Medicare should update its policies for separately payable drugs in the Outpatient Prospective Payment System, MedPAC says

Worthwhile changes include requiring drugs to be proven clinically superior before granting them pass-through payment status, according to a new report.

Congress should modify Medicare policies for separately payable drugs to better strike a balance between innovation and efficient utilization, according to the Medicare Payment Advisory Commission (MedPAC).

MedPAC’s latest report to Congress includes a chapter on rethinking how Medicare pays for drugs that aren’t included in package pricing in the Outpatient Prospective Payment System (OPPS). Many of the concerns cited in the report involve the pass-through policy for high-cost newer drugs. Discrete payments are made for those drugs over a two- to three-year period while CMS gathers data with which to formulate package payment rates.

MedPAC states that because “the pass-through policy does not include a requirement that a drug show clinical superiority over similar treatments to qualify … Medicare could pay separately for a drug no more effective than a competing drug already in use, even when the cost of the existing drug is reflected in the OPPS payment rate for the applicable service.”

How 340B drugs relate to the pass-through policy

Payment rates for pass-through drugs are significantly higher than rates for comparable drugs acquired through the 340B Drug Pricing Program, and that discrepancy could affect providers’ choice of which drugs to use.

MedPAC notes that OPPS payment rates for pass-through drugs are set at average sales price (ASP) plus 6% in accordance with the Social Security Act, with that price offset by the cost of any drug that is clinically similar and included in the package price for the primary service. If the pass-through drug represents the reason for a visit (e.g., in the case of chemotherapy) rather than a supply to a service, no offset is applied.

Meanwhile, CMS has established a rate of ASP minus 22.5% for 340B drugs, which likewise are separately payable.

As a result of the disparity, “Providers that obtain their OPPS drugs through the 340B program — which account for more than 50% of Medicare spending for separately payable drugs in the OPPS — have a financial incentive to use pass-through drugs” instead of similar drugs that are not eligible for pass-through payment, the report states.

Better ways to approach nonpackaged drug pricing

Medicare should make pass-through payments for drugs only when they can be defined as supplies to a service, rather than the reason for a visit. That would remove 85% of new drugs from pass-through eligibility, according to MedPAC. Non-pass-through newer drugs still could be separately payable — but at a lower rate if obtained through the 340B program.

Drugs also should be eligible for pass-through payments only if proven to be clinically superior to established drugs that have similar therapeutic uses, MedPAC says.

“Manufacturers would have to meet a meaningful criterion to have a drug eligible for pass-through payments, beyond simply meeting the pass-through cost criteria,” the report states. “Therefore, manufacturers would have an incentive to dedicate more resources to developing drugs that offer better clinical outcomes and fewer resources to new products that are profitable but offer little in terms of better clinical outcomes.”

The clinical superiority requirement could be modeled on the new-technology add-on payment clause in the Inpatient Prospective Payment System, the report states.

Effects of the recommendations on spending

Among the benefits of the changes, according to MedPAC, would be to mitigate the effects of OPPS pricing differences between pass-through drugs and other separately payable drugs

Medicare drug spending through the OPPS would be projected to fall under the new approach, with the payment rate for some drugs dropping by 28.5 percentage points if obtained through the 340B program. Other pass-through drugs would shift to packaged status if they aren’t shown to be clinically superior.

However, due to statutorily mandated budget neutrality, reductions in drug spending initially would be negated by increases in payments for other OPPS costs.

Over time, Medicare spending likely would decrease due to lower utilization of drugs with the pass-through payment rate, the report states. “In addition, adding a clinical superiority requirement to the pass-through policy would likely mitigate the inflationary pressure on drug prices.”