Medicare Bill Boosts Coverage for Biotech Therapies

On December 8, 2003, after a long, contentious battle, President George W. Bush signed a massive, complex bill that promises to overhaul Medicare policies and coverage for drugs and biologics. The centerpiece of the legislation is a new prescription drug benefit for seniors, which is slated to cost at least $400 billion over the next ten years. Manufacturers applauded the measure for boosting drug utilization without establishing explicit price controls. Of immediate importance to biotech companies, the bill revises payment formulas and reverses recent reimbursement cuts for certain therapies already covered by Medicare.

Expanding Drug Use

New coverage for outpatient drugs begins modestly this year by providing seniors with Medicare-endorsed drug discount cards that could cut drug costs up to 25%. In 2006, Medicare beneficiaries can sign up for a new drug benefit that will cover about 75% of prescription costs up to a $2,250 cap (after a $250 deductible). The program then will pay almost all pharmacy expenses above a $3,600 "catastrophic" threshold, an approach that will make high-cost biotech therapies more affordable for patients.

The program will provide assistance for low-income beneficiaries' fairly high out-of-pocket costs. This includes "dual eligible" seniors who qualify for state Medicaid programs but now will get drug coverage through Medicare instead. In addition, elderly patients who enroll in managed care plans are likely to gain broader coverage to fill in the "donut hole" between the $2,250 cap on regular benefits and the $3,600 catastrophic coverage threshold.

Establishing a relatively low threshold for catastrophic coverage is important in providing assurance to biotech manufacturers that patients will be able to gain coverage and reimbursement for innovative products in the future, explains Sharon Cohen, vice president at the Biotechnology Industry Organization. Although Medicare covers most biologics because they are administered in hospitals, clinics, and doctors' offices, biotech companies are developing new oral products, inhalation therapies, and other treatments using innovative delivery systems that can be administered in the home — and would not have been covered under previous provisions.

Revising Biotech Payments

In addition to the new outpatient drug benefit, biotech manufacturers stand to gain from a number of less-noticed provisions in the bill that revise how Medicare calculates reimbursement for covered drugs and biologics. The bill will:

• Reverse recent cuts in Medicare payments for certain therapies delivered in hospital clinics. In January 2003, Medicare announced significant cuts in reimbursement rates for many drugs and biologics provided under the program's fairly new outpatient prospective payment system (OPPS). The legislation revises this policy by setting new payment floors on drugs and biologics affected by the program. For 2004, payment will be 88% of average wholesale price (AWP), dropping to 83% of AWP in 2005. In 2006, the program will establish a new payment methodology to reflect more accurately the costs of acquiring, handling, and storing these therapies.
• Drop the "functionally equivalent" standard. In recent months, Medicare granted very low payments for certain new therapies on the basis that they were functionally equivalent to older, lower-cost products. Manufacturers argued that Medicare officials lack authority to make such a determination and that FDA approval should be the basis for coverage decisions. The legislation prohibits Medicare from using the functionally equivalent approach in the future to limit reimbursement for new products.
• Boost reimbursement for new technologies used in hospitals. The legislation makes it more likely that certain highly innovative products may qualify for extra "add-on" payments to in-hospital payment schedules.
• Launch a demonstration program that pays for oral cancer drugs and self-injectable therapies. Medicare will cover oral cancer treatments and self-injectables for rheumatoid arthritis and multiple sclerosis for the next two years as part of a $500 million demonstration project. The program aims to test whether reimbursement for these products is cost-effective and increases patient access.
• Revise payments for therapies administered in doctors' offices. The legislation moves away from reliance on AWP numbers following complaints that the current system has excessively inflated Medicare payments for covered drugs such as cancer treatments. In fact, some AWP rates were so high that unscrupulous drug marketers promoted their products to doctors by encouraging them to pocket the "spread" between AWP and the much lower price charged to the physician. Under a new system, reimbursement in 2004 will be based on AWP minus 15% (a drop from the current AWP minus 5%), with flexibility for the Department of Health and Human Services (HHS) to adjust payments based on market surveys. Beginning in 2005, manufacturers will have to report average sales price (ASP) data; HHS may add a fixed percentage to the rate in order to better match actual market prices. At the same time, the legislation boosts payments to oncologists and other physicians who opposed AWP revisions that cut reimbursement rates for drugs without raising doctors' compensation for treating patients. Oncologists already are complaining that the payments are too low. Medicare will survey physician practice expenses for drug administration, and the Medicare Payment Advisory Committee will review how payment changes affect patient access to oncologists and other specialists.

Increased Scrutiny

Reform of the AWP payment formula also promises to increase government monitoring of manufacturers' prices. The legislation calls for the HHS inspector general to audit manufacturer price reports regularly and compare the figures reported to Medicare with prices available to private purchasers and those reported to Medicaid. Congress specifies that manufacturers will face criminal charges for submitting false price information, a provision that aims to ensure that Medicare payments reflect the "widely available market price."

Creating a $400 billion Medicare drug benefit in itself will focus attention on program design and costs. Provisions designed to protect beneficiaries from overly restrictive and arbitrary coverage decisions by pharmacy benefit managers (PBMs) will generate a certain amount of transparency in prices and rebate agreements. Plans must establish P&T (pharmacy and therapeutics) committees to develop and review formularies, which must list at least two products in each therapeutic class. Formulary decisions must be based on scientific evidence and standards of practice and provide patients access to medically necessary drugs. Plans also must notify patients and physicians of their intent to remove a drug from preferred-drug lists and provide a means for beneficiaries to request exemptions and appeal coverage decisions.

A number of government agencies will monitor and report on the impact of expanded Medicare drug coverage. In addition to keeping an eye on the market price of drugs, HHS will report on geographic variations in drug spending. The Federal Trade Commission will assess payments to pharmacists, while the General Accounting Office will monitor any decline in employer retiree benefits.

The Medicare legislation contains controversial language that prohibits Medicare officials from interfering with negotiations between manufacturers and PBMs or from establishing a national formulary or "particular price structure" for drug reimbursement. This provision provoked outrage from critics who claimed it prevents the government from benefiting from cost-control techniques available to private plans. Continued dispute over such policies will focus attention on how well PBMs can extract price concessions from industry.

Also, the debate about reimporting drugs from Canada and other countries is far from over. Congress adopted a fairly toothless measure that requires HHS to certify that any reimport program is safe — something the agency won't do. However, the public continues to clamor for access to cheaper Canadian drugs, and the legislation calls for HHS to study safety and trade issues associated with reimportation.The legislation also encourages more research on medical outcomes and cost-effectiveness. The Agency for Healthcare Research & Quality (AHRQ) gains funding to identify research projects on outcomes, comparative clinical effectiveness, and appropriateness of health care services and products. The aim is to assess whether government spending in certain areas is warranted, opening the door to increased attention to drug outcomes and comparative costs.

Opponents of the Medicare bill expect to press for further changes, and "corrections" are likely even in 2004. Analysts predict that the $400 billion budget is likely to support the program for only a few years — not ten. A big budget shortfall will generate demand for payment cuts and heftier discounts on drugs and biologics. If PBMs decide not to compete for Medicare business, the federal government may end up playing a greater role in providing drug benefits. Such developments will only intensify already harsh scrutiny of drug prices and encourage manufacturers to find new ways to cut costs and document product quality. BPI