How Can Medicare Hold Down Drug Prices?

By | July 5, 2018

There is a significant amount of discussion concerning the prices of drugs. For example, the spending on pharmaceutical treatment of cancer has increased $19 billion from 2012 to 2016. Price growth continues, and analysts estimate that by 2021, 25% of all new pharma research will be on cancer treatment and 87% of this growth will be on targeted, genomic agents, by far the costliest option available. An aging population means that Medicare will finance the majority of this spending. How we as a society, the owner of Medicare, respond will be critical for the sustainability of this social program.

The current laws governing drug payments under Medicare Part B and Part D require the coverage of all FDA-approved cancer drugs for on-label indications as well as off-label indications listed in approved compendia, whether through “reasonable and necessary” language for Part B or “protected class” criteria for Part D. Unlike other insurance carriers, Medicare does not have the authority to set coverage determinations or the formulary design. The law also prevents Medicare from directly negotiating with manufacturers for Part B drugs, which covers infused medications. The present payment system for these Part B treatments, which comprise the majority of cancer treatments, is the buy-and-bill system. Under that system, physicians and hospitals bill Medicare 6% above the average sale price, thus creating an incentive for all, with the exception of CMS and the consumer, to have that average price as high as possible. Part D coverage for all other medications is managed through third party insurance companies or pharmacy benefit managers, once again, removing the incentive to hold down costs with the introduction of a middle person.

What are the possible solutions? First and foremost, the FDA, in conjunction with oncology specialty societies and other stakeholders, need to agree on the appropriate endpoints and outcomes for approval. These minimum clinically meaningful effect sizes need to be consensus-driven, focusing on definitions that consider the value. These norms should include a minimum increase in life expectancy with the benefit to hazard ratio considered as well as the cost-effectiveness for the gain in Quality Adjusted Life Years (QALY). Secondly, the laws concerning the CMS’s ability to negotiate on pricing must be adjusted. In certain realms, Medicare should be allowed to act more as a payor.

Medicare is a social benefit; understandably, there is a definite concern in applying market forces to a social right. Having watched how our free market works, this is a legitimate problem. However, Congress could direct CMS to conduct a demonstration project to test and learn the best way to enact such changes as well as other payment innovations such as value-based drug pricing. To allow for unintended consequences to be monitored, their negotiating power could be phased in over time.

We should not let the polarity of the issue, privilege versus right, stop us from attempting to manage towards a better outcome. If we continue to look at all these issues as either one way or another, we run the risk of missing opportunities for creating a meaningful model that will allow for appropriate treatments and sustainability.