On Wednesday, October 25th, President Trump, along with HHS Secretary Alex Azar, introduced the administration’s new proposal to lower drug prices through Medicare Part B. The announcement follows ASPE’s morning release of a report comparing U.S. drug prices to international drug prices. The report, which used Medicare Part B payment numbers, stated that the U.S. has about 1.8 times higher ex-manufacturer prices for top drugs than other countries, and the new proposal intends to align U.S. prices with those abroad.

The Pilot Program

The proposal that President Trump discussed will use CMS authority to test three new measures. One will use international pricing as a metric, one will develop a new competitive acquisition program (CAP), and one would alter the average sales price (ASP) model already in effect. CMS released an Advance Notice of Proposed Rulemaking (ANPRM) yesterday that discusses the plan at length. CMS hopes to use a public comment period (ending December 31, 2018) to solicit feedback on the proposal and to develop a proposed rule that they will release in the Spring of 2019.

The ANPRM, as it is written, would implement a five-year pilot program run by CMS’s innovation unit, the Center for Medicare and Medicaid Innovation (CMMI), which would start in 2020. The pilot program would include all of the approaches listed above, and it would mandate that suppliers in certain geographic areas participate in the new model. CMS would assign different approaches to different geographic regions in a randomized manner to test the various proposed models. This eliminates providers' ability to choose the proposal they believe to be the most potentially lucrative. At the end of the five year pilot program, they will in theory select the practices that have worked best to lead to higher quality care for beneficiaries and reduce Medicare expenditures. They will then move in that chosen direction in the hopes of enacting systemic change.

What and Who it Affects

The process would begin with single source drugs and biologicals but may also move to include multiple source drugs in the future. The model participants include physician practices and hospital outpatients departments, and CMS will consider whether to include durable medical equipment (DME) supplies, Ambulatory Surgical Centers (ASCs) and other types of Part B providers and suppliers.

International Pricing

The proposed approach that seeks to align U.S. drug prices with those abroad is called the International Pricing Index (IPI) model. CMMI would create a “Target Price” for each drug that would be based on an IPI and then calculated using the ratio of Medicare spending for drugs using the ASP system vs. Medicare Spending for drugs using international price estimates. The administration would phase the Target Price in over the five-year pilot period. In this model, when the ASP of a drug is higher than an international price, the provider payments for the drug would be recalculated using the Target Price, which CMS estimates will result in 30% savings in total spending over a five-year period. 

Changes to the Competitive Acquisition Program

CMS would combine the IPI model with a new version of the Competitive Acquisition Program (CAP). The original CAP program was included in the law that created Medicare Part D in the early 2000s and was abandoned within a few years. As part of this program, private vendors would buy Part B drugs and supply them to providers, alleviating providers from potential financial risk. This particular approach could serve as an alternative to process where providers purchase drugs and are then reimbursed using the average sales price, as will be described below. Under the IPI model, CMS would pay the vendor based on the previously discussed Target Price. Providers in the test areas will have the option to choose the vendors they contract with. CMS is looking for public comment in this area to best determine what types of groups are best suited to perform the role of the vendor. 

Alternatives to ASP Add-Ons

As mentioned, the model also proposed an alternative to current ASP-based Provider Payments. At this moment, providers receive payments for Part B drugs that are based on the average sales price (ASP) plus an add on payment, for handling and storage, of what should be 6% of the price. The proposal wants to increase add on payments to more accurately reflect the whole 6% markup rather than the 4.3% that providers have been receiving due to sequestration. CMS is considering multiple options to accomplish this, one of which would be a flat price that would not vary based on the cost of the drug itself. The flat fee would, in theory, lower existing incentives for providers to prescribe higher cost drugs.

Putting the Proposal in Context

This initiative is the most recent of multiple efforts made since the May release of the administration’s Blueprint to Lower Drug Prices. Under the Obama Administration in 2016, CMS proposed dropping the payment for Part B drugs from 6% to 2.5% of a drug's average sales price while adding a flat payment of $16.80 per drug a day. That proposal was withdrawn under withering criticism from Congress and certain health care stakeholders. Stakeholder opposition to this new proposal is already every bit as intense as it was in 2016. The reaction from Congress remains to be seen.

*Olivia Graham contributed to this blog post.