Reform Medicare Part B To Improve Affordability And Equity

Making prescription drug prices more affordable and access to them more equitable are top bipartisan policy priorities.

Medicare Part B pays for physician-administered drugs that are used to treat some of the most serious and debilitating illnesses, including cancer and Alzheimer’s. In 2018, the Medicare program and its beneficiaries spent roughly $35 billion on drugs paid through Part B; from 2009 through 2018, Part B drug spending grew at an average annual rate of 12 percent. The program incentives are perverse: They reward physicians for prescribing the costliest drugs and offer few brakes on the prices of drugs used to treat Medicare beneficiaries.

Here, we propose four reforms that would reduce government and beneficiary spending on physician-administered outpatient drugs covered by Medicare’s Part B program and promote increased affordability and equity for patients and payers.

Background On Medicare Part B-Covered Drugs And Current Incentives

Medicare Part B drug spending has been growing due to the introduction of expensive drugs. While some Part B drugs recently approved by the Food and Drug Administration (FDA) embody treatment approaches that offer important new clinical benefits, many offer few, if any, benefits beyond existing medications or current standards of care. The recent and highly controversial approval of a new drug to treat Alzheimer’s disease is expected to almost double Part B drug spend in the next year.

Many of the highest-spend drugs covered by Medicare Part B are biologics: large, complex molecules produced using biotechnology techniques in living cells. Biologics accounted for roughly $145 billion in spending in 2018. In the same year, the top three drugs by spending were all specialty biologics with limited off-patent therapeutic competition. Biologics are also the fastest-growing segment of the pharmaceutical industry.

High Part B spending and rapid growth in Part B spending are driven by current incentives. There are neither limits on manufacturers’ launch prices for new drugs covered by Part B nor are there limits on annual price increases for existing drugs. Unlike drugs covered under Medicare’s pharmacy benefit, Part D, there are no price inflation penalties and no rebates offered by manufacturers to plans that slow overall spending. 

In addition, spending has grown due to Medicare Part B’s current “buy and bill” methodology. Hospitals and physicians acquire the drug at one price from manufacturers and are reimbursed by Medicare and patients when the drug is administered in treatment. The majority of outpatient clinics providing these services are eligible for deep discounts on the acquisition costs of Part B-covered drugs through the 340B program; however, these discounts are not required to be passed onto payers or patients. Consequently, this system creates incentives for hospitals and physicians to use more expensive drugs than needed—because higher prices offer the prospect of making more money—and offers providers little power to negotiate pricing with drug manufacturers. The current structure of Medicare Part B forgoes cost-saving opportunities on the legislative and administrative levels.

Medicare pays providers for newly launched physician-administered outpatient drugs at wholesale acquisition cost (WAC) plus 3 percent. Once the new drug has been assigned a unique Medicare billing code, Medicare switches over to paying providers at the average sale price (ASP) of the Part B-covered drug plus 6.0 percent (reduced to 4.3 percent by the budget “sequester,” spending cuts that are automatically triggered when Congress enacts appropriations in certain budget categories beyond legislatively set caps). The switch to payment based on ASP is intended to allow Medicare to share in some of the largely volume discounts manufacturers give to providers outside of the 340B program.

The add-on reimbursements for the use of Part B covered-drugs (plus 3 percent for new drugs, plus 6 percent for existing drugs) has been justified on the grounds that large provider purchasers, such as hospitals, can often negotiate lower prices than independent physician practices, potentially leaving small physician practices at risk of financial loss. However, numerous analyses have suggested that physician-administered outpatient drugs are a profit center for both physicians and hospitals, limiting incentives to lower these costs.

To promote competition and thereby decrease spending, the Affordable Care Act (ACA) created a new path to approval for biosimilar versions of biologic-based drugs when these products’ patents expire. The intent of the Biological Price Competition and Innovation (BPCI) Act of 2009 was similar to what the Drug Price Competition and Patent Term Restoration Act of 1984 (known as the Hatch-Waxman Act) aimed to do for generic small-molecule drugs: achieve a balance between promoting innovation through patent protection and encouraging generic entry and price competition. More than 90 percent of drug prescriptions in the US are currently dispensed as generic drugs, with a track record of safety, efficacy, and relatively low prices. 

