Old Lessons for the New Medicare Part B Drug Payment Model

Last month, President Trump announced a new plan to change how Medicare pays for prescription drugs under the Part B program — and, in the process, to lower drug costs for the program and beneficiaries. The three-pronged approach includes revamping payments to physicians for administering Part B drugs to patients, using international reference pricing to set a ceiling on Medicare payment for the drugs, and contracting with private vendors to purchase Part B drugs from manufacturers at lower prices.

This last part has been tried before, with little success, under the Competitive Acquisition Program (CAP), which Congress established in 2003 to test an alternative to physicians negotiating Part B drug prices. After running into speed bumps early on, the Centers for Medicare and Medicaid Services (CMS) suspended the CAP in 2009. What lessons did we learn from that experience, and are any reflected in the administration’s new plan?

What Was CAP All About?

As part of the Medicare Prescription Drug, Improvement and Modernization Act, Congress required CMS to set up the CAP for Medicare Part B drugs and, at the same time reformed how physicians were reimbursed for purchasing drugs. CMS gave physicians the option of either buying drugs on their own under an “average sales price” system — better known as ASP, or buy-and-bill — or using a preselected private vendor to negotiate for the drugs offered under the CAP. Vendors were determined through a competitive bidding process.

The CAP became operational in 2006 and ran through 2008. It required vendors to submit bids that wouldn’t exceed Medicare’s payment to physicians who used the buy-and-bill system, set at 106 percent of the average sales price for 180 selected drugs and biologics. The vendor then negotiated prices with manufacturers to generate savings for Medicare.

Initially, only one national vendor participated in the program, and physician attrition was high. A CMS evaluation revealed the cost of CAP-acquired drugs exceeded the average-sales-price threshold in aggregate by 3.2 percent for 2006 and 2007. Moreover, Part B spending increased over the 30 months the CAP was operational, while beneficiaries saw no decline in their cost-sharing. Providers were highly dissatisfied as well: 45 percent left in the first year and 53 percent in the second. Contract issues with the private vendors in the subsequent contract period led to the program’s postponement and, eventually, to its suspension at the end of 2008.

Despite several attempts, CAP design issues — like the type of vendors permitted to participate and the requirement that vendors assume all financial risk for the purchase of Part B drugs — couldn’t be resolved. In 2015, CMS solicited comment on exploring a new CAP-like model in Part B as part of a larger proposal to overhaul drug purchasing under Medicare, but the entire proposed rule was withdrawn (including revisions to the CAP model) because of stakeholder criticism. Earlier this year, the Trump administration solicited comment on a reprisal of a CAP-like model on two occasions: for its American Patients First blueprint, and for last month’s reform plan for Medicare Part B drug payment.

How Does the New Proposed Model Compare to the CAP?

Based on the announced plan and notice of proposed rulemaking, the private vendor model would differ from the original CAP in a few key ways (see table). For example, the type of vendors eligible to participate has been broadened to include physician groups. In addition, all physicians are required to use a vendor to negotiate prices, a move that provides vendors greater leverage to negotiate prices with manufacturers. CMS also proposes to test the vendor program in only half the country, allowing the agency to modify the program based on experience.

But it isn’t clear that the current plan resolves all the issues that led to CAP’s demise. For example, it may introduce additional financial risk for vendors by setting reimbursement rates well below current levels. Moreover, to earn a reasonable profit, vendors would have to negotiate prices below those set by other developed countries. The administration’s analysis suggests international prices are at least 47 percent lower than U.S. prices for drugs prescribed under Part B.

How Can We Lower Part B Drug Prices?

Under the Trump administration’s plan, it is unclear how any one vendor could achieve the savings intended without additional tools to negotiate with manufacturers, or how multiple vendors could generate these savings. Learning from the CAP experience, CMS may need to use innovative tools to leverage the purchasing power of Medicare.

In 2017, the Medicare Payment Advisory Commission (MedPAC) offered a voluntary, market-based alternative to the CAP called the Part B Drug Value Program. To incentivize efficiency, the program would be limited to a small number of vendors, each of whom would receive payment from physicians, use tools (such as a formulary) to negotiate with manufacturers, and share savings with physicians. MedPAC recommends reducing over time the current 6 percent add-on to physicians’ payments while phasing in other changes. If they are reflected in the administration’s proposal, several critical components — such as aggregating Medicare purchasing for negotiating leverage and being able to exclude or tier drugs through a formulary — could help avoid the CAP’s pitfalls and ultimately produce cost savings for the government and patients.

For such a sweeping change to Medicare drug payment to be successful, CMS will need to address many design and operational questions. Although how those questions are dealt with remains unclear, this much is certain: bold action is needed to reduce costs for Part B and lower all Medicare drug spending, as well as to create incentives for drug manufacturers to lower prices. And any changes considered should be informed by lessons from past efforts at reform.