MedPAC debates reference pricing, arbitration to bring down prices in Part B 

Drug prices
MedPAC held the first day of its monthly meeting on Thursday, and drug prices were a key topic on the slate. (Getty/Charles Wollertz)

The Medicare Payment Advisory Commission is weighing reference pricing and binding arbitration as possible solutions for rising drug prices in Part B. 

In a report at its monthly meeting on Thursday morning, MedPAC staffers outlined the two approaches, which could be considered individually or combined into a larger package aimed at drug costs.  

The goal, analysts Nancy Ray and Kim Neuman said, is to expand a reform package the commission recommended in 2017 and has yet to go anywhere in Congress. MedPAC recommended that the current pricing system for Part B drugs—average sales price plus 6%—be improved through consolidated billing codes as providers move toward an alternative system: the drug value program (DVP). 

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Ray and Neuman said that using reference pricing, arbitration or both could be built on top of those proposals to boost price competition in Part B. 

“I’m very glad we’re taking this up and not just sitting back on what we did with DVP,” Commissioner Paul Ginsburg, Ph.D., a health policy expert at the Brookings Institution, said. “If there’s a non-DVP approach, it would still be very welcome.” 

RELATED: MedPAC recommends Congress target rebate traps, biosimilars to bring down drug prices 

Reference pricing would address areas where there is limited competition between medications with similar clinical uses, according to the report. The commission could consider either an internal or international reference pricing approach, though Ray and Neuman’s report focused on the former. 

In that model, Medicare would use its own data on effectiveness and price competition to build a reference price for a certain therapeutic class; it could base that on the lowest-cost option or the middle cost, depending on which would ensure access more effectively. 

The commissioners expressed concern, however, about the potential operational burden that could arise in such a model. Jaewon Ryu, M.D., J.D., CEO of Geisinger Health System, noted that the report did not make clear how many reference pricing scenarios would be in place, and the most effective way to inform patients about how these changes could impact their out-of-pocket costs or access to certain medications. 

There’s a big difference, he said, in using this model solely for pricey oncology drugs and using it across the spectrum of Part B products. 

“What’s the magnitude?” Ryu said. “Where would it fall from a physical or specialty standpoint? That then helps us inform the operational burden.” 

RELATED: MedPAC recommends overhaul to Medicare’s hospital quality programs 

Commissioner Kathy Buto also warned that there’s a risk of treating all drugs in a certain class or for a certain condition in the same manner. 

“I think there is some real danger in treating similar drugs for payment purposes as equivalent for effectiveness and side effects,” Buto said. 

The commissioners were also concerned about the operational cost and burden associated with rolling out binding arbitration in Part B. This model, according to the report, would target drugs with high prices at launch. 

Congress would establish benchmarks or triggers that pharmaceutical companies would have to follow, and if these companies launched a medication at a price significantly higher than those thresholds, it would trigger arbitration. In the example offered by Ray and Neuman, the Department of Health and Human Services Secretary and the drugmaker would each offer a price for the drug to a neutral arbiter, who would pick between the two options. 

Both parties would also offer criteria for consideration in that decision, such as clinical effectiveness, comparison prices to other drugs with similar therapeutic use and the rarity of the condition the drug targets. 

RELATED: MedPAC searches for ways to reach Medicare-eligible individuals who still aren’t enrolled 

The report did not include estimates on how often arbitration could be triggered in a single year, which the commissioners warned could mean a large pile-up of cases that could hinder patient access to certain drugs as they await a pricing decision. 

David Grabowski, Ph.D., a health policy professor at Harvard Medical School, suggested a tweak that the commission could explore in the future to address this concern: allowing price negotiation ahead of arbitration. 

Building negotiation in the plan would allow drug companies and HHS to discuss pricing before going to an arbiter, which would likely eliminate a number of cases in a hypothetical backlog, he said. 

“Nobody wants to go to binding arbitration,” he said. “That could bring a lot of people to the table.”

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