ads by PhaRMA. The use of third party vendors, however, can accomplish many of the same goals and, in effect, apply Part D negotiation (sans rebates) to Part B in a roundabout kind of way.The biggest take away from the proposal is that the once invincible PhaRMA lobby has some real challenges ahead of it in a rapidly changing political landscape, making the usual facile predictions of an outcome difficult to accept. |
On Thursday, President Trump announced plans to announce (in Washington, known as an Advanced Notice for Proposed Rulemaking) a new approach to paying for Medicare Part B drugs. Since then, you have no doubt read, or at least received, a few dozen notes saying, “it won’t ever happen” or “the Pharma lobby is too powerful; they’ll get Congress to stop it” or “it will end just like Obama’s Part B Demo.”
These arguments to us are mostly wishful thinking. That is not to say the broad outlines of a new policy in the ANPRM is exactly what will be implemented in 2020. Nor is it inaccurate to anticipate what happens next will be an epic battle between the pharmaceutical industry and the Trump administration. What we have trouble accepting is a facile dismissal when the landscape for pharma has shifted so dramatically over the last 12 to 18 months and the circumstances of the Trump proposal are vastly different from Obama’s Part B Demo.
Comparisons to Obama-era Part B Demo.
First, unlike the Part B Demo that was proposed by the Obama Administration in 2016, Trump’s initiative represents some serious policymaking. It is still in rough draft form, but the basic outlines are:
- CMS would introduce reference pricing by creating an International Pricing Index and linking it to Target Price for each of 27 Medicare Part B drugs and any new drugs that met certain criteria. This Target Price would be phased-in over five years.
- CMS would remove providers from the “buy and bill” practice by paying third party vendors the phased-in target price and the vendors would, in turn, negotiate with manufacturers for the drug’s acquisition price.
- Third party vendors could be GPOs, wholesalers, distributors, specialty pharmacies, hospitals, physicians practices, hospitals and Part D plan sponsors.
- Third party vendors would take title to, but not necessarily possession, of drugs and offer delivery mechanisms such as electronic ordering, frequent delivery and onsite stock replacement.
- Providers would still be paid an add-on fee but as a set payment amount. CMS will calculate the add-on payment in the absence of the model, before sequestration (6% of what would be ASP) and distribute to all providers participating in the model.
- The program will be implemented in half the U.S.
One of the hallmarks of serious policy is the time it took to develop and the advance signaling of change. Rushed policy changes are rarely successful. The Council of Economic Advisers released a white paper in February discussing disparities between U.S. and international drug prices and floated the idea of developing a mechanism to correct that. The President’s Blueprint to Lower Drug Prices also included mention of price disparities. Speeches by Secretary Alex Azar and CMS Administrator Seema Verma have included warnings of a policy shift as well.
Another hallmark of sound policy development is evidence that important stakeholders were asked to participate in its development. President Trump’s Blueprint was accompanied by a Request for Information to which PhaRMA provided a robust 130 page response. Their answer to the administration’s concerns about Part B prices was, in so many words, “hands off Part B.”
In contrast, the Part B Demo proposed by the Obama administration was accompanied by very few policy signals. While MedPAC, an adviser to Congress not the White House, had discussed changes to the Part B payment methodology and policy people have questioned the wisdom of linking payment to providers to list prices, there was little policy work done to support the Obama administration’s proposal.
Second, the Trump administration’s proposal for Part B drug prices avoids a number of Obama’s mistakes. Specifically, a central feature of the Obama Part B Demo was a reduction in the add-on payment from ASP plus 6 percent (4.3 percent after sequestration) to ASP plus 2.5 percent plus a flat fee of $16.80. This proposal would have significantly reduced compensation to providers, especially oncologists, rheumatologists and ophthalmologists.
Trump’s proposal calls for increasing the add-on payments from the post-sequester amount of 4.3 percent to 6 percent of what would be ASP absent the new proposed model. Most providers will be held harmless by the change. Some providers, mainly large research universities, who can negotiate drug acquisition costs on a case-by-case basis below the ASP level, may be negatively affected as they will lose that incremental margin. However, providers like community oncologists who led the opposition to the Part B Demo may see reimbursement rise as they rarely have the purchasing power to reduce acquisition costs below ASP.
Another distinguishing feature of Trump’s proposal is elimination of the “buy and bill” system for providers. The plan calls for using third party vendors to purchase drugs from manufacturers, hold title but not necessarily have possession, and distribute the drugs to providers. The expense associated with purchasing high cost Part B drugs for dispensing and billing later has been too much for small practices, leading to their acquisition by larger health systems.
