New Marketplace

MedPAC’s Role in Curtailing Drug Prices

Interview · February 14, 2018

Mark Miller and Melinda Buntin headshots

Part 2 of our interview with Mark E. Miller, PhD, Vice President of Health Care at the Laura and John Arnold Foundation, and former Executive Director of the Medicare Payment Advisory Commission. Continued from Part 1: Why Does MedPAC Matter?


Melinda Buntin: One piece — given the commission is focused on populations and total spend — that we haven’t talked about yet is drug prices. Part D drug prices are not part of that total spend that many APMs [alternative payment models] are at risk for. Can you tell me what MedPAC thinks could be done to curtail drug price increases, and how those could be factored into how we think about the program as a whole?

Mark Miller: Let me break this up into a couple of thoughts. With respect to APMs, there is probably some thinking that needs to be done in order to integrate drugs into the APM models because you’re right, they aren’t right now, and there is a need to think through that. There’s some thinking that the commission has done there, but more needs to be done. I won’t go into that right at the moment, because I think your larger question focuses around Part D. Before I get to Part D, it’s probably important to keep in mind that there’s another $30 billion in Part B drugs that also is paid differently and needs to be thought about differently. I’ll just put that out as a marker as I go into the bigger drug issue.

It’s important to keep in mind that a lot of the high drug price problem comes from the monopoly and exclusivity periods that are branded through the patent and drug approval process. That all occurs before the drug gets to Medicare. Medicare has to address the problem once the drugs are out on the market. The way Part D was set up is as a competitive model. You have drug plans negotiating on the behalf of Medicare for a better price and they’re using formularies, whether you put a drug on or off a formulary, and tiering, where the beneficiary will pay for co-pay.

What’s happening right now in Part D is that the federal subsidized portion of Part D is growing really rapidly, and after the cost exceeds a catastrophic cap, the federal government takes over 80% of the spend. That’s being driven by the fact that very high-priced specialty drugs are coming to market. Beneficiaries are using them and then they’re moving into the catastrophic cap much faster. This is occurring for two reasons: either the drug doesn’t have a clear competitor (and of course Part D is predicated on the notion that the plans can negotiate with multiple manufactures and try and bid prices down through the formularies and the tiering, but if there’s no competitor that doesn’t work).

Then a second problem is that the plans may not have as strong as an incentive to move to the lower-cost drug when there is one because they may be realizing very high rebates from the higher-priced drug, so they don’t always have the strongest incentive to go to the lower-cost drug.

So the basic issue is that you’re getting many more high-priced specialty drugs that are driving more beneficiaries into the catastrophic cap where the federal government pays 80% of the cost. The cost of the program is increasing, and either that’s happening because there are not lower-cost competitor drugs to move patients to, or because the plan has an incentive to stick with the higher-cost drug because it gets a higher rebate. MedPAC has three major recommendations in this area:

The first is to change the risk in the catastrophic portion of the benefit and put 80% of the risk on the plan and 20% of the risk on the government. And I’ll note in passing here that we would eliminate the beneficiaries cost-sharing and the catastrophic range, which is currently 5%, and I’ll come back to that in just a second. But the idea is give the beneficiary a true catastrophic cap and shift greater risk to the plan.

The reason the commission believes that is that at the inception of the Part D benefit in 2006, there was great concern about the level of uncertainty in predicting drug costs. So the legislation was designed with this catastrophic cap to protect the plan, but we’re 10 years into it now. Plans do understand the risk and it appears that they aren’t always opting for the lowest-cost drugs. This may be now the time, or the commission believes it is the time, to shift the risk more to the plan, which would get them greater pressure to negotiate lower prices and also make the acceptance of the higher rebates less valuable to them because they would have to pay more on the catastrophic cap.

At the same time, MedPAC would give the plans more tools to conduct better on negotiations such as removing some of the protected classes and allowing mid-year formulary changes when a generic comes on the market without advanced approval from CMS.

