Today, the Medicare Payment Advisory Commission (MedPAC) convened for the first day of their March public meetings. Among their deliberations, the Commission considered developing payment policy to promote use of services based on clinical evidence. Discussion focused predominately on proposals to apply the defunct least costly alternative (LCA) policy to Medicare Part B drugs.
After staff presented a summary of the policy, including a research review and policy rationale, Commissioners discussed the benefits and challenges of implementing such a policy in the Medicare program. Among the most prominent concerns, several Commissioners said that the policy could prevent beneficiaries from accessing medications that are medically necessary, and the appeals process for such a system would likely be burdensome and costly. Commissioners also acknowledged that there would be challenges in determining clinical effectiveness between drugs, specifically in determining what incremental differences would merit differences in reimbursement rates.
Despite some concerns raised with the LCA policy, many Commissioners expressed support for the measure and noted that MA plans and private companies have effectively implemented such cost containment techniques “for decades.” Following discussion, MedPAC Chairman Glenn Hackbarth said that the Commission will continue to pursue ways to utilize clinical evidence, with a focus on four potential outcomes: (1) the traditional LCA policy which would give the Secretary the authority to selectively limit reimbursement based on the price of the least costly alternative; (2) a methodology based on grouping together drugs that treat the same conditions, and developing an average reimbursement rate that would apply to the entire grouping; (3) illness episode bundling, which would reimburse an episode at the average price based on a clinical assessment; and (4) rely on Accountable Care Organizations (ACOs) and Medicare Advantage (MA) to make progress in payment reform, while conceding that such techniques are too difficult to apply to traditional Medicare.
Staff Presentation
MedPAC Principal Policy Analyst, Nancy Ray, and Senior Research Assistant, Katelyn Smalley, provided an overview of the Commission’s March discussion on promoting payment policy to promote use of services based on clinical evidence, and advanced additional rational for applying the LCA policy to Medicare Part B drugs. Ms. Ray noted that at the Commission’s March 2014 meeting, commissioners discussed setting the payment rate of Part B drugs based on the results of comparative clinical evidence.
Currently, Ms. Ray explained that Medicare reimburses providers for drugs under Part B by using the average sale price (ASP) and adding six percent. The ASP is obtained from the revenue of the drug, net of rebates, discounts, and price concessions. Ms. Ray noted that while this creates an incentive for providers to hold costs down, it also encourages the use of more expensive drugs if they can negotiate to pay manufactures less than 106 percent. Under the LCA policy, which was first implemented between 1995 and 2010, she said that payment rates would be set based on the least costly drug that treated the same condition and produced the same outcome. While the policy resulted in savings for the Medicare program, Ms. Ray noted that it was overturned in 2010 as a result of a lawsuit. A beneficiary challenged the LCA policy arguing that the drug should be covered by the Medicare Part B policy of paying 6 percent more than its average sales price. Federal courts agreed with the plaintiff, she explained, and in April 2010 LCA policies for Part B drugs were rescinded.
Ms. Smalley outlined a number of case studies to highlight the impact the LCA policy would have on drug prices. According to estimates from the Congressional Budget Office (CBO), applying the LCA policy to Part B drugs used for osteoarthritis of the knee would have saved Medicare approximately $500 million (time period undefined). And an estimate from the Office of the Inspector General (OIG) concluded that Medicare could have saved $33 million in one year if it had continued its LCA policy for prostate cancer drugs.
Ms. Smalley went on to summarize the use of reference pricing in other organizations, both domestically and internationally. She said that while most programs in the United States involve hospital services—although some price drugs this way—internationally, LCA tends to be used for pharmaceuticals. Ms. Smalley highlighted the Oregon-based Drug Effectiveness Review Project (DERP), which includes a collaboration of state Medicaid and public pharmacy programs conducting comparative effectiveness reviews for categories of drugs. There are currently 12 states participating in the initiative, she said, including some which use the information to set Medicaid payment policy. She also focused on Germany’s Pharmaceutical Market Restructuring Act. In Germany, an independent board evaluates the effectiveness of new drugs, the manufacturer sets the initial price, manufacturers and payers negotiate price discounts if the drug is shown to be superior to standard treatment, and if it’s not, a reference price is used for the new drug.
