Medicare Drug Coverage to Spur Pharmaceutical R&D

After a long, contentious battle, Republicans mustered up enough votes just before Thanksgiving to approve a massive, complex bill designed to overhaul Medicare policies and provide coverage for prescription drugs. Pharmaceutical and biotech companies applauded the measure for boosting drug utilization without establishing explicit price controls. The bill also raises reimbursement for cutting-edge therapies administered in hospitals and clinics. These provisions are slated to stimulate new product development, but also set the stage for increased government scrutiny of drug prices and value.

Jill Wechsler

Expanding utilization

The centerpiece of the legislation is a new prescription drug benefit for seniors, which is projected to cost at least

$400 billion over the next 10 years. The program begins this spring by providing seniors with Medicare-endorsed drug discount cards that could cut prescription drug costs up to 25%. In 2006, Medicare beneficiaries will be able to sign up for a new drug benefit that will cover about 75% of outpatient prescription drug costs, up to a $2250 cap. The program then will pay almost all pharmacy expenses above a $3600 "catastrophic" threshold.

Establishing a relatively low catastrophic level is a key feature for sponsors of new medical products. It provides assurance to sponsors testing new treatments that they will be able to gain coverage and reimbursement for future high-cost innovative products, explains Sharon Cohen, vice president at the Biotechnology Industry Organization.

The legislation also offers incentives for discovering therapies with innovative modes of delivery. Medicare traditionally has covered most injectables administered in hospitals, clinics, and doctors' offices, a policy that has discouraged R&D on self-administered products for the elderly. Now, companies developing new oral medicines, inhalation therapies, and other treatments using innovative delivery systems will gain coverage. A new demonstration project provides immediate reimbursement for oral cancer drugs and self-injectable therapies for rheumatoid arthritis and multiple sclerosis, and will continue for the next two years as part of a $500 million test program. The project aims to determine whether reimbursement for these products is cost-effective and increases patient access.

More Evidence to Support Choices

Another spur for R&D may come from an expansion in Medicare benefits to provide screening for diabetes and cardiovascular disease. The program is likely to increase diagnosis and treatment of patients with these conditions, and another pilot program is offering disease management programs for seniors with certain chronic conditions.

Although seniors still will have to pay fairly high out-of-pocket costs to obtain reimbursement for outpatient drugs, low-income beneficiaries will gain assistance in paying premiums and copays. In addition, elderly patients who enroll in managed care plans are likely to gain coverage of these costs plus the "donut hole" between the $2250 cap on regular benefits and when catastrophic coverage begins.

Focus on outcomes, effectiveness

With the federal government spending $400 billion on a Medicare drug benefit, pharma companies can expect heightened Congressional and public interest in product costs and effectiveness. The legislation expects PBMs (pharmacy benefit managers) and managed care plans to establish formularies and use other management tools to extract price concessions from manufacturers.

Controversial language in the bill prohibits Medicare officials from interfering directly in negotiations between manufacturers and PBMs. However, the Agency for Healthcare Research & Quality (AHRQ) gains resources to provide PBMs and health plans with scientific evidence and information on outcomes, comparative clinical effectiveness and appropriateness of health care services and prescription drugs. The Medicare bill provides $50 million for AHRQ to conduct or support demonstrations, evaluations, and technology assessments in this area. AHRQ will launch this program by developing a list of research priorities related to health care services and prescription drugs, with a focus on:

• high-cost health care items and services

• underutilized or overutilized products and services

• products and services that may significantly improve the prevention, treatment or cure of high-cost diseases or conditions [see sidebar: More Evidence to Support Choices].

The Medicare legislation specifies that PBMs should base formulary decisions on scientific evidence and standards of practice, and utilize outcomes and cost-effectiveness information in making decisions on prescription drug coverage. At the same time, the bill spells out in some detail how Medicare drug plans should operate, including requirements that may hinder the ability of PBMs to negotiate rebates and discounts. Drug plans should establish P&T (pharmacy and therapeutics) committees to develop and review formularies, which must list at least two products in each therapeutic class as defined by the U.S. Pharmacopeia. Plans must provide patients access to "medically necessary" drugs and notify patients and physicians of intent to remove a drug from preferred-drug lists. There should be a system for beneficiaries to request exemptions and to appeal coverage decisions.

The legislation also calls for plans to provide drug utilization programs, quality assurance measures to reduce medical errors, and medication therapy management programs. It remains to be seen if these requirements hamstring PBM operations so much as to discourage them from competing for Medicare business.

Increased scrutiny

Expansion in federal coverage of prescription drugs also promises to increase government monitoring of manufacturers' prices. One important, fairly technical provision revises the payment system for therapies administered in doctors' offices to shift away from reliance on average wholesale price (AWP) numbers reported by manufacturers. The aim is to curb reimbursement based on excessively inflated AWP rates for certain cancer treatments and other products that allowed unscrupulous drug marketers to market the "spread" between AWP and a much lower price actually charged the physician. The legislation reduces reimbursement for this year (2004) and then adopts a new payment formula based on average sales prices (ASP) to be calculated by manufacturers.

To prevent future pricing scams, the legislation instructs the HHS inspector general to audit manufacturer AWP and ASP price reports regularly and compare the figures with prices available to private purchases 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."

At the same time, the legislation boosts payments to oncologists and other physicians who have opposed AWP revisions that cut rates for drugs without raising doctors' compensation for treating patients. To ensure adequate reimbursement of these practitioners, Medicare will survey physician practice expenses for drug administration, and the Medicare Payment Advisory Committee will review how payment changes affect patient access to care by oncologists and other specialties.

In addition, government agencies will monitor and analyze the impact of expanded Medicare drug coverage from several vantage points. HHS will report on geographic variations in drug spending. The Federal Trade Commission will assess the impact of expanded mail-order pharmacy services on payments to local pharmacists. Congress' General Accounting Office will monitor any decline or expansion in employer drug benefits for retirees.

The Institute of Medicine (IOM) also will conduct a comprehensive study on the nature and causes of medication errors in order to improve drug safety and quality. As a follow-up to previous IOM reports on medical errors in the health care system, this study aims to help policy makers promote a "national agenda" for medication error reduction. It will develop more credible estimates of the incidence and cost of medication errors and propose a research agenda to evaluate the health and cost impacts of alternative approaches for reducing these problems.

Future changes

Despite expanded prescription drug benefits and use of PBMs to negotiate lower drug prices, the campaign is continuing to authorize expanded reimporting of drugs from Canada and other countries. The Medicare bill includes a fairly toothless measure that permits reimporting only if HHS certifies that such activity is safe-something the agency won't do. Food and Drug Administration commissioner Mark McClellan led the administration's attack against reimporting, claiming that it would encourage distribution of counterfeit and unapproved products in the United States and thus threaten public health. But the public continues to clamor for access to cheaper Canadian drugs, and Congress is likely to revisit the issue after HHS completes a study on safety and trade issues associated with reimportation.

Critics of the Medicare bill expect to press for further changes, and "corrections" are likely even this year. Analysts predict that the $400 billion budget for the drug benefit is likely to support the program for only a few years-not 10. A big budget shortfall will generate demand for additional 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 put a premium on research able to document product quality.