The Trump administration is also focusing its initiative on a short list of 27 drugs, largely single source drugs and biologics, instead of all drugs paid for by the Part B benefit, thus limiting the impact. There are approximately 500 drugs that would have been affected by the Obama-era proposal, many of which were not and still don’t represent a significant portion or growth in the Medicare spend.
Lastly, the Obama administration's decision to drop a proposed rule, with little advance warning and even less ground work, forced the industry and other interested parties into combat model. Those forces mobilized, with community oncologists leading the charge, not to influence the proposal but to defeat it. The Trump administration has chosen to use the ANPRM with a comment period to try and build consensus among the disparate constituencies affected by the change.
International Pricing Index.
By far, the most controversial provision of the proposal is to link the prices Medicare will pay third party vendors to prices paid overseas. The approach fits squarely into the core philosophy of President Trump"s that the rest of the world takes economic advantage of the U.S.
According to a concurrently released report by HHS, reducing prices for certain Medicare Part B drugs will have a ($8B) impact on Medicare spend.
The administration proposes a five-year phase-in to mitigate the consequences.The phased-in approach is being estimated with $17 billion in savings over the five year duration of the initiative.
The approach is a big gamble by the Trump administration. They believe that manufacturers will do what they can to prevent cannibalizing their U.S. markets by seeking price increases overseas, or, if necessary, abandoning certain low reimbursement markets. What the administration is counting on is that manufacturers don’t abandon Medicare, avoiding access issues for beneficiaries.
In an interview on Friday, Azar makes this point. “They are going to walk away from the tens of millions of American seniors that basically fund all of their profit in the world? And they are going to walk away and play a game of chicken? I don’t think so.”
The approach is also unusual enough - importing European price controls - and political enough - to invite criticism and, in turn, modification. However, much of the same goals of reference pricing can be accomplished with strategic and tactical use of third party vendors.
The Vendors.
Probably the most intriguing part of the ANPRM – and we suspect the reason for the proposal – is the use of third party vendors that will negotiate with Part B manufacturers for the best price, take title to the drugs but not necessarily possession and “use innovative delivery models” to reduce provider risk and enhance customer service.
The ANPRM names as possible vendors Part D plan sponsors. The administration has made no secret of its interest in combining the Part B and Part D programs. However, to do so would require an act of Congress. Their model, however, may achieve the same result by permitting Part D plan sponsors who already negotiate with major drug manufacturers to add one more line to their book of business.
While we hate the “Amazon will take over health care” argument, there is no denying that the administration’s reference to “innovative delivery models” suggests an invitation to non-traditional approaches to logistics and supply. Amazon seems to be a natural respondent to that call.
Pharma v the world.
Making Trump’s path to victory a little easier than Obama’s is the waning influence of PhaRMA and other trade groups since the November 2016 election. Contrary to policy, in February Congress shifted liability for the cost of Part D drugs from plan sponsors to manufacturers for Medicare beneficiaries in the coverage gap. Since then, PhaRMA has attempted to reverse or revise the change but to no avail. It was a rare but consequential loss for a lobby many consider invincible.
So far at least, no one on Capitol Hill has come to PhaRMA’s defense. Senator Bill Cassidy (R-LA) tweeted support for the idea including the use of an International Pricing Index.
Complicating matters for PhaRMA is that one of their own, Alex Azar, former Eli Lily executive, is in charge of Trump’s drug policy. His expertise, unlike the non-profit and political backgrounds of his predecessors Sylvia Burwell and Kathleen Sebelius, makes him more equal to the task of taking on PhaRMA.
In comments to reporters, Azar says, “Judging by drug companies’ reaction to any changes around Part B, the implication is that any system that does not pay precisely average sales price plus 6 percent isn’t capable of sustaining innovation. Indeed, yesterday the drug industry labeled me un-American and a socialist for suggesting that this system has to change. These talking points are prima facie implausible -- they are also mathematically unbelievable, too,” Azar said.
Azar is supported in a seemly unqualified manner by his boss who is always spoiling for a fight and would like nothing more than to defeat the storied lobbying capabilities of PhARMA.
What is Next?
The administration is taking public comments on the ANPRM for 60 days. They plan to make a formal proposal in Spring 2019 with implementation in Spring 2020. It is an entirely reasonable schedule.
Call with questions. The administration is quickening the drug price reform pace so the more we talk, the better.
Emily Evans
Managing Director – Health Policy
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