Big Change Ahead for Medicare – And Employers Will Feel It, Too 

The inauguration of President Barack Obama, January 20th 2009. Dan Moore
Nov 08 2018

The Trump Administration is considering a proposal that is a major shake-up in the way Medicare reimburses for infused drugs paid under Medicare Part B, which – like any change to the federal healthcare program – could have a major ripple effect on employer plans. The October 25th announcement includes these key points:

  • For selected Part B drugs, reimbursement would shift from a “cost plus %” reimbursement to a fixed fee based on an International index of drug prices from several developed countries including the UK, Japan, Canada and Germany.
  • The proposed start date is 2020 with the new system going into effect for half of the US as part of a five-year mandatory Medicare demonstration project. (No change to the other half of the country.)
  • The Administration estimates that the change would save $16B over 5 years.

What’s different?

In the Medicare program today, infused drugs for diseases like auto-immune disorders and cancer are purchased by physicians under a “buy and bill” system. Physicians are reimbursed the cost of the drug plus an add-on fee—typically 6% of the drug’s cost. A concern with this payment approach is that physicians are inherently incented to use higher cost drugs since the add-on fee is based on the cost of the dispensed drug. Some studies indicate that oncology and other specialist practices drive up to one third of their practice revenue from these dispensed drugs.

Further, Medicare currently may not negotiate drug prices. Moving to a fixed fee schedule for some drugs would represent a big change in policy.

What’s the potential impact?

While this is being discussed as a five-year test, should this change become permanent it would affect all stakeholders in the healthcare system. Physicians could see their revenues decline or (less likely) increase, depending on the amount of the final fixed fees. But the impact on pharmaceutical manufacturers would be very significant, as some of their marquee products would be reimbursed at much lower rates by Medicare, the largest purchaser of drugs in the US.

The impact to the private sector could be, well, HUGE. Simply stated, if physicians and/or pharma companies make less money off these products they will look to replace that revenue. And that will very likely result in massive cost shifting to the private sector.

The Administration seeks comments on this idea that it would it then include in a formal proposed regulation and then final rule. It wishes to start the program in the spring of 2020. It’s possible that additional changes could occur to this proposal after the Administration considers public comments. However, the Trump Administration appears to have strong opinions on implementing pricing changes in the public sector. As noted, these changes—while important—may also result in the unintended consequence of increased costs in the private sector.

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