On October 14, President Biden issued an Executive Order directing the Center for Medicare and Medicaid Innovation (CMMI) to consider a demonstration that could lower prescription drug costs. While policies in the Inflation Reduction Act will reduce drug prices, the administration intends to go further in making prescription drugs affordable.
CMMI’s statutory directive to test models that improve health outcomes, quality, or costs makes the agency a natural partner in this effort. In addition, CMMI’s recent focus on increasing health care affordability aligns with the administration’s focus on lowering Medicare beneficiaries’ copayments for prescribed drugs, which often depend on their list price rather than the net price. The latter includes manufacturer rebates and is the price that payers pay for drugs.
Below, we review a range of approaches CMMI could consider in order to reduce drug spending that include: 1) new models, 2) revisiting previous proposals, and 3) adjustments to existing models.
New Models for Reducing Prescription Drug Spending
CMMI could develop models that test new approaches to reducing drug spending.
- Common billing codes: Biosimilar drugs are biologic drugs that are similar to already approved “reference” biologic drugs in terms of their potency, safety, and efficacy. Despite this similarity, reference biologic drugs have much higher costs for Medicare beneficiaries and the Medicare program. CMMI could test a common billing code that would reimburse biosimilar and reference biologic Part B drugs at the same rate, based on blending the prices of the biologic and the biosimilar. This policy now applies to generic and brand-name drugs, which Medicare now reimburses at the same rate to encourage competition. The Medicare Payment Advisory Commission (MedPAC) believes that a fully blended billing code would increase utilization of biosimilars and reduce costs in Medicare Part B.
- Reference pricing for drugs with limited clinical evidence: CMMI could set reimbursement for drugs with limited clinical evidence (i.e., drugs approved via the Food and Drug Administration’s accelerated approval pathway) using reference prices for fully approved drugs that treat the same medical condition. In addition to saving patients money, this could help address the substantial scrutiny of these products and the associated high spending on them by not paying more for them than existing treatments that have more clinical evidence.
- Generic and biosimilar utilization: CMMI could incentivize savings by developing models that reward providers and plans when they increase utilization of generic and biosimilar drugs. For Medicare Parts B and D, this could take the form of bonus payments.
Revisiting Previous Proposals to Reduce Drug Spending
The Biden administration along with the Obama and Trump administrations have considered policies to lower drug prices that CMMI could revisit.
- Referenced-based pricing for therapeutically similar drugs: CMMI could test a model in which Part B drugs with a similar clinical benefit are paid the same amount. As suggested by MedPAC, this reference price could be based on the lowest, average, median, or volume-weighted average of the prices of the comparable products. Between 1995 and 2010, the Centers for Medicare and Medicaid Services (CMS) applied a Least Costly Alternative (LCA) policy for certain cancer drugs that applied the lowest reimbursement among a group of clinically similar drugs. The policy was found to have significant savings. CMS ended the policy after it was ruled that it exceeded its authority. However, that was before CMMI was established and granted the authority to test such payment methods. Under CMMI authority, CMS could now test a reference-based reimbursement model — LCA or another approach — for biosimilars and biologics as well as for competing products that are clinically similar.
- Most Favored Nation (MFN) Model: In 2020, the Trump administration finalized the MFN Model, which would have tied Medicare Part B drug prices to the average price of the product paid among other countries belonging to the Organisation for Economic Co-operation and Development (OECD). Though the Biden administration subsequently rescinded the Trump-era MFN, it has stated it is still reviewing the comments received on the MFN model for selected Medicare Part B drugs. The agency could therefore consider advancing an MFN-like model that is either limited in size (i.e., affecting less of the Medicare population) or limited to certain drugs/drug types. In a similar approach, CMMI could consider a new model that ties drug prices to those commanded domestically across other federal payers (e.g., the Department of Defense or the Veterans Administration).
Adjustments to Existing Models
CMMI is currently operating a range of models that could be adjusted to test approaches for controlling drug spending.
- Part D Senior Savings Model: To make drugs more affordable for beneficiaries, CMMI could consider models that build on the Part D Senior Savings Model, which first tested the impact of a $35 cap on copayments for a one-month supply of insulin before the Inflation Reduction Act broadly applied a similar copayment limit for all Medicare beneficiaries. Specifically, the Department of Health and Human Services noted in its Comprehensive Plan for Addressing High Drug Costs that it was considering the inclusion of additional drug classes associated with high out-of-pocket costs.
- Additional value-based models: CMMI could incorporate incentives to reduce drug spending into existing value-based models. Notably, current accountable care models typically do not include incentives for controlling Medicare Part D spending (i.e., the targets do not incorporate Part D drug spending). CMMI could adjust accountable care models or design a new model that incorporates Part D spending into the benchmarks. In addition, CMMI could expand its current approach to episode-based bundled payments — which pay a set amount for an episode of care, such as hip replacement surgery — by bundling episodes of care that include drugs and biologics accounting for a large proportion of Medicare Part B drug spending. Such an approach also could include incentives for the use of generics and biosimilars.
Looking Ahead
The Executive Order gave the Center for Medicare and Medicaid Innovation 90 days to develop a report outlining any models it has selected for testing, meaning it is due by January 12, 2023. The report also must include a timeline for testing any such models.
Any efforts to test new models that lower prescription drug prices will provide much-needed financial relief to patients and could provide valuable insights into policies that Medicare or commercial payers might want to scale and make permanent in the future.