However, since the ACA’s passage, biosimilars have not delivered on their promise of lower-cost, safe, and effective drugs for payers and patients. While there are a handful of biosimilars now available in the US, biosimilar competition remains limited. This contrasts dramatically with the US’s positive experience with generic entry and competition for small-molecule drugs, as evidenced by the accumulated track record of safety, efficacy, and relatively low prices.

As a result, providers that administer biosimilars are paid more for using more expensive drugs without any regard to their clinical or economic value. Unlike Medicare Part D-covered drugs dispensed by pharmacies, there are no Part B formularies to guide providers to the use of branded drugs that are more effective and cost-effective than comparators, and to the use of generic versions of branded drugs or biosimilars when available. Nor does the Centers for Medicare and Medicaid Services (CMS) systematically include evidence reviews and other measures of value when making coverage determinations for Part B-covered drugs. Consequently, Medicare coverage decisions commonly ignore empirical evidence even when support for a product’s use is significantly limited.

Our Policy Recommendations

We propose four actions to address the incentives that drive high prices, even in the absence of clinical benefit, for Medicare’s Part B prescription drugs.

Empowering The Department Of Health And Human Services To Negotiate Prices With Drugmakers

First, we recommend that Congress empower the secretary of Health and Human Services (HHS) to negotiate the prices of Part-B-covered drugs. The potential list of drugs to be targeted by these efforts would be guided by assessments of the degree to which prescription drugs covered under Medicare Part B have prices that do not align with their health benefits. This assessment would be done by a committee of experts that would evaluate each drug’s health benefits, predominantly based on the improvements that the drug offers over alternatives. The committee would also consider any negative health effects of a drug in comparison to existing alternatives, and whether the drug’s price is unreasonable.

The assessment would be based on information from a variety of sources, including documents provided by the pharmaceutical company to the FDA in its new drug application, biologics license application, or generic and biosimilar equivalents. The assessment would also consider the contributions to research and development of the drug by federal agencies.

For drugs that are judged to have a price that significantly exceeds their clinical benefit or that for other reasons is unreasonable, HHS would enter into negotiations with the manufacturers. Such negotiation could take place directly between the companies and CMS or between the drug manufacturers and CMS-sponsored intermediaries armed with formulary authority and the potential for requiring mandatory binding arbitration, as recommended by the Medicare Payment Advisory Commission (MedPAC). International reference pricing—comparing the US cost of a drug to the cost in a reference country or “basket” of countries—could be used to create bounds for the negotiations, but this would not be necessary to effectuate the objectives of the reform.

For all drugs subject to this price negotiation, our proposed legislation would require pharmaceutical manufacturers to offer the ceiling price resulting from negotiation or arbitration to all public and private payers, not just Medicare. These payers and their intermediaries would be permitted to negotiate additional price concessions in the form of rebates and discounts.

Capping Add-On Payments

Second, we recommend Congress establish $1,000 as the maximum add-on amount that a provider could be paid for a drug, biological, or biosimilar covered under Part B that is administered on or after January 1, 2022. Specifically, through December 1, 2028, the provider billing for the drug would be paid the lesser of $1,000 and the add-on amount that would otherwise be paid—6 percent of the ASP for a drug or biological, 6 percent of the ASP for the reference product for a biosimilar, 3 percent of WAC for a new drug in the initial period. For 2029 and each subsequent year, the $1,000 maximum add-on amount would be updated to reflect general inflation. This policy has also been endorsed by independent experts, including MedPAC.

Head-To-Head Price Competition

Third, we recommend that CMS reduce spending on biologic drugs by creating head-to-head price competition between originator products and biosimilars. Under this policy, Medicare would not pay the additional costs associated with a more expensive drug when a clinically similar, lower-price drug is available. This would be achieved through a revision of the Medicare Part B physician fee schedule to group biosimilar and originator biologics under the same reimbursement code, with reimbursement set to the average price of the clinically similar options. Physicians would be driven to purchase the lowest-cost drugs because they would be rewarded by collecting the difference between the average price and the actual purchase price.

This policy has been supported by independent policy experts such as MedPAC and Pew Charitable Trusts.

