Washington Report: The Main Event Begins - Pharmaceutical Executive


Washington Report: The Main Event Begins
Thorny issues are already emerging about Medicare Rx.

Pharmaceutical Executive

Fear of fraud In formulary negotiations, marketers often offer services to PBMs, but such arrangements with PDPs may raise anti-kickback charges. Pharma companies will have to carefully structure disease management, drug utilization review, and other services, particularly if such activities replace discounts and are too much above market value.

Ongoing review The U.S. Pharmacopeia wants CMS to assign it a formal role in evaluating its formulary guidelines over the next few years as new drugs enter the market and new information emerges about the safety and efficacy of existing therapies. A lot of manufacturers are unhappy with the USP guidelines and oppose their continued influence over the program, but CMS will need some independent body to provide ongoing review after the program is established.

The FDA connection CMS already conducts parallel reviews of some medical products covered by the traditional Medicare program. These reviews enable the agency to issue speedy decisions about coverage when FDA approves a new product for market. It is reasonable to expect that over the next few years CMS will play a much larger role in monitoring drug safety, marketing, and appropriate use. CMS data banks will provide a wealth of information on drug utilization and adverse events and may shape development of risk management plans for high-risk drugs. CMS coverage for seniors participating in clinical trials may shape research protocols.

Calculating Costs All these issues will affect the overall cost of the Medicare Prescription Drug Benefit, which continues to generate outrage on all sides. When Congress approved the Medicare Modernization Act in December 2003, the administration insisted that the cost would be about $400 billion over 10 years. The CMS actuary quickly boosted the number to $534 billion, which raised an outcry. Those fairly high numbers applied to the 10-year period of 2004 to 2013, which includes two years before the program even starts.

Now fiscal conservatives and Democrats are up in arms over the latest soaring administration cost projections for Part D: a whopping $724 billion for 10 years, from 2006 to 2015, when more seniors are expected to be enrolled in the program. Conservatives want to cap program spending at $400 billion, while Democrats insist they can save money by bringing in cheap imports and establishing a centralized Medicare drug purchasing program, unhampered by the much-debated non-interference clause.

Of course, the Part D program won't be so expensive if seniors decide not to participate. All the current estimates assume that 90 percent of eligible Medicare beneficiaries will join the program, but most observers doubt that participation will be anywhere near that level. One hurdle in convincing seniors to sign up is considerable uncertainty about future co-pays and costs. CMS expects monthly premiums to average $35, but that's just a guess. And if CMS finds itself spending more on drugs than anticipated, the statute calls for adjusting Part D parameters, including benefit ceilings, the catastrophic floor, and levels for co-pays and deductibles.

A broad range of beneficiaries need to join the program for it to work, but it's not yet clear how to measure success or failure. Should policymakers expect 90 percent of seniors to enroll in PDPs—or will 75 percent be a reasonable expectation? Will the program have to keep spending down to $400 billion a year, or will someone figure out how to relate increased spending on drugs to broader measures of health care quality? One thing is certain: The more seniors in the program, the more it will cost. We can't have it both ways.

Ending Best Price One important but less noticed provision in the Medicare program exempts PDP rebate negotiations from the Medicaid best price policy. Now it looks like best price requirements may disappear completely.

The provision grew out of a business challenge posed by Medicaid: Companies were required to give Medicaid their best price, but if that price was revealed publicly, it would quickly be used by other customers to force down the prices they already paid. Instead, the government set up a rebate system based on Average Manufacturer's Price and the best price offered to any customer (with a few exemptions, such as the Veterans Administration). HMOs and hospitals have complained for years that best price essentially puts a floor on the prices they can negotiate. CMS administrator Mark McClellan evidently agrees and proposes to switch to a flat rebate formula. Pharma companies are not too upset because state Medicaid drug spending will drop considerably as low-income seniors switch to Medicare to receive drug coverage under Part D.

McClellan doesn't expect the switch from best price to curb Medicaid spending on drugs, but it should help reduce costs for the broader health care system. The task of lowering the Medicaid pharmacy budget will come through another reform initiative. This aims to restructure Medicaid pharmacy reimbursement to base payments on drug acquisition costs instead of wholesale prices, similar to changes made in how Medicare pays for drugs administered by doctors and hospitals. This reduction in "overpayments" to pharmacists, together with proposals to close loopholes that permit excessive payments to states and allow some wealthy seniors to qualify for assistance, are projected to cut Medicaid spending by $60 billion over 10 years.

Jill Wechsler is Pharmaceutical Executive's Washington correspondent.


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