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Shifting parts

Why HHS Secretary Azar wants to scrap the Part B drug program

HHS Secretary Alex Azar is convinced that the way Medicare Part B spends money for drugs makes no sense, costs the taxpayers too much and isn’t good for patients. He says he’s open to suggestions from drug companies about ways to change it, and if they don’t come up with acceptable ideas for increasing competition, he’ll impose changes the industry won’t like.

Azar’s preference for replacing the system of purchasing drugs under Part B, which covers medicines administered under a physician’s supervision, is to shift those drugs into Part D, which was created to cover drugs purchased from pharmacies.

From the perspective of CMS, the biggest difference between the systems is that Part B pays the average sales price (ASP) plus a 6% administration fee, while Part D uses private plans to negotiate prices and impose utilization management controls.

For many patients, however, the difference is that supplemental insurance eliminates or sharply reduces out-of-pocket costs in Part B, while Part D imposes costs that can put drugs out of reach.

“We should move to a system where doctors have no financial incentive in terms of the drugs they are prescribing.”

Alex Azar, HHS

CMS’s challenge, if it shifts drugs from Part B to D, is to secure savings for the taxpayer without imposing crushing costs on patients.

In 2015, the most recent year for which the Government Accountability Office provided a total, Part B spent $26 billion on drugs.

Azar has made it clear that he is open to ways of changing Part B drug purchasing other than shifting to Part D, including reviving a failed experiment, the Competitive Acquisition Program (CAP), that ran from 2005 to 2007. Under CAP, private vendors served as middlemen between drug manufacturers and medical practices.

Azar hasn’t announced timelines for achieving the changes he envisions. It would be impossible to implement large-scale restructuring of Medicare drug payment policies in 2019 and will be challenging to get them into place in 2020.

This gives pharma, providers and patients time to engage with HHS to reshape the Medicare drug purchasing environment -- or to mobilize opposition (see “Azar’s Razor”).

Industry hasn’t decided whether it will work with Azar or try to obstruct his efforts in the hope of running out the clock on the Trump administration. PhRMA’s board of directors will meet June 1 to discuss the trade association’s response to the administration’s drug pricing blueprint, including its Part B provisions.

Because Azar can accomplish most of his goals through the power of his pen, corporate America’s preferred tools for influencing public policy, armies of lobbyists and buckets of campaign contributions, will be blunted. Industry’s attempts to sway the executive branch are more likely to focus on the deployment of surrogates, including patient and medical groups.

Sidebar: Azar’s razor

Dumping drugs from Part B

Under Part B, the government is “paying sticker plus a markup,” Azar told reporters at a briefing on May 14.

Relying on physicians and hospitals to purchase drugs and then reimbursing them ASP plus 6% ensures that government overpays, and creates financial incentives for physicians to prefer the most expensive therapeutic alternative, according to Azar.

“I fundamentally believe we should move to a system where doctors have no financial incentive in terms of the drugs they are prescribing,” he said.

Although HHS isn’t even close to having firm plans for what it will do to Part B, Azar is adamant that there will be changes, and that it would be in the best interests of biopharma companies to help determine how to design them.

“We are going to bring negotiation to Part B drugs,” he said at a May 16 meeting sponsored by the American Enterprise Institute and the University of Southern California-Brookings Schaeffer Initiative for Health Policy.

“It is going to happen, so it would be most productive if the pharmaceutical industry came to us with plans for these changes.”

Alex Azar, HHS

“It is going to happen, so it would be most productive if the pharmaceutical industry came to us with plans for these changes,” Azar said. “If pharma doesn’t come to us with a plan about which drugs it makes sense to move from Part B to D, we’ll decide that for them.”

Shifting drugs from Part B to D makes sense “so they are being paid under the same regime, fighting against each other, being put on formularies [and] controlled with appropriate utilization management,” Azar said.

While the ultimate goal is to merge all of Part B drug purchasing into Part D, HHS is considering several options for starting the process.

The shift could initially be limited to therapeutic classes where drugs are purchased both by Part B and by Part D, he said. Some conditions can be treated by biologics that are infused and by small molecule drugs. In addition, many drugs can be purchased and administered either under a physician’s direction or from a pharmacy, so they are purchased by both Part B and Part D.

Alternatively, HHS could use the results of a study it is conducting of disparities between U.S. pricing and prices in other The Organisation for Economic Co-operation and Development (OECD) countries to target Part B drugs that are much more expensive in the U.S. than in other industrialized countries, Azar said.

