Assessing the Impact of Differential Reimbursement Of Medicare Pharmacy Benefits

Inconsistencies and competing interests between Medicare Parts B and D could create perverse incentives that lead to suboptimal outcomes.

Abstract

Inconsistent benefit structures among Medicare Parts B and D could create perverse incentives and challenge CMS’s ability to provide the most appropriate, cost-effective therapy.

With the passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), Congress launched an ambitious effort to reshape U.S. healthcare. The law’s vision is to provide more comprehensive medical and prescription drug coverage for beneficiaries while saving money through such systemic improvements as cheaper procurement of drugs, reduced transactions and fewer errors through e-prescribing, and better chronic care. This vision appears to be supported, at least in concept, by consumers, patient advocates, and elected officials.

This changing environment will affect the access, usage, and coverage of many biologic therapies in the United States. How will this affect reimbursement and patient choice in Medicare and private plans? How will manufacturers and insurers respond? Will drug development change?

The MMA is more than 400 pages long. The supplementary regulations are already hundreds of additional pages, and that could double or triple in the coming months. The truth is that moving from law to reality is a huge effort. In addition to the potentially ground-breaking initiatives in chronic care improvement, information technology, and in electronic prescribing, the centerpiece of the law is an outpatient prescription drug benefit (Part D) intended to help most beneficiaries achieve better access to pharmacologic and biologic therapies.

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Implementation will be no small task. The Centers for Medicare and Medicaid Services already has written formulary guidelines, enrollment procedures, and eligibility requirements. How all this translates into ease of use, as well as how well exceptions processes (such as appeals of coverage denials) work in practice ultimately will shape beneficiary perception of the value of the program. In addition, in trying to make the Part D benefit successful, CMS faces one of the most challenging business launches in history. CMS will be responsible for creating and implementing an outreach program, administering Part D (with its complex multisystem benefit), and managing a dizzying array of service providers and intermediaries. It also must find a way to deliver a consistent benefit across a range of policy parameters, combining the lessons learned from Medicaid and commercial programs with the need to follow legislative intent.

The task of merging existing practices into a consistent system that reinforces selection of the most beneficial and cost-effective therapies for patients will be a major challenge. This task includes creating consistent rules among various segments of Medicare, particularly between Parts B and D. These decisions will determine access to, and range of, therapeutic choices. Aside from these direct effects on beneficiaries, there are tremendous downstream effects on payers and manufacturers. Inconsistent rules and regulations may create waste in the system and yield negative clinical outcomes.

Numerous issues could arise from inconsistent benefit structures and management between Part D and existing parts of the Medicare program, particularly Part B payment for office-based care. Structural inconsistencies will challenge CMS’s ability to provide the most appropriate, cost-effective therapy, creating obstacles to patient care and the development of biologic and other therapies.

SILO ALERT

Early indications of how CMS can reconcile Congress’s lofty ambitions and public expectations with the existing Medicare program are embodied in some of the Medicare demonstrations created as precursors and additions to the full Part D benefit. Such demonstrations include the Medicare Replacement Drug Demonstration (MRDD) and the Chronic Care Improvement Program (CCIP), designed to make healthcare more efficient.

The MRDD offers immediate coverage for selected injectable or oral therapies that previously were not covered under Medicare. Parts A and B traditionally have provided reimbursement only for therapies that are administered in the hospital or physician’s office, respectively. This created an unusual situation in which intravenous therapies, such as chemotherapy for oncology treatment or infliximab for rheumatoid arthritis, were covered — but similar oral or self-injectable therapies were not. Access to care and product selection, thus, was influenced by delivery mechanism —potentially at the expense of overall quality and cost of care.

Part D: More complex than the old Medicare.

Medicare Part A covers hospital care, Part B covers outpatient treatment, physician office visits, and physician-administered therapies, and Part C, known as Medicare+Choice, offers additional services and benefits through a private health insurance company. Part A (traditional Medicare) is free to those 65 and older. Part B is a supplemental coverage that includes an additional monthly premium, annual deductible, and 20 percent patient copayment. The monthly premium depends on when the Medicare-eligible patient enrolls in the program (the longer an eligible patient waits, the more expensive the coverage becomes). Part C and Medigap are elective and cover at least some out-of-pocket costs, such as the 20 percent patient co-insurance. These programs are offered through private insurers, and a range of options, benefits, and prices exist.

Even with the complexity of the existing system, Medicare Part D will be substantially more so. The current model includes supplemental coverage but no patient choice over the basic coverage, and a range of program coverage options but direct payment by CMS and its carriers to service providers.

Among other objectives, these demonstrations seek to address this inequity in coverage. In particular, the MRDD alleviates the challenges that patients solely reliant on Medicare had in getting access to oral and self-injectable therapies. Yet, despite the objective of giving beneficiaries a broader range of appropriate therapeutic choices, Parts B and D will operate separately. As a result, an inequity in coverage remains, with potentially negative implications for quality of care and access to therapy and with consequences for drug development.

