HHS advances payment model to lower drug costs for patients

Oct. 26, 2018

The U.S. Department of Health and Human Services, through the Centers for Medicare & Medicaid Services (CMS), announced and sought input on a new “International Pricing Index” (IPI) payment model to reduce what Americans pay for prescription drugs.

Under the IPI model, described in an Advance Notice of Proposed Rulemaking (ANPRM), Medicare’s payments for select physician-administered drugs would shift to a level more closely aligned with prices in other countries. Overall savings for American taxpayers and patients are projected to total $17.2 billion over five years.

The move from current payment levels to payment levels based on international prices would be phased in over a five-year period, would apply to 50% of the country, and would cover most drugs in Medicare Part B, which includes physician-administered medicines such as infusions. The model would correct existing incentives to prescribe higher-priced drugs and, for the first time, address disparities in prices between the U.S. and other countries. Since patient cost sharing is calculated based on Medicare’s payment amount, patients would see lower costs under the model.

Physicians currently purchase the drugs that they administer to patients and receive payment from Medicare for those drugs at an amount equal to the average sales price plus an “add-on” fee. The add-on is calculated as a percentage of the average sales price of the drug.

This creates several problems. First, the dollar amount of the add-on increases with the price of the drug, which encourages prescribing higher-cost drugs. Second, Medicare accepts sales prices for Part B drugs, with no negotiation. Together, this results in higher out-of-pocket costs that burden American seniors.

The pharmaceutical industry offers deep discounts abroad while taking advantage of the payment system in Medicare Part B which drives the cost in the U.S., even though Medicare is the world’s largest drug purchaser. The IPI model would take on this issue and pay vendors for Part B drugs at a level approaching international prices.

For the first time in Medicare, the IPI model would create a system in which private vendors procure drugs, distribute them to physicians and hospitals, and take on the responsibility of billing Medicare. Vendors would aggregate purchasing, seek volume-based discounts, and compete for providers’ business, thereby creating competition where none exists today.

Under the model, instead of the current percentage-based add-on payment, physicians and hospitals would receive a set payment amount for storing and handling drugs that would not be tied to drug prices. Therefore, the IPI model would remove the financial incentive to prescribe higher-cost drugs. The model also frees physicians from having to “buy and bill” high priced drugs, which creates financial risk that jeopardizes their practice and the ability to serve their community.

HHS has the full release

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