Would shifting from B to D save?

HHS has not modeled the economic effects of shifting drugs from Part B to D, but Azar has no doubt it would produce substantial savings. “I believe it will save patients out of pocket; I know it will save the taxpayers,” he told reporters.

The savings, he said, will result from applying the tools Part D plans use to negotiate prices. He suggested the savings could be large enough that some Part D plans could provide the drugs on terms that are at least as attractive for patients as the terms under Part B.

Experience with drugs purchased under both Part B and Part D provides insights into the pricing side of the equation.

According to the CMS Medicare Drug Spending Dashboard, Part B paid $9,814 per patient for Lucentis ranibizumab from the Genentech Inc. unit of Roche in 2016, spending $1.04 billion to treat 106,408 patients. Medicare paid an average of $8,380 for the 334 patients who received Lucentis under Part D in 2016.

Remicade infliximab from Johnson & Johnson cost Part B an average of $22,925 per patient for 58,397 patients in 2016. Medicare Part D paid an average of $28,282 per patient for 2,407 patients.

The Part B figures for both drugs reflect all of Medicare’s costs. The Part D figures, however, are almost certainly overestimates because they do not reflect manufacturer rebates or price concessions.

Given the large numbers of patients who use Lucentis and Remicade, and the availability of therapeutic alternatives, Part D plans would have a great deal of leverage to negotiate lower prices.

In addition, there is no way to know whether utilization management tools, such as requiring copays or prior authorization, would suppress demand in Part D.

Out-of-pocket costs

Ensuring that patients aren’t hurt by shifting from B to D will be crucial, and a challenge, James Scott, president & CEO of healthcare consulting firm Applied Policy, told BioCentury.

Scott said Azar’s objections to the Part B drug scheme make a great deal of sense from the taxpayer perspective. “The real problem is that Medicare Part B is an unmanaged benefit, with very few coverage policies, nothing limiting prescribing to on-label uses or those in guidelines, and the 6% administration fee rewards physicians for choosing the most expensive among alternatives,” he noted.

The patient perspective, however, could be quite different.

While patients who obtain drugs under Part B are responsible for a 20% coinsurance payment, the “vast majority of Medicare beneficiaries have supplemental insurance, so even though the drugs are very expensive, a lot of times the patient’s obligation is zero,” Scott noted.

In 2013, 81% of Medicare beneficiaries had supplemental coverage, according to the Kaiser Family Foundation.

“Proposals to merge Part B coverage of medicines into Part D could increase patient costs and reduce access.”

Holly Campbell, PhRMA

For drugs that cost more than $670 per month, Medicare Part D plans can charge up to a 33% coinsurance fee. Supplemental insurance cannot be used to offset out-of-pocket costs under Medicare Part D.

As a result, even Part B beneficiaries who do not have supplemental coverage could pay more out-of-pocket if a drug were shifted from Part B to D.

“It will be important for the administration to consider these factors as it considers whether some Part B drugs should be reimbursed under Medicare Part D to make sure the move isn’t just good for the government’s bottom line, but is also good for consumers,” Scott said.

An analysis conducted by Avalere Health LLC illustrates the complexity of determining the effects of shifting drugs from B to D.

The analysis included a basket of drugs that were approved for new indications including lung, intestinal, breast, ovarian and pancreatic cancers and melanoma, myeloma and lymphoma. The Part D drugs were oral therapies, and the Part B drugs were administered by physicians. All the drugs had been approved for these indications for one year or less.

In 2015 and 2016 about 14,000 Part D enrollees who were not eligible for low-income subsidies paid an average of $4,400 in out-of-pocket costs for new cancer therapies, and their average gross drug costs were $70,000. Gross drug costs include total spending for the prescription claim by the patient, plan and government, but exclude manufacturer rebates paid to plans.

During the same period, about 2,000 Part B enrollees who did not have supplemental insurance paid an average of $9,700 for new cancer therapies, and their average ASP+ drug costs were $48,000.

This analysis demonstrates that a shift from Part B to D would result in higher out-pocket costs for the minority of Part B enrollees who do not have supplemental coverage. While the analysis was conducted on selected cancer drugs, Avalere told BioCentury results would be similar for other high-cost drugs.

Complicating the analysis further, more people are enrolled in Part B than in Part D. Holly Campbell, deputy VP for public affairs at PhRMA, ballparked the figure at “hundreds of thousands” of beneficiaries. Some of those patients who would have had access to drugs under Part B may be unable to afford them if they are shifted to Part D, Campbell said.