The second idea is that in the gap phase of the benefit, brand-name manufacturers have to provide a discount to the plans for drugs during that gap phase. That discount, under current law, is counted as if the beneficiary paid it out of pocket. That means that the beneficiary moves more quickly into the catastrophic cap and then the government takes over the payment. The idea here is to continue to have the discount, but not count it as the catastrophic cap, not count it as out-of-pocket spending for moving to the catastrophic cap. This would mean some beneficiary would be in the gap phase longer, and have to pay more out of pocket, but it would also mean that when they hit the catastrophic cap they get full protection based on the first recommendation I went through.

Then the last recommendation is to allow plans greater flexibility and setting cost-sharing for the low-income subsidy (LIS) population. Those cost-sharing amounts are set in law, and what the commission argued is that the LIS population is sensitive to prices too, and if a generic is available, allow the plan to go down to as low as zero cost-sharing for the generic, and allow them to boost the price on the name brand to something like $7 or $10 to give the low-income subsidy beneficiary a clear price signal to move toward the less expensive or the generic.

The last thing I’d say on Part D is that Part D benefitted in 2006 when it was passed, and in the last few years from a number of drugs going off patent and a rise in generic drug use. The drug pipeline is shifting now and we’re getting many more specialty drugs, bios, and gene therapy drugs, all of which are going to start arriving and all of which are going to arrive with monopoly exclusivity periods where they can set their prices. And where substituting drugs, it’s going to be murkier on how you substitute across drugs. I believe that that’s going to put Part D spending under a lot of pressure in the years going forward.

I guess the very last thing I would say there, and this is not a Medicare issue, [is] that we need to look very hard at the patent and exclusivity periods that drugs are given and the drug approval process through the FDA in order to create as much competition as possible.

Buntin: Picking up on this theme of drugs and total cost from a slightly different angle, may I ask you about the Medicare Advantage program? That’s one place where you can put the parts of the benefit together. Where do you see that program going, and what are the strengths and weaknesses of it?

Miller: Managed care or Part C — there [are] a few things. First off, there is a fair amount of evidence that the managed care plans can under-bid the basic fee-for-service benefit in parts of the country where the fee-for-service benefit is really high. Managed care plans are probably bidding in the 70% of fee-for-service range in Miami. Then where fee-for-service expenditures are very high, but then there are other parts of the country where fee-for-service is so low — think of the northeast or the northcentral of the country where managed care plans have a hard time out-competing fee-for-service because they have relatively high overhead, 10% or more, and if utilization is already very low in some part of the country it’s hard for the managed care plans to compete against it. So [with] managed care plans, generally what you want to happen is in areas where managed care plans can out-compete fee-for-service, you want them to be rewarded and to send signals to the beneficiary that they should choose plans that are lower priced and move to those plans. Some of that is happening now, but there are probably changes to the way that Medicare sets its subsidies between fee-for-service and managed care that could send a stronger signal.

In parts of the country where managed care plans can now compete fee-for-service, then the signal would be to move toward managed care plans, and in parts of the country where fee-for-service is more efficient than managed care plans, the signal would be to stay with fee-for-service. There are probably ways to design Part C or the managed care program to send those signals a bit more strongly.

Then it does have the benefit of also integrating the signal between the standard Part A and Part B, think hospital and physician parts of the program with the Part D, drug part, of the program, which is lost in the fee-for-service sector where you have beneficiaries getting their Part A and B services from a set of providers and then separately getting their Part D services from a standalone drug plan, which does not have as much line of sight of incentive to coordinate the benefit across A, B, and drug benefit.

The one other thing I’ll say about the managed care program — you were asking what works well — I think it works well in some parts of the country where it can underbid fee-for-service. It probably does a better job of integrating A, B, and D. But one issue that needs to be looked at is with the changes in 2010, the way managed care plans generate revenue is through their coding practices for the risk of the patient and their quality scores. There is definitely evidence of over-coding in the managed care environment. Not each and every plan, but certainly evidence that there’s relatively widespread over coding, and that’s something that Congress should address directly and has the tools to address. There is also some evidence of things like consolidating plans in order to maximize quality scores, which is something Congress should address. Again, Congress has the tools to address that. I’ll stop there.