Highlighting the policy concerns around LCA policies, Ms. Smalley said that LCA policies could impact manufacturer’s incentives to innovate, could impact clinicians’ ability to treat individual patients, and could potentially lead to an unpredictable or less-than-transparent process. But she also outlined arguments for LCA, including: Medicare should ensure that beneficiaries are getting the best value; payment should not vary for products that clinicians prescribe for the same condition and produce similar outcomes; it would further sustainability of the medicare program; and Medicare’s Inpatient Prospective Payment System (IPPS)/Outpatient Prospective Payment System (OPPS) already have a precedent in increasing payments for technologies that are a substantial improvement of the existing technologies.
With respect to specific policy options, Ms. Ray explained that Medicare would need legislative approval to link payment to comparative clinical evidence. In 2012, she said that OIG recommended that CMS seek legislative authority to apply the LCA policy for certain clinically comparable products under circumstances it deems appropriate. Ms. Ray added that restoring Medicare’s LCA authority could be coupled with a requirement that the program evaluate opportunities for its application. She went on to add that a number of supplemental policies could be added to such a proposal to ensure that a transparent and predictable process was established for Part B drug pricing. For example, Ms. Ray suggested that all draft and final policies should be publicly listed, beneficiaries and stakeholders should be able to comment on the process, exemptions should be granted for medical necessity, and beneficiaries should be permitted to purchase a more costly item if an exemption is not granted.
Commissioners Discussion
Commissioner Kathy Buto, a former HHS/CMS official and healthcare executive, framed the discussion by turning the focus to three key concerns with LCA policies: (1) impacts on beneficiaries, (2) challenges in determining clinical effectiveness, and (3) the potential to stifle innovation. Among her concerns, she said that beneficiaries could be held responsible for overwhelming costs if they did not choose what was determined to be the most cost-effective treatment, while also questioning the validity of a proposed appeals process for medical necessity. With respect to determining clinical effectiveness, she said that while entities such as the Patient-Centered Outcomes Research Institute (PCORI) could be helpful in making such determinations, it can be difficult to draw distinctions between the effectiveness of many drugs. Finally, regarding innovation, she said that companies will likely be less willing to invest and innovate in areas where LCA policies are applied, and incremental improvements in treatments are unlikely to be rewarded. Chairman Hackbarth guided the remainder of the discussion around each of these three topics of concern.
Beneficiary Issues
Commissioner Jack Hoadley of Georgetown University said that relying on the appeals process for patients with medical necessity is not an ideal approach. He said that there is a “general sense” that appeals processes are burdensome, and often ineffective. And without an appeals process, he said that the alternative seems to be that the beneficiary would pay the difference in the cost. Nonetheless, Commissioner Hoadley expressed interest in an alternative proposal that would pay all products that are categorized in the same “cluster”—those that are said to produce similar outcomes for the same condition—a consistent payment rate. Commissioner Alice Coombs of South Short Hospital also expressed doubt with the appeal process, saying “if the appeals process worked well, I’d be more apt to support this Secretary jurisdiction.”
Determining Clinical Effectiveness
Commissioner Craig Samitt, formerly of DaVita HealthCare Partners and Dean Health System, said that the Medicare program should look to Medicare Advantage plans to identify how they have handled the issue of determining clinical effectiveness. Chairman Hackbarth said that looking at private MA plans could provide both lessons on how to handle the process mechanically, as well as “looking at the philosophical belief that it should be handled through a decentralized process at a more local level.” Commissioner William Hall of the University of Rochester School of Medicine said that drug prices need to be calculated in a way that creates stability—calling the current process a “regulatory nightmare”—and suggested that it’s difficult to set a “gold standard” for effectiveness when experts are often at odds on how to measure quality.
Chairman Hackbarth went on to elaborate on the challenge of creating a system that is fair and transparent from the beneficiary perspective. He said that while there are benefits in determining payment rates in a more “localized” fashion, as far as patients are concerned, it’s less transparent if the standards are not centralized. Commissioner Herb Kuhn of the Missouri Hospital Association responded that transparency is key from the beneficiary perspective, and said that “the centralization process works.” Commissioner Buto added that patient’s understanding of treatments is an issue that rarely comes up in the pricing discussion, but noted that this discussion could lead to a point where clinical evidence is brought to a level that the patient can understand, and they can be compelled in the difference in one treatment over another.
