MedPAC Recommends Changes to Medicare Drug Coverage

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Pressure is mounting to reduce costs and spending on prescription drugs.

Rapid growth in Medicare spending on prescription drugs is prompting a leading advisory group to recommend significant revisions in how the government pays for medicines under Part D and Part B. Much of the June 2016 report of the Medicare Payment Advisory Commission (MedPAC) focuses on these issues in its effort to address the serious financial challenges in securing healthcare for the nation’s elderly.

The proposals, which MedPAC approved several months ago, aim to halt the estimated 20% annual growth in the Part D program, which is running $73 billion in annual costs. The aim is to save at least $10 billion over five years by encouraging insurers to negotiate lower prices with pharma companies and supporting more generic drug use. The analysts note that rising drug costs are driving more beneficiaries over the current Part D out-of-pocket (OOP) spending threshold (approximately $7500) and into catastrophic coverage. To offset this trend, MedPAC proposes that Part D plans should bear more of cost of doughnut-hole coverage, which should encourage sponsors to negotiate harder for lower prices from pharmaceutical companies. The government would still pay 75% of Part D costs, explained MedPAC executive director Mark Miller, but its share would be lower for those in the reinsurance portion of the program, which has been growing much faster than the rest of the drug benefit.

Pharma companies also would feel pressure to lower prices on Part D drugs by the proposal to exclude manufacturers’ discounts from calculations of true OOP costs of beneficiaries. This change would delay when beneficiaries reach catastrophic coverage and cost manufacturers and Medicare patients approximately $1000 a year, while reducing Part D spending by about $1 billion annually. To soften the blow, beneficiaries would gain greater protection through a “hard cap” on OOP costs of about $4800.

Part D plans, in turn, would gain more flexibility in revising and managing formularies. A major change, which was previously discussed, is to remove antidepressants and immunosuppressants for transplant rejection from the list of drug classes with mandatory coverage, a move that routinely draws strong objections from pharma companies.

Avalere Health calculates that setting a cap on catastrophic spending would lower OOP costs for beneficiaries with very high prescription drug spending. At the same time, the change in how true OOP costs are calculated to exclude brand discounts would increase beneficiary spending.


MedPAC also supports strategies for revising coverage of drugs dispensed in doctors’ offices and clinics under Medicare Part B. The aim here, as in earlier reform initiatives from the Centers for Medicare and Medicaid Services (CMS), is to encourage prescribing of less costly medicines by revising the reimbursement model based on average sales price (ASP) and to promote more price competition among Part B drugs. 

Coverage of oncology medicines under Part B gets special attention, with a range of proposals for adopting risk-sharing agreements and the use of medical homes and bundling to better coordinate and manage cancer treatment overall. The $20-billion Part B program is growing by 10% a year, and about half of that is due to higher priced drugs, explained Miller. And half of Part B program costs involves cancer treatment. Miller acknowledged that it’s hard to strike a balance between managing costs and getting the best outcome for beneficiaries, but that the commission seeks to shift away from the “anything goes” fee-for-service environment that has characterized Part B reimbursement for too long.   

Many of these revisions require Congressional action, and have been on the table for several years. So far the legislators have rejected such changes, partly due to strong objections from pharma manufacturers that such sweeping reforms will erode coverage and leave patients without access to treatment. But a new administration and a new Congress may look more favorably on strategies for curbing outlays on prescription drugs.