As an extension of the policy, we recommend that the FDA reevaluate the requirement that biosimilars use suffixes to distinguish them from the originator drug, which risks leading consumers to consider the biosimilars inferior. We also urge the FDA to explore whether “interchangeability” requirements for biosimilars—the additional requirements a biosimilar must meet before a physician can substitute it for the original biologic in filling a prescription—could be relaxed without compromising safety and efficacy. Current interchangeability requirements are so strict that no biosimilars satisfy them.

Scrutiny Of Potentially Anti-Competitive Business Practices

Finally, we recommend that the Federal Trade Commission investigate the business practices of specialty drug manufacturers, group purchasing organizations, and pharmacies, including but not limited to negotiated discounts, rebates, bundled purchase requirements, “white bagging” and “brown bagging,” and other contractual terms as applicable. Additional tactics employed by pharmaceutical companies and middle parties to erode the market uptake of generics and biosimilars after launch should also be the subject of scrutiny. We encourage Congress to hold investigative hearings on these business practices.

Likely Impacts Of These Reform Efforts

Taken together, these reforms would promote competition, improve equity, and reduce spending. None of these reforms entail rationing of treatment to needy patients, and savings could be applied to expanding equitable access to needed services and promoting other innovative activities.

Improve Competition

Improving biosimilar competition and using price regulation would move prices closer to those in European countries, ensuring that Americans do not pay more for prescription drugs than people in other advanced countries. These reforms would also have the effect of reducing anti-competitive actions by the pharmaceutical industry.

Improve Equity

The reimbursement reforms we propose would directly reduce and slow spending by the Medicare program. As Medicare Part B enrollees are responsible for an out-of-pocket share of Part B drug costs with no limit, lowering Part B spending would also directly result in beneficiary savings. Medicare enrollees who are not dually insured (Medicare and Medicaid) or who lack Medigap coverage (approximately 20 percent of Medicare Part B enrollees) would benefit disproportionately. People of color are slightly overrepresented among people without such supplemental Medicare Part B coverage. All Americans would benefit from greater availability, market uptake, and affordability of biosimilars.

Increase Savings

There are several ways in which these proposals would promote cost savings. First, the Congressional Budget Office’s analysis of H.R.3—the House Democratic drug pricing reform bill—estimated that the component of the bill allowing HHS to negotiate with drug manufacturers would reduce government health care spending by $456 billion over a decade. (This estimate was made before amendments increased the minimum required number of negotiated drugs from 35 to 50.) The measures in the bill aimed at preventing drug price growth from exceeding inflation rates were projected to save another $36 billion in government spending. One study in JAMA Internal Medicine comparing prices of Medicare Part B drugs in the US and European countries found that among 67 drugs, drug prices in other high-income countries were a median of 45.8 percent to 59.7 percent lower than those in Part B.

Second, the most recent federal score for establishment of a maximum add-on payment for drugs, biologicals, and biosimilars is a savings of $621 million (2021–30). And in 2017, the Pew Charitable Trusts estimated the potential one-year effect of a consolidated payment policy—forcing originator biologics and biosimilars to compete head to head on pricing—on Part B drug costs for five biologics: Avastin (bevacizumab), Herceptin (trastuzumab), Neulasta (pegfilgrastim), Remicade (infliximab), and Rituxan (rituximab). These reference biologics were selected based on their costs to Medicare Part B: In 2014, annual Part B spending on these five biologics totaled $5.47 billion, based on the payment rate of ASP plus 4.3 percent. Pew estimated that the ASP of each drug, when combined, accounted for approximately $5.25 billion of this total amount, while $226 million could be attributed to the 4.3 percent add-on payments. The consolidated payment policy was estimated to reduce annual spending to $4.32 billion, for a savings of 21 percent.  

We acknowledge that some will resist these reforms. At least one pharmaceutical industry lobby group is already attempting to mount resistance to congressional efforts to revive drug price negotiation policies, as proposed in H.R.3. The Pharmaceutical Research and Manufacturers of America’s (PhRMA’s) most common talking point against establishing price negotiations is that it would erode innovation incentives. We believe this supposes a false choice—the US has successfully pursued policies in the past that aimed to improve incentives for both innovation and affordability. Reform efforts will also likely meet resistance from hospitals that derive significant revenue off the current buy-and-bill system. 

More generally, improving the efficiency and equity of the system should be a shared goal of all members of the health care system, including pharmaceutical companies, medical providers, and various middle entities.