Commissioner Scott Armstrong of Group Health Cooperative downplayed these concerns, and said that “now is the right time to do this,” adding later that “this [policy] seems like a no brainer.” He pointed out that organizations such as Group Health Cooperative have been selectively paying for therapies for decades, and that the value for beneficiaries is in the fact that they know the drugs they are taking meet a high standard. Commissioner Jay Crosson of the American Medical Association agreed, but added that bundling payments for an entire episode of illness could be a more effective payment strategy and avoid the challenges of making drug-by-drug comparisons. He went on to say that this solution could also be more broadly applicable beyond the purview of Part B administered drugs. Warner Thomas of Ochsner Health System also agreed, saying that “these decisions are made every day by other entities.” He added that this comports with the principles of “looking out for the good of the beneficiary,” and ensures that they are charged “fairly and consistently.”
Stifling Innovation
Commissioner Katherine Baicker of the Harvard School of Public Health highlighted how the challenge of establishing differences in clinical effectiveness could lead to diminishing returns for drug developers who make incremental progress. She said that certain drugs may perform better in some impacts on worse on others, and “beneficiaries should be able to choose among the outcomes that matter to them the most.” She added that it’s important to maintain a system to rewards incremental improvements while not paying “more than necessary” for the population average. Commissioner Rita Redberg of the UCSF School of Medicine supported the German approach of reference pricing, and said that industry often overstates the impact of stifling innovation, and suggested that there is no evidence that LCA policies would lead to a reduction in innovation. Instead, she said that “we end up paying for things that are not new, innovative, or necessary at all.”
Commissioner Willis Gradison, a former Congressman and Duke University scholar, said that LCA policies should also consider Medicare Part D pricing. He cited evidence that less generic drugs are utilized for beneficiaries that are eligibility for the Low-Income Subsidy (LIS). Commissioner Gradison explained that he will support the LCA policy, but added that the Commission should look further into why physicians are choosing more expensive alternatives. Commissioner Hoadley responded with a proposal to use modified a Healthcare Common Procedure Coding System (HCPCS), calling it a “micro bundle example.” This methodology would include grouping together drugs that treat the same conditions, and developing an average price based on that grouping. He said that this would require researchers to review healthcare literature to determine if the drugs are actually equivalent. And in instances where there is a lack of scientific literature, PCORI could be commissioned to pursue additional research.
Despite some concerns raised with the LCA policy, many Commissioners expressed support for the measure and noted that MA plans and private companies have effectively implemented such cost containment techniques “for decades.” Following discussion, MedPAC Chairman Glenn Hackbarth said that the Commission will continue to pursue ways to utilize clinical evidence, with a focus on four potential outcomes: (1) the traditional LCA policy which would give the Secretary the authority to selectively limit reimbursement based on the price of the least costly alternative; (2) a methodology based on grouping together drugs that treat the same conditions, and developing an average reimbursement rate that would apply to the entire grouping; (3) illness episode bundling, which would reimburse an episode at the average price based on a clinical assessment; and (4) rely on Accountable Care Organizations (ACOs) and Medicare Advantage (MA) to make progress in payment reform, while conceding that such techniques are too difficult to apply to traditional Medicare.
Staff Presentation
MedPAC Principal Policy Analyst, Nancy Ray, and Senior Research Assistant, Katelyn Smalley, provided an overview of the Commission’s March discussion on promoting payment policy to promote use of services based on clinical evidence, and advanced additional rational for applying the LCA policy to Medicare Part B drugs. Ms. Ray noted that at the Commission’s March 2014 meeting, commissioners discussed setting the payment rate of Part B drugs based on the results of comparative clinical evidence.
