Shafrin in AIS Health: New Medicare Pricing Proposal Could Pose Long-Term Concerns

In the most recent Radar on Specialty Pharmacy, Senior Research Economist Jason Shafrin addresses the Trump Administration’s proposed changes to the International Pricing Index, and how these changes might impact future drug development and innovation.

The complete article, including Dr. Shafrin’s quotes, can be found below.


ANPRM for Part B Stands to Impact More Than Just Pharma
AIS Health
by Angela Maas

As the Trump administration continues to take steps toward bringing down spending on prescription drugs, the most recent HHS proposal has prompted the loudest pushback from the pharma industry. Unveiled Oct. 25 in an Advanced Notice of Proposed Rulemaking (ANPRM), the three-pronged effort that’s focused on Medicare Part B would bring payments for those drugs closer to what other countries pay for these medications, revive a program that was unsuccessful in its initial iteration and modify the reimbursement structure for those therapies. If implemented, the changes stand to have a huge impact on various stakeholders, but pharma most of all.

In the ANPRM — which came less than two weeks before the midterm elections — HHS said that it is seeking comments on a variety of Part B changes in anticipation of issuing a proposed rule in the spring. The actual model would start one year later, in spring 2020, running until spring 2025, with changes being phased in during those five years. It would apply to half of the country.

The document, titled Medicare Program; International Pricing Index Model for Medicare Part B Drugs (83 Fed. Reg. 54546, Oct. 30, 2018) was published in the Federal Register on Oct. 30. Comments are due by 5 p.m. Dec. 31.

Currently CMS reimburses Medicare Part B drugs at their average sales price (ASP) plus 6% (although it really is plus 4.3% due to the 2013 budget sequestration). The administration is proposing that CMS instead reimburse these medications based on an International Pricing Index (IPI) based on drug pricing data from not only the U.S. but also 16 other developed countries. In addition, instead of an add-on payment based on a percentage of ASP — a structure that many argue encourages providers to prescribe higher-priced drugs over lower-priced ones — there would be a set payment amount.

CMS also is proposing an alternative to the buy-and-bill process by which private-sector vendors will negotiate drug prices, take title of them and compete for business from physicians and hospitals — essentially a revival of the Competitive Acquisition Program (CAP) that the agency discontinued nearly a decade ago.

Analysis Shows Pricing Discrepancies

On the same day as the ANPRM was unveiled, HHS’s Office of the Assistant Secretary for Planning and Evaluation (ASPE) released a report that analyzed pricing differences among the U.S. and 16 other countries for 27 Part B-reimbursed drugs that represented the top spending among U.S. physician offices and hospital-based outpatient departments. Total spending on these drugs in the U.S. was more than $17 billion in 2016.

Titled Comparison of U.S. and International Prices for Top Spending Medicare Part B Drugs, the report — which was cited in the ANPRM — notes that since 2006, even though there has been low enrollment growth within the fee-for-service Medicare Part B program, spending on Part B drugs has doubled.

The analysis found that for the 27 drugs, the prices that manufacturers charged wholesalers and distributors in the U.S. were 1.8 times higher than what they were on average in other countries. Six of the products had higher U.S. prices that were within 20% of the average international price. Prices for 20 medications within the U.S. were more than 20% higher on average than those in the other countries. Only Gammagard (immune globulin [human]) from Shire plc had a lower U.S. price than the average international price.

In an Oct. 25 speech at HHS, President Donald Trump maintained that through the model, the U.S. will “begin to confront one of the most unfair practices…that drives up the cost of medicine in the United States. We’re taking aim at the global freeloading that forces American consumers to subsidize lower prices in foreign countries through higher prices in our country,” he said. “For decades, other countries have rigged the system so that American patients are charged much more…for the exact same drug.”

The IPI model, contended Trump, also will “fix a broken payment system where doctors are reimbursed more if they prescribe a much more expensive drug.”

Model Would Have Dramatic Impact

If the ANPRM is implemented, “it will have a huge impact on the prescription drug marketplace in the U.S. and will dramatically impact foreign drug markets,” contends Elan Rubinstein, Pharm.D., principal at EB Rubinstein Associates. He tells AIS Health that “the only thing that would have a more dramatic impact on the U.S. prescription drug marketplace would be elimination of the anti-kickback safe harbor for drug rebates, because if those go away, many businesses will need to change strategy — such as PBM drug formulary/tier placement.”

Manufacturer advocacy groups immediately derided the proposal.

“The administration is imposing foreign price controls from countries with socialized health care systems that deny their citizens access and discourage innovation,” said the Pharmaceutical Research and Manufacturers of America. “These proposals are to the detriment of American patients. The United States has a competitive marketplace that controls costs and provides patients with access to innovative medicines far earlier than in countries with price controls, and it’s why we lead the world in drug discovery and development. Americans have access to cancer medicines on average about two years earlier than in developed countries like in the United Kingdom, Germany and France.”

According to the Biotechnology Innovation Organization, “the proposal continues a troubling trend towards undermining the Medicare Part B drug program. This program supports the sickest, most vulnerable Medicare patients and accounts for only a small fraction of all Medicare spending.”

