MedPAC to Forward Three Recommendations to Congress to Target Prescription Drug Costs

During the April 2023 Medicare Payment Advisory Commission (MedPAC) meeting, the Commission unanimously approved three recommendations designed to target the cost of certain medicines covered by Medicare. The Commission considered alternative approaches for Medicare to address several factors, including high prices and uncertain clinical evidence for Part B accelerated approval drugs, the lack of price competition for drugs with similar health effects, and financial incentives that are associated with the percentage add-on to Medicare Part B’s payment rate.

One recommendation would lower prices by applying a cap for drugs approved by the United States Food and Drug Administration (FDA) under the accelerated approval program, but for which a clinical benefit was not confirmed; a second would allow the Centers for Medicare and Medicaid Services (CMS) to bundle similar drugs and biologics into a single average sales price (ASP)-based payment rate; while the third would replace a long standing payment formula for physicians by reducing add-on payment for drugs and biologics paid ASP and eliminating add-on payment for drugs and biologics paid at wholesale acquisition cost (WAC).

Accelerated Approval Drugs

MedPAC notes that when some drugs are approved under the accelerated approval pathway, there is uncertainty about whether the drug will improve clinical outcomes. At this time, there is no way for Medicare to differentiate payment between accelerated approval drugs whose clinical benefit is not verified, whose confirmatory trial is late, or drugs that are covered under a coverage with evidence development (CED) policy. Therefore, the Commission believes that the current Part B drug payments do not encourage manufacturers to complete their confirmatory trials in a prompt manner.

MedPAC suggests capping the payment for these types of accelerated approval drugs so that manufacturers would be encouraged to complete their confirmatory trials quickly and help to ensure that Medicare does not overpay when a product’s clinical benefit is not confirmed. Under the recommendation, the payment cap could be set based on the clinical benefit and the cost of the drug relative to the standard of care. Additionally, the cap could be in the form of a rebate. Once the clinical benefit of the drug is verified, the payment rate would then revert to current law.

Price Competition for Similar Drugs

The Commission also stated a belief that there is currently insufficient price competition for drugs and biologics that have similar health effects. Currently, Medicare Part B pays for single source drugs, 505(b)(2) drugs, biologics, and biosimilars based on each products own ASP. In 2017, the Commission recommended a type of reference pricing for biosimilars and originator biologics. This new policy recommendation would build upon that recommendation and would extend reference pricing to products that have similar health effects. The Commission believes that such a policy would help increase price competition and reduce the spending by both Medicare and beneficiaries.

The Commission believes that a policy to establish a single ASP-based payment rate for drugs and biologics with similar health effects would serve to improve price competition. Under this recommendation, each product could remain in its own billing code and payment could be based on the volume weighted ASPs of all products in the reference group. When creating a reference group, the Commission recommended certain factors to be considered, including clinical indications, classification, and ease of implementation.

Payment Changes

Finally, the Commission aims to change the way providers are paid in connection with Part B drugs. Currently, Part B pays providers ASP plus 6% for drugs. An additional – separate – payment for drug administration under the physician fee schedule (PFS) or outpatient prospective payment system (OPPS) can also be made. The Commission believes that such a payment structure can incentivize and play a role in which drugs are prescribed by providers to patients.

Therefore, the Commission aims to reduce add-on payments for costly Part B drugs that are paid based on ASPs to improve financial incentives. The Commission recommended maintaining the 6% ASP add-on for lower price drugs while reducing add-on payments for middle to high-priced drugs and adding a fixed fee. Additionally, they recommend placing a fixed dollar cap on the add-on for the costliest drugs. By way of example, the ASP add-on for a particular drug could be the lesser of: 6%, 3% + $24, or $220.

What Happens Next?

From here, the recommendations will be forwarded to Congress, though there is no requirement that Congress take action on the recommendations.