Deficit Deal Could Diminish Drug Access

As the deadline approaches for a deal on deficit reduction, some members of the congressional “super committee” reportedly are considering a short-sighted proposal that could lead to adverse consequences for patients and taxpayers, including higher federal spending over the longer term.

Case in point: An effort to change the way Medicare pays for some prescription drugs.

Medicare Part B pays for medications administered in doctors’ offices, including chemotherapy – drugs which require physician supervision because they must be infused or injected, and which must be handled properly to assure they are safe.

In 2003, Congress changed the way Medicare reimburses doctors for purchasing these drugs. The changes dramatically reduced Part B drug spending by instituting a system in which payment rates are set based upon the actual prices that physicians and clinics pay for the drugs, reflecting discounts and other prices they negotiate in the competitive market. This replaced an outmoded payment policy which had led to higher and higher spending every year.

This competitive pricing model for Part B drugs is based upon the drugs’ “average sales price,” or ASP, and has saved money for both taxpayers and patients. A 2009 report commissioned by the Centers for Medicare and Medicaid Services (CMS), which runs Medicare, said, “The payment reforms appear to have controlled Medicare expenditures for Part B drugs and to have reduced beneficiaries’ out-of-pocket liabilities for these drugs.”

Physician practices and clinics typically purchase these drugs through wholesalers or directly from the drug manufacturer. Physicians are empowered to be prudent purchasers because the ASP pricing data are available on the Medicare website. The prices are updated every three months to make sure they are current.

Unfortunately, some super committee members are considering undercutting this program that relies on competitive negotiations and price transparency. Instead, they are looking at imposing an arbitrary form of rationing of care by making changes to reimbursement for Part B medicines that are used more frequently.

Specifically, members are considering a “tiered pricing” proposal that would pay physicians less for the most frequently used Part B drugs. This makes no rational sense – basically saying that because a drug is especially effective or important to treating patients, doctors will be reimbursed less for it. For some doctors and some drugs, that means they would be paid less than what it costs them to buy, store, and handle these often-delicate and complex drugs.

The proposed tiered pricing change would establish how doctors are reimbursed for acquiring these drugs, ultimately making Part B drugs more costly and likely leading to patients being denied care. All this, for the chance to save $3 billion (a tiny fraction of their $1.2 trillion deficit target) by imposing what amounts to a novel form of price controls.

If the super committee were to endorse this tired pricing strategy for Part B drugs, it would lead to several adverse consequences:

Reduced access for patients, especially in rural areas. If doctors can only purchase drugs at a loss, many will be forced to stop providing care in their local clinic or offices. This will impact patients in rural areas the most, forcing them to travel much further to get their treatment.

A recent study shows that nearly 200 community cancer clinics have closed in the last three years and nearly twice as many more are struggling financially. The proposed cuts in reimbursement would put many of them under, especially if the scheduled 27 percent cut in Medicare reimbursement rates were to go into effect in 2012.

Higher costs as patients are forced to get care in other venues. If patients can’t get care in their doctor’s office, many will be forced to go to hospital outpatient departments. A study by Milliman, an independent actuarial and consulting firm, found that cancer patients who received treatment in hospital outpatient settings actually cost Medicare 14 percent more than patients who received care in a doctor’s office. So this cost-cutting move could wind up actually costing taxpayers more.

Diminished incentive for competitive pricing. The proposal to micromanage Part B drug reimbursement would have the perverse effect of weakening the incentive for some drug manufacturers to negotiate lower prices, and could actually result in increased spending for drugs as there may be fewer discounts to offset manufacturer price increases. The tiered pricing strategy would change the competitive dynamic and create winners and losers – hardly a desirable result.

A recent study by the American Action Forum found that, since the original ASP formula was introduced after passage of legislation in 2003, growth in drug expenditures in Medicare Part B has been limited to just over 2 percent, significantly below the 11 percent overall growth in spending in the Medicare program over the same period.

The proposed change to the ASP formula that the super committee is considering at first looks like a straight $3 billion cut in reimbursement to doctors, but the impact will be reduced access to care for patients and ultimately higher spending for Medicare in the long run.

Rather than create these random and arbitrary reimbursement changes to providers that would only harm patients, super committee members would be better advised to look for changes that will make the right kinds of structural reforms to Medicare, as we described in our paper on recommendations on entitlement reform. Arbitrarily forcing rationing of care with misguided reimbursement strategies that target only certain products in an effort to save money is highly problematic and would be unwise policy.

Posted on RealClearMarkets, November 15, 2011.

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