Providers warn controversial most-favored-nation rule could imperil their financial stability

Stethoscope on top of five, ten, and twenty dollar bills.
A new rule aimed at lowering Medicare drug spending could cause providers to get reimbursed less for certain drugs, providers and experts say. (Getty Images/PLG)

A hurried final rule aimed at tying drug prices to those paid by foreign countries could lead to providers paying more for drugs than what they will get reimbursed by Medicare, according to several providers and experts.

The controversial interim final rule, published by the Centers for Medicare & Medicaid Services (CMS) on Friday, sets up a mandatory payment model surrounding the prices for 50 drugs administered under Medicare Part B, which reimburses providers for drugs administered in a clinic or hospital such as chemotherapy or vaccines. The administration is pushing the rule to lower Medicare drug spending.

But providers who are heavily reliant on Medicare Part B reimbursements, such as oncology centers, say they could close if they have to buy drugs below what Medicare reimburses them for. 

“The oncology ecosystem is pretty unstable right now already,” said Debra Patt, M.D., Ph.D., executive vice president of Texas Oncology, a network of more than 400 physicians and oncology specialists.

Currently, Medicare Part B reimburses providers for the average sales price of a drug, plus a 6% add-on to cover storage and handling costs. That add-on declined to roughly 4% due to sequestration cuts.

Starting Jan. 1, the model will introduce a most-favored-nation price for the 50 drugs, 38 of which are oncology-related. The most-favored-nation price will be calculated based on the lowest GDP-adjusted country-level price.

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After a price is established, the model will phase it in with the applicable average sales price. The goal is to give providers “time to adjust to the model payment amounts and formulas,” the rule said.

The model aims to phase in the most-favored-nation price by 25% per year for performance years one to three in the seven-year model and reach 100% by performance years four through seven.

If a drug becomes in short supply, the price will revert to the average sales price, the rule said.

However, the concern is that the manufacturer’s price will remain the same and will not be lowered to compensate for the most-favored-nation price, experts said.

“If implemented on Jan. 1, the reimbursement for most of the drugs they use will drop substantially,” Ian Spatz, senior adviser with legal and consulting firm Manatt Health, told Fierce Healthcare. “The question becomes: 'What are the economics of continuing to provide those drugs if you assume the manufacturers won’t drop the price of those drugs in the U.S.?'”

Providers may have to develop some mechanism like a rebate or a discount with the manufacturer to get down to the amount they are reimbursed.

“Even if that blended [price] cuts your reimbursement 5% to 10%, that could well be the difference between making positive revenue on a drug and losing money each time you dispense it,” Spatz said.

The problem is that providers, who are already struggling with fighting COVID-19, don’t have the resources to absorb the difference.

Patt gave an example of a $100 drug that only gets reimbursed by Medicare for $85 under the new model.

“For every $100 drug that I purchase and administer I would lose $15,” she told Fierce Healthcare. “It is not a matter of lack of willingness. It is just not an economically sustainable model.”

Complicating this fluctuation is a major change to the add-on payment.

Instead of an add-on of 6% of the price, the provider will get a flat fee no matter the cost of the product. 

The add-on payment will be calculated based on 6.1% of the 2019 historical spending on all of the most-favored-nation drugs in total, the rule said. The payment will be adjusted every year based on inflation.

When CMS first proposed the model back in 2018, it suggested replacing the add-on payment with a flat fee. There have long been concerns that the current method leads providers to frequently prescribe higher-cost drugs to get a higher add-on.

“Some people’s add-on will go way down, and [some] will go way up,” Spatz said.

The rule does exclude certain providers and suppliers from participating. Those providers ultimately do not get paid for drugs based on an average sales price and include children’s hospitals, critical access hospitals, Indian Health Service facilities, rural health clinics and cancer hospitals.

Providers that are in the Maryland Total Cost of Care model that has an annual global budget for healthcare spending are also excluded.

Dealing with price changes

Providers are in a bind in that their reimbursements could drop significantly on Jan. 1 for any drugs that they purchased before the end of the year.

Sometimes providers must purchase Part B drugs ahead of time to ensure there is enough supply for a patient’s appointment. But the provider does not get reimbursed until the drug is actually administered.

The price paid for a drug on Dec. 31 could result in a lower reimbursement when the blended price goes into effect on Jan. 1.

“There is some inventory in the system … that would be devalued because of this transition,” Spatz said.

This difference could become greater as the program moves forward. Normally, a drug price doesn’t change too much from quarter to quarter, said Deepak Kapoor, M.D., Chairman and CEO Integrated Medical Professionals, a major urology group practice.

But that will change under the model where the cost could vary by double digits if the country the price is based on changes from one quarter to the next, he added.

“The quarter-to-quarter variation is going to make it impossible for anyone to ... significantly stock this type of drug, which results in a lot of inconvenience to patients because it makes it hard to time their visit,” Kapoor said. "100% of the burden on this rule is on the providers, which makes colossally no sense.”