After Medicare proposes changing how docs get paid for pricey drugs, the industry is up in arms

Medicare trustees released their annual report last week on the fiscal health of the Medicare system. Although they noted the program’s current costs are low by historical standards, trustees said Medicare “still faces a substantial shortfall that will need to be addressed,” and projected that the date of depletion of the hospital trust fund is now 2028, not 2030, as trustees projected last year. Medicare, though, is not running out of money nor is it going bankrupt, as some opponents of the program have suggested. Even if the worst happened, it would still be able to pay about 87 percent of the benefits it currently provides. But concerns about the system’s finances remain and containing costs is crucial for long-term stability.

That’s all the more reason to pay attention to the very public fight going on between Medicare and the oncologists and other doctors who administer expensive chemotherapy and injectable drugs in their offices for Medicare patients. (Hospitals also administer these drugs.) Doctors buy the drugs and are reimbursed by Medicare. Medicare pays 80 percent of the cost for this Part B service. Seniors pay the remaining 20 percent through their Medigap policies, or as the 20 percent coinsurance most Medicare Advantage plans require them to pay until they hit the out of the out-of-pocket maximum — this year as much as $6,700. 

Those Part B drugs are some of the priciest around, and Medicare wants to spend less and get better value for the services it covers. It’s not uncommon for some cancer drugs to cost as much as $100,000 for a course of treatment. A new study by the consulting firm Milliman found that biologic chemotherapies increased 335 percent from 2004 to 2014 for people insured under Medicare, and 485 percent for those insured by commercial carriers. That’s not exactly small change.

For drugs covered by Part B, the Centers for Medicare and Medicaid Services (CMS) must pay what the manufacturer asks plus a profit margin, so changing the payment formula is a way for the agency to begin containing the prices it pays for Part B drugs and targeting its dollars toward the most effective drugs for the lowest cost.

Medicare now pays doctors who administer Part B drugs according to a formula, which is the average sales price of the drug plus 6 percent, an amount that’s been reduced to 4.3 percent under the rules of the government sequester effective in 2013. Under its new proposal, a pilot program, Medicare will pay doctors 2.5 percent of the price, also lowered by the sequester, plus a flat fee of $16.80, which would be adjusted each year. The idea is to create a payment arrangement far less dependent on the price for the drugs set by the pharmaceutical companies.

Changing the incentives and helping seniors with lower out-of-pocket costs are worthy goals, but doctors, drug companies, and patient advocacy groups with ties to the industry don’t see it that way. They’ve been waging a PR war to force Medicare to back down. 

CMS says in a press release it wants “to make sure that doctors aren’t penalized for choosing the most effective drug if it happens to be inexpensive. Today, if a doctor chooses a lower-priced but more effective drug, he or she is paid less.” The new formula aims to give lower payments to doctors who prescribe more expensive drugs and higher reimbursements to those who use less expensive ones.  Another plus for Medicare beneficiaries is that they would pay less coinsurance because doctors would prescribe cheaper drugs.

Changing the incentives and helping seniors with lower out-of-pocket costs are worthy goals, but doctors, drug companies, and patient advocacy groups with ties to the industry don’t see it that way. They’ve been waging a PR war to force Medicare to back down. The “Stop the Medicare Experiments” campaign pushed by the Community Oncology Alliance, a group of more than 300 cancer organizations, is urging voters to “express strong opposition to the CMS Medicare drug experiment” using messages crafted by the Alliance. It’s a common lobbying tactic that often works. The Immune Deficiency Foundation, a patient group that advocates for people with immunodeficiency diseases, asked members to send “Action Alerts” to Congress this spring “to force CMS to listen to the harsh implication of this proposed reimbursement structure.” 

One industry consultant told me, “The industry’s objective is to get rid of this now so it doesn’t become national payment policy.”

I discussed all this with Dr. Peter B. Bach who heads the Center for Health Policy Outcomes at Memorial Sloan Kettering in New York City. Bach is a vocal critic of the high price of cancer drugs. “What the doctors and pharmaceutical companies are claiming is demonstrably false,” he told me. “Doctors say it’s a pay cut, but it’s primarily a redistribution of profits earned from using high-priced drugs to lower-priced drugs.” The doctors who will get less don’t like it one bit and neither do the drug makers.

“Doctors are carrying water for the pharmaceutical corporations because their interests are aligned,” Bach said. “The current practice CMS is trying to change allows them to raise drug prices over time. It’s a distorted incentive that allows those corporations to make their products more attractive by having higher prices,” he adds. “There’s no other industry I can think of where raising prices increases your market share.” Of course higher prices translate into bigger checks for prescribing doctors.

Bach and his colleagues have found that the cost to the health care system from the current payment arrangement for doctors and hospitals is 49 percent over and above the cost of the drugs themselves.

Bach’s team has also examined the claims and comments opponents of the change have made. One assertion is that when doctors are financially stressed, they send patients to hospitals for treatments, a point doctors have been making for a few years. “What they claim did not happen,” according to Bach. As evidence he points to the sequestration law, which did cut payments by 2 percent. Unlike then, this latest CMS proposal is not a cut, he told me. It’s intended to be a budget neutral redistribution.

Medicare has been through these fights many times before. Fear mongering and urging scared patients to send letters and emails to the agency and to Congress usually do the trick. So do letters from members of Congress. As a result, CMS often scraps its proposals. This may happen again. A CMS official has already said he would work with Congress and “make adjustments as needed.”

Health care sellers have a lot of power, and they’re skilled at exploiting Americans’ strongly held belief that they must have the latest and greatest medical technology no matter the cost. That makes containing those costs really hard. What the proposal doesn’t do, says Dan Mendelson, CEO of the consulting firm Avalere Health, “is improve competitiveness of drug purchasing or set up some rational framework to bring more value to the system.” Meanwhile, pharma corporations are still calling the shots.   

Veteran health care journalist Trudy Lieberman is Contributing Editor of the Center for Health Journalism Digital and a regular contributor to the Remaking Health Care blog.