In the U.S., Rubinstein points out, “manufacturer drug prices are not negotiated centrally: Rebates are negotiated by individual purchasers such as health plans, PBMs and Part D plans in exchange for drug formulary position and other competitive market advantages. Purchasers, some dominant in their markets and others with a national presence, leverage their own covered lives and control methods in price negotiations. On the federal government side, the Federal Supply Schedule relies on centralized purchasing leverage, including excluding access to drugs that are not contracted, and generally achieves low prices relative to other buyers.”

Nations Included in IPI Will Be Critical

That’s in contrast to the IPI model, also known as reference pricing, which “is a common approach that most industrialized countries use,” says Lisa Kennedy, Ph.D., chief economist at Epiphany, a company that performs health economics, reimbursement and market access studies. “We see this a lot in our international work.”

Rubinstein tells AIS Health that the nations CMS chooses to benchmark prices against “will have a huge impact — because prices vary widely in Europe, due in part to the degree of nations’ centralized purchasing leverage, whether hospitals control product choice through exclusive tenders and, possibly also to per capita income.”

He also wonders whether manufacturers will disclose international drug sales data — and whether HHS can compel them to do so.

Model Echoes Some Previous Proposals

Trump maintained in his speech that “this is a revolutionary change. Nobody’s had the courage to do it, or they just didn’t want to do it.”

However, in 2016, CMS under former President Barack Obama tried to implement a multipronged approach to exploring alternative payment models for Part B, including changing the add-on payment to 2.5% plus a $16.80 per-drug per-day flat fee payment (RSP 3/16, p. 1). That proposed demonstration project was met with pushback from an array of stakeholders, leading the agency to scrap the Part B Drug Payment Model (81 Fed. Reg. 13230, March 11, 2016) later that year (RSP 1/17, p. 4).
The current proposal also would mean that those drugs with reduced net prices due to the IPI will have lower ASPs. And “a lower ASP will result in reduced provider reimbursement for drugs administered ‘incident to’ a physician office visit and paid on a markup of ASP, a problem for providers if they cannot acquire drugs and biologicals below these reduced ASPs,” points out Rubinstein.

Providers participating in the model and continuing to serve patients outside of it will experience a host of logistical challenges as well.

Paying providers a flat rate for dispensing drugs “makes sense in theory since physicians should not be financially incentivized to prescribe more expensive drugs,” says Jason Shafrin, Ph.D., senior director, Policy & Economics at Precision Health Economics. “For instance, if two drugs are equally effective, but Drug A costs twice as much as Drug B, physicians make more money from prescribing the more expensive Drug A even though the patient’s health benefit is the same.”

So while this approach will result in less money that Medicare pays for drug administration, “a key question is whether this policy is beneficial to patients; paying physicians a flat rate for each drug administered could negatively affect patient access to breakthrough treatments,” says Shafrin. “Some physician-administered medications cost tens or even hundreds of thousands of dollars over the course of a year. Physicians’ financial investment in inventory for these treatments can be substantial. Flat physician reimbursement schemes do not take into account physicians’ cost of capital needed to hold these treatments in inventory over an extended period of time. Thus, physicians may begin refusing to stock highly effective but expensive treatments if the administration costs more than this new flat-rate reimbursement level.”

For example, Shafrin tells AIS Health, “consider the case where Drug A is more expensive than Drug B, but expected survival for patients on Drug A is 10 years compared to only one year for Drug B. Most people would want patients to get the more effective Drug A, but physicians may not be able to afford the capital cost of holding this more effective drug in inventory under the president’s plan to pay a flat-rate dispensing fee. Physician groups may decide to store expensive treatments in more central locations. If this were the case, physician inventory costs may be lower, but patient access may be delayed if individual physician practices do not have the treatment in stock, or if patients need to travel to other locations to receive expensive treatments.”

Asked how effective the proposed rule would be in lowering what Americans pay for medications, Kennedy says that while it appears, based on CMS’s financial analysis, that it would not reduce premiums, “it should reduce the coinsurance for Medicare Part B beneficiaries (including a small reduction for dual-eligibles). I suspect that this is the administration’s efforts to announce this pre-election — equally from a practical perspective, they need to save money somehow to maintain the significant tax cuts they’ve instigated. Also, this might also have a market effect whereby Medicare Advantage suppliers demand the same discount for their commercial/non-Medicare beneficiaries.”

“The effectiveness of the legislation in reducing drug costs largely depends on two factors: the target price to which CMS will index the drugs and how pharmaceutical firms respond by pricing drugs in other countries,” says Shafrin. “According to HHS, the target price for the international price index scheme is 126% of the average price that is paid by the 16 countries included in the index. Higher target prices would result in less saving; lower target prices would result in more savings.

“However, pharmaceutical firms are not passive actors,” he continues. “They may decide to raise prices in other countries in response to President Trump’s IPI initiative. If this occurs, the price of medications will decrease, but perhaps not as much as expected based solely on the target price.”

“Whether and to the degree to which this proposal will lower what Americans pay for injectables and biologicals depends on how it is implemented,” points out Rubinstein. “This is an ANPRM, after all, which proposes a process and requests stakeholder input.

“The final program cannot be known at this time, nor can it be foretold whether the idea of international reference pricing implemented through a drug CAP-like vendor program has legs on any basis.”

View the ANPRM at, and download the ASPE report at

Contact Kennedy at, Rubinstein at and Shafrin via Tess Rollano at G


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