MedPAC Debates Formulas to Combat Rising Part B Drug Costs

Spending in 2012 Topped $13 Billion

September 19, 2014 03:53 pm Michael Laff Washington –

A big part of controlling overall medical costs means reducing the cost of drugs, a monumental task that Medicare officials have been trying to tackle for years.

During a recent Medicare Payment Advisory Commission (MedPAC) meeting, members discussed developing a payment policy that promotes the use of clinical evidence as a measurement for drug pricing. In a report prepared by MedPAC staff,( the authors noted that Medicare payments currently reflect the cost of a service, not its overall effectiveness.

From 1995 to 2010, the report noted, Medicare used a method known as the least costly alternative (LCA) policy for Medicare Part B drugs. When two or more drugs exist for a particular condition, payment is made based on the lower-cost drug. But after a lawsuit brought by a patient and a manufacturer challenged the pricing method -- eventually prevailing in federal court -- Medicare dropped the policy.

MedPAC Chair Glenn Hackbarth, J.D., suggested that commissioners consider four options:

  • Recommend restoring traditional authority to the HHS secretary to establish the LCA as official policy.
  • Bundle drugs in categories according to HCPCS codes and use the average price.
  • Bundle drugs by illness episode and calculate the average price.
  • Given the complexity of the issue, recommend no policy and simply leave pricing to accountable care organizations and Medicare Advantage.
Story highlights
  • Medicare's drug costs have increased since a policy supporting lower-cost alternatives was rescinded in 2010.
  • Spending on Medicare Part B drugs totaled $13.2 billion in 2012, an increase of 3 percent compared with 2011.
  • Members of the Medicare Payment Advisory Commission recently considered several proposed formulas for determining appropriate payment for prescription drugs.

Least Costly Alternative

Some members voiced support for restoring the LCA, which would require congressional action.

"I know there is a lot of frustration generated by pricing," said Commissioner Kathy Buto, M.P.A. "Once the LCA is established, the lowest cost drug will be selected."

Commissioner William Hall, M.D., noted that drug prices are difficult to set because use fluctuates and formularies change every year. "You think you have your patient on the right set of drugs, and then one day, you find out that the same people who said the evidence shows that Drug A is better than Drug B just disappears overnight," he said.

"I think before we get too far into this, we ought to try to understand this whole notion that we can actually do this in a way that isn't going to have to change every six months or every year," Hall added.

He cautioned that if Medicare creates a national price standard, it could become a global standard for drug prices. "The 10 most expensive drugs are not anticholesterol drugs or drugs for congestive heart failure," Hall said. "They're invariably biologics, because these are very, very expensive drugs."

Spending on Medicare Part B drugs totaled $13.2 billion in 2012, an increase of 3 percent compared with 2011. With most Part B drugs being provided by physicians, Medicare pays them 106 percent of the drug's average sales price.

A study by the Congressional Budget Office found that $500 million could be saved if the LCA was applied to Part B drugs prescribed for arthritis of the knee. In a separate HHS study, the majority of physicians who used a lower-priced drug said cost was the primary reason for the selection.

Overall, said Commissioner Jay Crosson, M.D., for the majority of patients, the less-expensive drug is sufficient for their treatment.

Use of more expensive drugs began to increase after the LCA policy was rescinded, according to a 2012 HHS study( The policy was primarily applied to drugs used to treat prostate cancer. In the absence of price controls, spending on the same prostate cancer drugs increased $33 million one year after the policy was rescinded.

Bundled Payment

Commission members also discussed the possibility of moving to a bundled payment model rather than reintroducing the LCA, with Herb Kuhn suggesting that Medicare consider a price-per-therapy approach instead of pricing drugs per pill or per milligram. Other commission members, however, warned of the potential pitfalls of such an approach.

"I'm not a fan of bundled diagnosis payments," said Craig Samitt, M.D. "It enhances complexity in the payment structure."

Commissioner Jack Hoadley also pointed out the flaws of a bundled payment strategy, especially if pricing options for a particular drug do not exist. "If there are three drugs for hepatitis C, and they all cost $1,000, that's not going to get us there," he said.

Commission member Rita Redberg, M.D., suggested that an independent body could review the cost of drugs. If MedPAC were to recommend a stricter regimen of price controls, such a move likely would encounter resistance from the pharmaceutical industry.

"I hear a lot about innovation, and I just think we need to be really careful, because I hear a lot more innovation than I see innovation," she said. "The industry always says that it (price control) will stifle innovation. I don't think you stifle innovation by asking for evidence.

"We shouldn't be paying more if the outcomes aren't improved."

The pharmaceutical industry's rhetoric on pricing changes to suit existing conditions, Hoadley contended.

"We used to hear that drugs were priced high to recoup the cost of innovation and research and development," he said. "Now, with drugs like Sovaldi, they're saying the price is set based upon the amount it's saving the system. How do we challenge that rhetoric?"

Ultimately, Hoadley noted, instead of setting prices for particular drugs, especially the expensive ones, private insurers are controlling which patients have access to them.

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