Currently, Ms. Ray explained that Medicare reimburses providers for drugs under Part B by using the average sale price (ASP) and adding six percent. The ASP is obtained from the revenue of the drug, net of rebates, discounts, and price concessions. Ms. Ray noted that while this creates an incentive for providers to hold costs down, it also encourages the use of more expensive drugs if they can negotiate to pay manufactures less than 106 percent. Under the LCA policy, which was first implemented between 1995 and 2010, she said that payment rates would be set based on the least costly drug that treated the same condition and produced the same outcome. While the policy resulted in savings for the Medicare program, Ms. Ray noted that it was overturned in 2010 as a result of a lawsuit. A beneficiary challenged the LCA policy arguing that the drug should be covered by the Medicare Part B policy of paying 6 percent more than its average sales price. Federal courts agreed with the plaintiff, she explained, and in April 2010 LCA policies for Part B drugs were rescinded.
Ms. Smalley outlined a number of case studies to highlight the impact the LCA policy would have on drug prices. According to estimates from the Congressional Budget Office (CBO), applying the LCA policy to Part B drugs used for osteoarthritis of the knee would have saved Medicare approximately $500 million (time period undefined). And an estimate from the Office of the Inspector General (OIG) concluded that Medicare could have saved $33 million in one year if it had continued its LCA policy for prostate cancer drugs.
Ms. Smalley went on to summarize the use of reference pricing in other organizations, both domestically and internationally. She said that while most programs in the United States involve hospital services—although some price drugs this way—internationally, LCA tends to be used for pharmaceuticals. Ms. Smalley highlighted the Oregon-based Drug Effectiveness Review Project (DERP), which includes a collaboration of state Medicaid and public pharmacy programs conducting comparative effectiveness reviews for categories of drugs. There are currently 12 states participating in the initiative, she said, including some which use the information to set Medicaid payment policy. She also focused on Germany’s Pharmaceutical Market Restructuring Act. In Germany, an independent board evaluates the effectiveness of new drugs, the manufacturer sets the initial price, manufacturers and payers negotiate price discounts if the drug is shown to be superior to standard treatment, and if it’s not, a reference price is used for the new drug.
Highlighting the policy concerns around LCA policies, Ms. Smalley said that LCA policies could impact manufacturer’s incentives to innovate, could impact clinicians’ ability to treat individual patients, and could potentially lead to an unpredictable or less-than-transparent process. But she also outlined arguments for LCA, including: Medicare should ensure that beneficiaries are getting the best value; payment should not vary for products that clinicians prescribe for the same condition and produce similar outcomes; it would further sustainability of the medicare program; and Medicare’s Inpatient Prospective Payment System (IPPS)/Outpatient Prospective Payment System (OPPS) already have a precedent in increasing payments for technologies that are a substantial improvement of the existing technologies.
With respect to specific policy options, Ms. Ray explained that Medicare would need legislative approval to link payment to comparative clinical evidence. In 2012, she said that OIG recommended that CMS seek legislative authority to apply the LCA policy for certain clinically comparable products under circumstances it deems appropriate. Ms. Ray added that restoring Medicare’s LCA authority could be coupled with a requirement that the program evaluate opportunities for its application. She went on to add that a number of supplemental policies could be added to such a proposal to ensure that a transparent and predictable process was established for Part B drug pricing. For example, Ms. Ray suggested that all draft and final policies should be publicly listed, beneficiaries and stakeholders should be able to comment on the process, exemptions should be granted for medical necessity, and beneficiaries should be permitted to purchase a more costly item if an exemption is not granted.
Commissioners Discussion
Commissioner Kathy Buto, a former HHS/CMS official and healthcare executive, framed the discussion by turning the focus to three key concerns with LCA policies: (1) impacts on beneficiaries, (2) challenges in determining clinical effectiveness, and (3) the potential to stifle innovation. Among her concerns, she said that beneficiaries could be held responsible for overwhelming costs if they did not choose what was determined to be the most cost-effective treatment, while also questioning the validity of a proposed appeals process for medical necessity. With respect to determining clinical effectiveness, she said that while entities such as the Patient-Centered Outcomes Research Institute (PCORI) could be helpful in making such determinations, it can be difficult to draw distinctions between the effectiveness of many drugs. Finally, regarding innovation, she said that companies will likely be less willing to invest and innovate in areas where LCA policies are applied, and incremental improvements in treatments are unlikely to be rewarded. Chairman Hackbarth guided the remainder of the discussion around each of these three topics of concern.
