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CMS Proposed Rule Reduces Drug Payments & Requires Implementation of Value-Based Purchasing Tools

Proposed Rule

Recently, CMS published a Proposed Rule seeking to test a new model for how Medicare pays for drugs and biologicals paid under the Medicare Part B program. With the goals of determining whether alternative drug payment models will result in “better care” and “smarter spending” by reducing Medicare expenditures while enhancing the quality of care, CMS proposed a two phase Part B Drug Payment Model to “test whether alternative payment approaches for Part B drugs improve value (relative to current drug payment approaches under Part B).”

Current Payment Model

Medicare Part B reimburses physicians for the costs of certain drugs and biologicals that are not usually self-administered but are provided as part of a physician service in a physician office. For hospital outpatient services (paid under Part B), although most drugs are included in a bundled payment, some drugs are paid separately. Certain other categories of drugs are also paid under Medicare Part B (such as oral anti-cancer drugs), but most prescription drugs are covered under Medicare Part D and are not impacted by this Proposed Rule.

Currently, most Part B drugs are paid based on the Average Sales Price (ASP) plus a statutorily mandated 6% add-on. The ASP is defined in Section 1847A of the Social Security Act as a weighted average sales price for all National Drug Codes that are assigned to a Healthcare Common Procedure Coding System code and does not vary based on the price an individual entity paid or the effectiveness of the drug. Payment for these products does not include the professional charge to administer them to patients (such as by injection or infusion).

Based on a 2015 MedPAC Report to Congress, CMS believes that the ASP payment methodology may encourage the use of more expensive drugs because higher priced drugs result in higher add-on payment amounts (because the add-on is a percentage of the ASP, and the ASP varies by drug).

Proposed Rule Phase 1

As proposed, CMS will implement a variation to the add-on component of Part B drug reimbursement. In different geographic regions of the country, the 6% add-on to the ASP used to make Part B drug payments will be reduced to 2.5% plus a flat fee of $16.80 as the alternative add-on amount. The fee would be annually adjusted based on the percentage increase in the consumer price index for medical care for the most recent 12-month period. The proposal requires all providers and suppliers, including physicians, durable medical equipment suppliers, and hospital outpatient departments, furnishing any Part B drugs included in the selected geographic region to participate in the new payment model.

Hinting at where CMS might focus future drug cost containment efforts, CMS notes in the Proposed Rule that the Phase 1 approach addresses the add-on to the drug manufacturer’s ASP but not the ASP information actually reported. The preamble to the Proposed Rule notes that “[f]or a given HCPCS code, the add-on represents about 6 percent of an ASP-based Part B drug payment; the remaining 94 percent of the payment is calculated from the manufacturers’ reported ASP data,” making “ASP . . . a more significant driver of drug expenditures than the add-on payment amount for Part B drugs.”  81 Fed. Reg. 13229, 13232 (March 11, 2016).

Proposed Rule Phase 2

In conjunction with Phase 1, as proposed, CMS will implement with Phase 2 so-called “value-based purchasing tools,” such as those used by commercial health plans, pharmacy benefits managers, and other private payers to manage drug cost. CMS proposes using one or more tools, such as “indication-based pricing,” “reference pricing,” and “clinical decision support tools” to Part B drugs, to see if and how much the tools affect expenditures and patient outcomes.

Seeking Comments

Comments in response to the Proposed Rule are due to CMS by May 9, 2016.

In addition to soliciting comments relating to Phase 1 and Phase 2, CMS is seeking comments on:

  • How to create value-based purchasing arrangements with manufacturers under Medicare fee-for-service payment for drugs;

  • Whether CMS should consider implementing an updated version of the Competitive Acquisition Program for Part B Drugs and Biologicals; and

  • Whether CMS should pursue a more bundled or episode-based approach that moves beyond a fee-for-service payment structure.

© 2020 Foley & Lardner LLPNational Law Review, Volume VI, Number 74


About this Author

Judith Waltz, False Claims Act Attorney, Foley Lardner Law Firm

Judith A. Waltz is a partner and business lawyer with Foley & Lardner LLP. Her practice focuses on government investigations, false claims act, corporate integrity agreements (CIAs), bankruptcy, and Medicare and Medicaid counseling. Ms. Waltz works with clients in various areas of the health care industry. She is former co-chair of the firm’s Life Sciences Industry Team, and former vice chair of the Health Care Industry Team. Ms. Waltz is also a member of the Government Enforcement, Compliance & White Collar Defense and Bankruptcy & Business Reorganizations...

Jason L. Drori, Foley Lardner, Drug industry Lawyer, Pharmaceutical Compliance Attorney
Senior Counsel

Jason Drori is a senior counsel in the Business Litigation & Dispute Resolution Practice of Foley & Lardner LLP. Mr. Drori concentrates his practice on the legal needs, business challenges, and regulatory pressures of the life sciences sector, particularly pharmaceuticals. He represents pharmaceutical companies and other drug industry stakeholders in commercial disputes as well as investigations and enforcement actions by the Department of Justice, federal regulatory agencies, and State Attorneys General. Mr. Drori litigates complex, high-profile cases involving claims of health care fraud, regulatory noncompliance, off-label drug promotion, drug misbranding and unbranded marketing, False Claims Act violations, and unfair competition.

Torrey K. Young, Foley Lardner, Health Care Attorney, Regulatory Compliance Lawyer
Senior Counsel

Torrey K. Young is a health care lawyer with Foley & Lardner LLP. She focuses on health care regulatory compliance and transactional matters. Ms. Young has significant experience conducting internal investigations, responding to government investigations, advising providers regarding compliance concerns, and assisting with managed care and clinical integration issues. She is a member of the firm’s Health Care Industry Team and the Government Enforcement, Compliance & White Collar Defense Practice.