Get ready for big changes in Medicare drug pricing

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Denise Scott, 66, of Cleveland, Ohio, gets a subsidy from Medicare to help her pay for some of her prescription drugs. But, next year, some a premium increase may mean some low-income Medicare drug beneficiaries must pay a larger share for their medicine. Photo by Lynn Ischay/Kaiser Health News

Medicare announced a test program last week to help combat the trend of rising drug prices. Medicare Maven Phil Moeller explains the far-reaching changes. Photo by Lynn Ischay/Kaiser Health News

Editor’s Note: Journalist Philip Moeller, who writes widely on health and retirement, is here to provide the Medicare answers you need in “Ask Phil, the Medicare Maven.” Send your questions to Phil.


In place of our normal dive into the reader mailbag today, I wanted to give you a heads up on a significant announcement the Centers for Medicare and Medicaid Services made last week. It is likely to set in motion far-reaching changes in the way you pay for some and perhaps eventually all of the drugs you buy through Medicare. I say “likely” because the proposal has scads of influential opponents in the medical community and Congress, so its final form and timing are anything but certain. Also, the changes wouldn’t begin until late this year. For these reasons, I’m not going to get too deeply into details today. Rest assured, I will do so when the time is right.

As I’ve complained repeatedly, Medicare is prohibited from directly negotiating drug prices with pharmaceutical companies. This was one of the “free enterprise” provisions that Republicans insisted upon when Medicare’s Part D prescription drug program was enacted in 2003 (the actual Part D plans did not begin until 2006). Preventing Medicare from directly using its powerful leverage to influence drug prices has been a major (but hardly the only) cause of what is now a runaway epidemic of higher drug prices. A government report estimates that prescription drug spending totaled about $424 billion in 2014, up 12.6 percent from 2013, and increased another 8 percent last year to an estimated $457 billion.

READ MORE: Lower drug prices: Does any candidate have an Rx?

While no one would accuse the drug industry of taking it easy on consumers when it comes to pricing, the reasons for the increases are not all in the greed department — just mostly.

The report noted that 10 percent of the increase is due to population growth and another 30 percent caused by a rise in the numbers of prescription drugs we take. A goodly amount of this is undoubtedly due to the industry’s enormous $5 billion annual spending on consumer drug ads. Another 30 percent of the increase was attributed to “economy-wide” inflation, although this is a bit of a head-scratcher, as general inflation has been modest if not nonexistent. The final 30 percent segment was caused by drug prices that increased by more than economy-wide inflation rates and by drug prescribers moving consumers into higher priced medications. This last factor is also one that has been heavily influence by drug companies’ marketing efforts.

Preventing Medicare from directly using its powerful leverage to influence drug prices has been a major (but hardly the only) cause of what is now a runaway epidemic of higher drug prices.

To help combat this trend and influence pricing within its limited powers to do so, Medicare announced a test program last week that would change the way some providers are paid for the drugs they prescribe in Part B of Medicare. This is NOT the part of Medicare that covers most drugs. That would be Part D. Part B covers drugs — many expensive ones — that are administered in doctors’ offices or by caregivers in an outpatient setting.

Annual Part B expenses are less than $20 billion, compared with $140 billion for Part D. But it’s hardly unreasonable to think that changing Part B payments would lead to “tests” of new Part D pricing approaches as well and then perhaps to broader prescription plans for all consumers. Calling this a test is, by the way, disingenuous. The Centers for Medicare and Medicaid Services proposes that the test will last for five years and be mandatory and that providers (and Medicare beneficiaries) in 75 percent of the country will face pricing changes.

READ MORE: Big hikes in drug prices make Medicare open enrollment shopping a must

“Today, Medicare Part B generally pays physicians and hospital outpatient departments the average sales price of a drug, plus a 6 percent add-on,” the Centers for Medicare and Medicaid Services said. “The proposed model would test whether changing the add-on payment to 2.5 percent plus a flat fee payment of $16.80 per drug per day changes prescribing incentives and leads to improved quality and value.”

The Centers for Medicare and Medicaid Services thinks the current flat 6 percent add-on tilts doctors and other drug prescribers toward using more expensive drugs. The logic is that 6 percent of an expensive drug puts more money in a doctor’s wallet than 6 percent of an inexpensive medication. Including a smaller percentage and a flat payment per drug, the agency says, will encourage doctors to use less expensive drugs that might be equally or even more effective.

In addition to the pricing shift, the agency also would test a number of other pricing tools, including eliminating consumer cost sharing for Part B drugs, to support the goal of so-called “value based pricing.” This objective is part of a recent law that included provisions to move Medicare away from being a fee-based insurer to one that pays providers for the quality of their care and the improved health of Medicare beneficiaries.

Later this year, the agency would begin testing the 2.5 percent, $16.80 daily flat-payment approach for some Part B prescribers, while keeping the current 6 percent add-on for others. In 2017, it would split these two groups into four by testing value-based purchasing tools for some providers in each group.

READ MORE:Your guide to choosing a Medicare drug plan that’s right for you

Many medical groups, particularly those treating cancer patients and others who take expensive drugs, have issued unusually strong statements of opposition to these changes, saying they will hurt and not help patients by forcing doctors to prescribe less expensive and less useful drugs. The notion that doctors would sacrifice patient welfare for financial gains doesn’t go over so well either.

In a letter to the Centers for Medicare and Medicaid Services officials, one of those medical groups, the Community Oncology Alliance, said, “we are actively pursuing every legal, legislative, and related option to stop the CMS [Centers for Medicare and Medicaid Services] Medicare Part B Drug Payment Model, which is nothing more than a perverse experiment on cancer care provided to seniors.”

Many medical groups have issued unusually strong statements of opposition to these changes, saying they will hurt and not help patients by forcing doctors to prescribe less expensive and less useful drugs.

An earlier letter, signed by more than 100 medical groups, said, “Medicare beneficiaries — representing some of the nation’s oldest and sickest patients — must often try multiple prescription drugs and/or biologics before finding the appropriate treatment for their complex conditions. These patients need immediate access to the right medication, which is already complicated by the fact that treatment decisions may change on a frequent basis. These vulnerable Medicare patients and the providers who care for them already face significant complexities in their care and treatment options, and they should not face mandatory participation in an initiative that may force them to switch from their most appropriate treatment.”

“There is no evidence,” it added, “that the payment changes contemplated by the model will improve quality of care, and may adversely impact those patients that lose access to their most appropriate treatments. In fact, data suggests that the current Part B drug payment system has been both cost effective and successful in ensuring patient access to their most appropriate treatment, as Part B expenditures remain relatively stable and Part B drugs account for just 3 percent of total program costs.”

This is a big deal for many reasons. While not doubting the Centers for Medicare and Medicaid Services’ goal to improve quality and reduce costs, these and other test programs are likely to create very unsettling transition periods.

Stay tuned and strapped in!


Clarification: Brady, one of last week’s questioners, described receiving Medicare’s Extra Help benefits to help pay for Medicare and Part B premiums. The Extra Help program is only for Part D prescription drug assistance. The other Medicare support programs mentioned in the answer do involve payments for other Medicare expenses, include Part B premiums.

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