Beneficiary Issues
Commissioner Jack Hoadley of Georgetown University said that relying on the appeals process for patients with medical necessity is not an ideal approach. He said that there is a “general sense” that appeals processes are burdensome, and often ineffective. And without an appeals process, he said that the alternative seems to be that the beneficiary would pay the difference in the cost. Nonetheless, Commissioner Hoadley expressed interest in an alternative proposal that would pay all products that are categorized in the same “cluster”—those that are said to produce similar outcomes for the same condition—a consistent payment rate. Commissioner Alice Coombs of South Short Hospital also expressed doubt with the appeal process, saying “if the appeals process worked well, I’d be more apt to support this Secretary jurisdiction.”
Determining Clinical Effectiveness
Commissioner Craig Samitt, formerly of DaVita HealthCare Partners and Dean Health System, said that the Medicare program should look to Medicare Advantage plans to identify how they have handled the issue of determining clinical effectiveness. Chairman Hackbarth said that looking at private MA plans could provide both lessons on how to handle the process mechanically, as well as “looking at the philosophical belief that it should be handled through a decentralized process at a more local level.” Commissioner William Hall of the University of Rochester School of Medicine said that drug prices need to be calculated in a way that creates stability—calling the current process a “regulatory nightmare”—and suggested that it’s difficult to set a “gold standard” for effectiveness when experts are often at odds on how to measure quality.
Chairman Hackbarth went on to elaborate on the challenge of creating a system that is fair and transparent from the beneficiary perspective. He said that while there are benefits in determining payment rates in a more “localized” fashion, as far as patients are concerned, it’s less transparent if the standards are not centralized. Commissioner Herb Kuhn of the Missouri Hospital Association responded that transparency is key from the beneficiary perspective, and said that “the centralization process works.” Commissioner Buto added that patient’s understanding of treatments is an issue that rarely comes up in the pricing discussion, but noted that this discussion could lead to a point where clinical evidence is brought to a level that the patient can understand, and they can be compelled in the difference in one treatment over another.
Commissioner Scott Armstrong of Group Health Cooperative downplayed these concerns, and said that “now is the right time to do this,” adding later that “this [policy] seems like a no brainer.” He pointed out that organizations such as Group Health Cooperative have been selectively paying for therapies for decades, and that the value for beneficiaries is in the fact that they know the drugs they are taking meet a high standard. Commissioner Jay Crosson of the American Medical Association agreed, but added that bundling payments for an entire episode of illness could be a more effective payment strategy and avoid the challenges of making drug-by-drug comparisons. He went on to say that this solution could also be more broadly applicable beyond the purview of Part B administered drugs. Warner Thomas of Ochsner Health System also agreed, saying that “these decisions are made every day by other entities.” He added that this comports with the principles of “looking out for the good of the beneficiary,” and ensures that they are charged “fairly and consistently.”
Stifling Innovation
Commissioner Katherine Baicker of the Harvard School of Public Health highlighted how the challenge of establishing differences in clinical effectiveness could lead to diminishing returns for drug developers who make incremental progress. She said that certain drugs may perform better in some impacts on worse on others, and “beneficiaries should be able to choose among the outcomes that matter to them the most.” She added that it’s important to maintain a system to rewards incremental improvements while not paying “more than necessary” for the population average. Commissioner Rita Redberg of the UCSF School of Medicine supported the German approach of reference pricing, and said that industry often overstates the impact of stifling innovation, and suggested that there is no evidence that LCA policies would lead to a reduction in innovation. Instead, she said that “we end up paying for things that are not new, innovative, or necessary at all.”
Commissioner Willis Gradison, a former Congressman and Duke University scholar, said that LCA policies should also consider Medicare Part D pricing. He cited evidence that less generic drugs are utilized for beneficiaries that are eligibility for the Low-Income Subsidy (LIS). Commissioner Gradison explained that he will support the LCA policy, but added that the Commission should look further into why physicians are choosing more expensive alternatives. Commissioner Hoadley responded with a proposal to use modified a Healthcare Common Procedure Coding System (HCPCS), calling it a “micro bundle example.” This methodology would include grouping together drugs that treat the same conditions, and developing an average price based on that grouping. He said that this would require researchers to review healthcare literature to determine if the drugs are actually equivalent. And in instances where there is a lack of scientific literature, PCORI could be commissioned to pursue additional research.