“Proposals to merge Part B coverage of medicines into Part D could increase patient costs and reduce access,” she told BioCentury.

Sorting through the claims and counter-claims about the effects on patients will be a complex, time-consuming process.

If the policies are implemented through a proposed rule, CMS would be legally required to produce an actuarial analysis. There are bureaucratic alternatives that would not require economic reporting.

Azar has said he will develop drug policy in a transparent manner. This suggests that CMS will release analyses of the costs and coverage implications of its proposals before they are put into effect.

Reviving CAP

In addition to shifting drugs from Part B to D, the Trump administration is considering reviving CAP.

CAP was authorized by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003. The idea was to allow physicians to opt out of the Part B buy-and-bill process.

CMS solicited bids in 2005 from vendors who would purchase drugs from manufacturers and provide them to physicians. CAP went into effect in 2005 and was suspended in 2008 because it didn’t attract enough vendors.

The economic environment has changed a great deal since 2008, with Part B supplying multiple competing high-priced drugs, so there could be more interest on the part of potential middlemen, Azar told reporters.

A revival of CAP, “or a model building on CAP authority, may provide opportunities for Federal savings to the extent that aggregate bid prices are less than 106 percent of ASP,” according to the Trump administration’s prescription drug pricing plan. It would also provide “opportunities for physicians who do not wish to bear the financial burdens and risk associated with being in the business of drug acquisition.”

CAP, or something like it, could leverage restrictive formularies to negotiate prices. While doing so would reduce prices, it could also raise concerns among patients and physicians about restrictions on access to therapies.

Power of the pen

Azar told reporters he believes CMS has authority to implement changes to Medicare drug payment under the Affordable Care Act (ACA), which created the Center for Medicare & Medicaid Innovation (CMMI) and gave it power to test innovative payment and service delivery models.

“We believe it is within our authority to use demonstration authorities, as well as the innovation authority within CMMI, to experiment with changing Part B into Part D drugs, and we will not hesitate to do so,” Azar told reporters.

CMS tried to use CMMI to restructure Part B under the Obama administration, proposing in March 2016 to reduce the ASP fee to 2.5% for physician practices in about 75% of the country while retaining 6% for the remainder. This was intended to be the first stage of a plan that would include experimenting with value-based payment models.

Biopharma companies, oncologists and rheumatologists, and patient groups attacked the plan.

A letter from 179 Republican members of Congress protesting the CMMI Part B demonstration said CMS “exceeded its authority, failed to engage stakeholders, and has upset the balance of power between the legislative and executive branches.”

The criticism forced CMS to withdraw the plan.

Azar told reporters that his use of CMMI to alter Part B drug payments wouldn’t meet the same fate. He called the Obama administration’s plan a “simple price control” that would have been achieved by “cramming down the 106%” of ASP formula.

Moving drugs to Part D “retains beneficiary choice” because there will be a multitude of Part D plans with different benefit designs, Azar said.

He also noted that ASP-based reimbursement hurts physicians, especially those with low-volume practices, who are unable to purchase drugs at or below the average sales price.

A key to building political support for the plan will be limiting the number of interest groups that oppose it.

If HHS finds a way to ensure that patients’ costs do not increase, and to compensate physicians and medical practices for administering drugs, it would neutralize two sets of potential opponents.

Companies and Institutions Mentioned

American Enterprise Institute, Washington, D.C.

Biotechnology Industry Organization, Washington, D.C.

Brookings Institution, Washington, D.C.

Eli Lilly and Co. (NYSE:LLY), Indianapolis, Ind.

Genentech Inc., South San Francisco, Calif.

Johnson & Johnson (NYSE:JNJ), New Brunswick, N.J.

Kaiser Family Foundation, San Francisco, Calif.

Pharmaceutical Research and Manufacturers of America (PhRMA), Washington, D.C.

Roche (SIX:ROG; OTCQX:RHHBY), Basel, Switzerland

University of Southern California, Los Angeles, Calif.

U.S. Department of Health and Human Services, Washington, D.C.


Schaeffer, S., et al. “Editors’ commentary: Save the baby.” BioCentury (2016)

Unsigned commentary. “Paying the piper.” BioCentury (2014)

Unsigned commentary. “Facing reality.” BioCentury (2013)

Usdin, S. “Plan B for Part B?” BioCentury (2016)

U.S. government. “American patients first: The Trump administration blueprint to lower drug prices and reduce out-of-pocket costs.” (2018)

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