Buntin: Thinking about Congress, there actually have been some signals that Medicare will be receiving attention in the upcoming year. I wonder if you have any thoughts about that or maybe want to take a longer view and tell us what you think are big trends in the Medicare program that might emerge over a longer timeframe, let’s say 10 to 20 years.

Miller: When you do think about trends, obviously demographics for the next decade, you have a baby boom hitting the program. Melinda, I know you know this. You can always think of spending as the number of people, the number of services, and what you pay for each of those services. Certainly, the number of people in the next several years are going to be a major factor in driving Medicare spending. Policies aimed at price and policies aimed at controlling utilization are probably necessary and need to be continued to be pursued, but keep in mind that you have a population aging into Medicare, which is going to drive spending.

Per capita spending I think will increase and I think it will increase above current levels, but I don’t think it returns to the really high historical rates of growth we saw over the last couple of decades. I’d like to give you a really good explanation for that, but I just don’t see it. I see an uptick in spending, but I don’t think it will reach the high historical levels, although there are some places where that may not be the case. I’ve tried to, in my other answer, give some warning about drug spending. I think with the entrance of specialty drugs and the bios and gene therapy you’re going to see Part D spending, Part B spending, and even with some of the generics where the number of manufacturers have left the market and so you’re down to one and two providers, even generic prices are going to go up. We’ve already seen evidence that they’re going up and that can in turn have an effect on hospital spending, which uses a lot of generic drugs.

I think another issue that you’re going to see is that hospital margins in Medicare are going to continue to decline. The commission believes a good part of that is driven by the fact that the commercial sector pays way above cost, probably more than 50% above cost, and that’s because there’s been a lot of consolidation in that sector, and they’re able to demand very high prices from commercial payers. They get those prices and then that leads to higher costs, which will make Medicare margins look less profitable over time. There’s a real dilemma there for Medicare programs, which is, should it restrain its payments in order to try and militate against the rise in cost? But it also has to be mindful of maintaining access for its beneficiaries.

I also think, while we didn’t touch on any of this, Medicare pays way above cost in the post-acute care sector, and there is extreme variation in the use of services across the post-acute care sector. I think you’re going to continue to see those issues well into the future, and I think that that’s an area that people are going to have to pay attention to.

Buntin: Great. [How about] a bonus round on the value-based payment, post-acute care? Do you have some thoughts, Mark?

Miller: First of all, when you say value-based care, it can mean a lot of different things. Paying differently across providers on the basis of their outcome, value-based insurance designs aimed at influencing consumers’ decision, or provider payments that de-incent low-value care, and probably other things that I’m not capturing. Recognizing that ambiguity, what I would say is it’s probably here to stay as a concept. To put it differently, Medicare returning to a monolithic, one-size payment for any payer or any provider or any outcome seems like the wrong direction. That said, I think we need to simplify things consistent with the point that I made earlier on overbuilding on the quality front. We should move to paying differentially on the basis of outcomes and a few measures, not scores of measures, most to population-based measures like avoidable hospitalizations, avoidable emergency room use, beneficiaries’ care experience, that type of thing, and away from individual process–type measures.

That way, you can reduce the measurement burden and the cost that the providers have to engage in or to collect all of this information. You can create incentives across providers to focus on the patient’s experience throughout their entire care continuum, not just the thing any individual provider is engaged in. I think that’s the direction it needs to move in, and then ideally you would have a relatively common set of measures across managed care, say fee-for-service managed models like accountable care organizations and even fee-for-service. Then ideally between the commercial sector, the Medicare sector, the Medicaid sector so that you had a small set of population-based measures that were driving coordination across all three major components of spending: commercial, Medicare, and Medicaid. I realize that’s highly idealistic, but that would be the idea.

Buntin: Great. You managed to have us end there on a little bit of a high note. I’m going to try, since this is a very serious conversation we’ve been having. Mark, are there any great Medicare jokes or humor that you passed around at the commission you want to share with Catalyst?

Miller: Nothing that I should say in a public setting.

Buntin: All right. I tried.

Miller: Is that about as dry as it can be?

Buntin: It was perfect.


Missed part 1 of this interview? Catch up here.

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