By John McManus, The McManus Group
Two weeks before the midterm election, the Trump administration announced a sweeping plan to subject physician-administered drugs in Medicare Part B to foreign price controls. The proposal, unveiled as an Advanced Notice of Proposed Rulemaking (ANPR) “demonstration project,” would subject half of the country to the mandatory pricing scheme but will ripple — like tidal waves — through the entire Medicare program. More formal rulemaking is expected next spring with implementation in 2020.
Medicare’s current average sales price (ASP) payment formula, which captures all price concessions and discounting in the U.S. market, would be replaced by a reference price based on the International Pricing Index (IPI) — composed of European countries plus Japan. The “demonstration” program would be phased in over five years, and when fully operational, U.S. pricing would have zero impact on Medicare reimbursement in tested areas (i.e., half of the country!).
The experiment would replace the long-standing practice of “buy and bill” where physicians and hospitals order and take ownership over physician-administered drugs. Medicare would instead rely upon vendors who would be entitled to artificially low prices based on the foreign IPI.
The remaining half of the country also will be substantially impacted since ASP, by definition, captures all prices, including the new reference prices, which are projected to be about 30 percent below market rates. That could put most providers in the “control” areas that are left on the ASP reimbursement structure under water when they prescribe Part B drugs, because their acquisition cost will likely far exceed the artificially deflated ASPs.
THE UNCHECKED POWER OF CMMI
The administration derived its authority for this radical “experiment” through a little-known agency — the Center for Medicare and Medicaid Innovation (CMMI) — established by the Affordable Care Act (ACA), which President Trump spent the first year of his presidency trying to repeal. That agency was funded with a whopping $1 billion annually indefinitely and is not reliant on the annual appropriations process, meaning it has little accountability to Congress. Moreover, CMMI is exempt from administrative or judicial review.
The ACA empowers CMMI to test “Phase 1” demonstration models that “address a defined population for which there are deficits of care leading to poor clinical outcomes or potentially avoidable expenditures.” Apparently, a “defined population” can comprise half of the entire country! CMS failed to provide any evidence that Medicare beneficiaries are experiencing poor clinical outcomes based on how Part B drugs are currently being reimbursed.
Unlike typical Medicare demonstration projects that are tested in a discrete number of geographic locations for several years and then must be explicitly authorized by Congress for nationwide adoption, CMMI can transform a Phase 1 demonstration (tested over huge swaths of the country) into a Phase 2 demonstration which is de facto nationwide policy with no congressional input or approval. CMMI is explicitly empowered to waive any and all provisions in the Medicare statute, and the program could be made permanent without any congressional change in the law.
For almost a decade, healthcare stakeholders and Congress were fixated on killing off the ACA’s Independent Payment Advisory Board (IPAB), which was tasked to reduce Medicare expenditures when certain target spending was exceeded. The IPAB was repealed earlier this year, but the CMMI was left untouched with absolutely no guardrails in place.
The very same concerns about the IPAB should apply to CMMI. Congress should have never offshored its critical role in the care and nurturing of the Medicare program to an unaccountable, unelected agency that can override, disregard, and supersede long-standing statutes and regulations.
However, putting the genie back in the bottle may be more difficult than imagined. A couple of years ago, then Budget Chairman Tom Price (R-GA) complained about the Congressional Budget Office’s (CBO) view that CMMI would save $45 billion over the decade through promotion of various demonstration projects. CBO refused to provide any quantitative rationale for the estimate, and at the time CMMI was focused on promoting voluntary demonstrations such as accountable care organizations that had failed to achieve any material savings.
TRUMP VS. OBAMA PART B DEMONSTRATIONS
In 2016, the Obama administration’s CMMI proposed a demonstration of Part B drug reimbursement. But the first phase of that demonstration only focused on reducing the add-on amount of physician payments: from ASP+6 percent to ASP+2.5 percent plus a flat fee. That proposal was met with vociferous opposition from a united physician, manufacturer, and patient community and eventually withdrawn.
The Trump administration’s proposal is far more sweeping in changing the underlying reimbursement on pharmaceuticals to foreign reference prices and eliminating buy-and-bill entirely. The administration likened the program to the now-defunct Competitive Acquisition Program that was operational from 2006 to 2008, but failed to attract many providers, and CMS was only able to secure a single vendor. But that program was voluntary and did not rely on foreign prices.
The Trump proposal attempts to avoid provider opposition by committing to retain the full 6 percent add-on payment that would no longer be paid as a percentage of the drug but set as a flat fee. But it is unclear how those resources will be distributed, and the lack of specificity in the ANPR makes it difficult to model the impact to the provider community.
However, some are pushing back. Steven Bernstetter, director of health policy and regulatory compliance at BJC HealthCare, a St. Louis-based health system, believes the model’s new vendors are middlemen that will add additional administrative burdens. “A significant driver of inflated drug costs involves the proliferation of what amounts to rent-seeking middlemen who contribute nothing to the actual development or deployment of pharmaceuticals by healthcare professionals.”
STOPPING FOREIGN FREE-RIDING?
The Trump administration’s professed purpose for importing foreign price controls is to stop foreign free-riding that forces American consumers to shoulder the burden of fixed R&D costs. But that theory only works if companies can raise prices in Europe. Price controls and threats of compulsory licensing make that prospect dubious.
More importantly, they lead to shortages and impaired patient access. According to the administration’s own analysis, only 11 of the 27 Part B drugs examined were available in all the 16 comparator countries. Drugs that treat cancer drive Part B spending, yet only 55 percent of new cancer drugs are available in the reference countries compared to 95 percent in the U.S. That rationing model is not one we should import to America!
A better approach is protecting American R&D abroad, as the Trump administration did when it secured 10 years of exclusivity for biologicals in its U.S.-Mexico-Canada Trade Agreement. That provides the ability for U.S. companies to recoup their investments abroad and spread costs to foreign consumers.
HOW WILL CONGRESS AND STAKEHOLDERS REACT?
The timing of the announcement directly before the election dissuaded Republicans from opposing the president and led to dismissive statements by Democrats of “too little, too late.” Yet the muted response by everyone other than the Wall Street Journal editorial page should be of great concern.
Where is the outrage that was shown toward a far less consequential proposal put forward by the Obama administration? Congress will be spurred to action only if stakeholders impacted by the proposal — patient advocates, physicians, industry — aggressively engage.
John McManus is president and founder of The McManus Group, a consulting firm specializing in strategic policy and political counsel and advocacy for healthcare clients with issues before Congress and the administration. Prior to founding his firm, McManus served Chairman Bill Thomas as the staff director of the Ways and Means Health Subcommittee, where he led the policy development, negotiations, and drafting of the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Before working for Chairman Thomas, McManus worked for Eli Lilly & Company as a senior associate and for the Maryland House of Delegates as a research analyst. He earned his Master of Public Policy from Duke University and Bachelor of Arts from Washington and Lee University.