In March 2016, the Centers for Medicare & Medicaid Services announced a proposal that changes the payment structure of prescription drugs administered under Medicare. It focuses on decreasing the current rate of average drug sales prices from 106 percent to 102.5 percent with a $16.80 flat fee. The goal is to reduce the price paid by Medicare beneficiaries, and the hope is that physicians will prescribe lower priced drugs once the current financial incentive is removed.
The 6 Percent Rule
Say your physician prescribes a drug for you that costs $2,000 a month. Medicare will pay your doctor 106 percent of the drug’s Average Sales Price (ASP). The additional 6 percent covers the ordering, tracking, storing, and processing of the drug along with any price variations in the drug from provider to provider.
This 6 percent is like a commission for physicians and, according to Medicare, this is a problem. If your doctor prescribes a $300 drug, they get $18; if they prescribe a $2,000 drug, they receive $120. The concern is that under the existing system, physicians are more likely to prescribe an expensive course of treatment when a more moderately priced drug is available.
Drug companies also benefit from this system, as they do not have to worry about the higher price and lower demand trade-off. In fact, expensive drugs are easier to market, so physicians and prescription drug companies seemingly do very well with the current system.
Unfortunately, this is not the case for patients. Although Medicare covers 80 percent of the ASP and the aforementioned 6 percent, patients are still liable for the other 20 percent. An estimated 6 million people do not have any additional insurance so they must pay the 20 percent out of pocket. In our $2,000 drug example above, you would have to pay $400, unless you have the appropriate Medicare Supplement (sometimes called Medigap) plan.
Incidentally, even if you have Medigap coverage, your premiums will rise because Medigap is now paying for an increased number of expensive specialty drugs.
Cutting the Fee
Medicare wants to replace the 6 percent system with a flat physician’s fee and a reduced percentage add-on payment. As aforementioned, this would equate to a flat fee of $16.80 regardless of the cost of the drug, along with a 2.5 percent added payment.
The hope is that a uniform payment structure will make physicians more likely to prescribe affordable medication. In theory, Medicare hopes the new system would result in physicians concentrating on providing the best possible care to patients with little consideration given to drug pricing and compensation.
Reference Drug Pricing
Medicare also announced plans to conduct an experiment across the United States beginning in 2017 to test several different methods for slowing down the spending on prescription drugs provided in hospitals, clinics, and doctor’s offices. This part of the proposal would have no effect on patients receiving drugs via a pharmacy.
Annual government spending on Medicare Part B is now $22 billion; this figure has doubled since 2007. This proposal could significantly reduce spending on Part B while maintaining the existing quality of service.
A key aspect of the proposal involves earmarking drugs deemed “therapeutically similar” and setting a “reference price” paid for all drugs within this category. For example, the drug deemed to be the most effective in the group could be the recipient of the reference price. At present, similar drugs can be thousands of dollars apart in terms of pricing. Medicare did not go into detail regarding this part of the proposal, but did say only selected Part B drugs would be subject to reference pricing.
Since Medicare’s proposal would reduce the profits of drug companies, it is no surprise to learn there is strong opposition to the plan from these companies. Other opposition includes the Pharmaceutical Research and Manufacturers of America, the American Hospital Association and the American Medical Association.
Rumor says that Medicare also wants to experiment by reducing or eliminating the existing 20 percent cost-sharing requirement. This would be fantastic news for Medicare beneficiaries, and we patiently await this development.
Although the proposal has high-level opposition and may not even come to fruition, it is a positive sign. Medicare is clearly aware of the high prices paid by patients and is attempting to find ways to cut costs while making sure quality of care is not sacrificed.