The private marketplace already has struggled with this issue and its consequences — the fragmentation of care that develops when separate people make payment and coverage decisions about drugs and in-office medical services. The risk these private payers face is in offering a suboptimal choice of therapies, potentially resulting in excess medical costs or inferior clinical outcomes. Medicare will face a similar challenge as it attempts to create a rational and cohesive system encompassing medical and pharmacy benefits.

VARYING RULES

The introduction of Part D will have the effect of making Medicare benefits similar to those of many private plans, in that Medicare will offer a drug benefit to go with its medical coverage.

Private health insurance plans often provide medical and drug benefits, though the pharmacy benefit often is managed by a separate entity, such as a pharmacy benefit manager that contracts with the health plan. Even for organizations that keep drug coverage in-house, medical and pharmacy benefits typically are managed separately —with different rules, procedures, and internal decision-making processes regarding payment, prior authorization, and member cost sharing. In most cases, this system is adequate for addressing the different types of coverage, but in cases where a patient could be treated by either an infused therapy or an oral drug, the systems collide. The result, in aggregate, may be a logical policy of coverage and reimbursement — or one less logical.

For example, patients may face minimal hurdles, restrictions, and out-of-pocket costs when gaining access to intravenous treatment, but high copayments and step-therapy restrictions may effectively block access to many oral therapies. This can occur regardless of which treatment is the better medical alternative or lower-cost option overall. Many insurers are addressing this issue head-on by taking a disease-based approach and integrating pharmacy and medical benefits for certain diseases that are treated with both oral and infused therapies.

Traditionally, Medicare has offered only a medical-type benefit with supplemental benefits available from third-party payers. The introduction of Part D means that Medicare will borrow heavily from the private model while attempting to merge its current components into a cohesive whole. Among basic stipulations of the MMA are the inclusion of private health insurers¹ that develop coverage plans and provide coverage. Beneficiaries will be responsible for assessing the different programs, coverage, and out-of-pocket costs, and then selecting the best program for their needs. These plans can vary by cost of monthly premium, specific drugs covered,² and copayments or co-insurance levels. All plans have to meet CMS minimum guidelines in terms of treatments covered and all will have some form of patient cost sharing. Lower-income individuals will have subsidized coverage. By virtue of the number of parties engaged in this new system and the number of options available, Medicare’s complexity becomes far greater than ever, with ripple effects on CMS, Medicare -eligible individuals, and the broader healthcare environment.

EFFECTS ON STAKEHOLDERS

Divergent coverage guidelines between Parts B and D create a perception of random rules for such parameters as out-of-pocket payments, off-label coverage, step therapy, and preferred therapies. The dichotomy in this new environment is that CMS controls the rule making for Part B but individual private plans have substantial control over Part D coverage. With many players, this becomes a game.

Healthcare providers, and therapy researchers, developers, and manufacturers³ face a world of uncertainty upstream from this system. The effects of this include patients’ choice of therapy, whether to develop a therapy based on its likely availability to patients, and waste in the system (including inferior patient care choices). Inherent in this new mix is the challenge to deliver appropriate care in the most cost-effective manner when different parties have different incentives and operate under different rules.

Cost-sharing differences between Parts B and D could persuade patients to switch therapies several times a year.

As a result of patient uptake of Medicare Part D and differing coverage between Parts B and D, reimbursement and access can — and likely will — affect therapy choice and product development. Because these two programs have differing payment rates, covered therapies, rules about off-label use, and widely varying cost-sharing requirements, various stakeholders may have conflicting interests.

Some private payers (PDPs in particular¹) may have an incentive to shift costs to Parts A and B and away from Part D, increasing costs to the federal government. These payers are responsible for drug costs, but not medical expenses. They may be able to reduce their costs and increase profits by recommending or requiring patients to use physician-administered therapies rather than oral or self-injectable drugs. Obviously, such a stance would influence a patient’s access to therapy and constrain a physician’s choice of therapy, potentially affecting a patient’s health outcome, lifestyle (e.g., a patient may be distant from an infusion center), or quality of life. Also, it could pose significant additional costs to Medicare if the lowest cost therapy is not the first available therapy. Although Medicare has processes that are in place for reviewing PDPs’ formulary management approaches, such as prior authorization or step therapy, PDPs do maintain a level of discretion in directing patients to specific therapies — therapies that may or may not be covered under Part D.

When faced with choosing between a covered and a noncovered therapy, patients may not have the financial wherewithal to pay for therapies their physicians recommend. In addition, the cost of a given therapy for the patient will change over time under Part D. As the patient moves into the “donut hole,” he or she bears all the cost of oral and self-injected therapy — a much more expensive proposition than coverage under Part B, which has a continuous 20 percent co-insurance. Once the beneficiary’s total drug expenditure exceeds $5,100 (the point at which the member has passed through the donut hole), coverage reverts to “catastrophic,” with only a 5 percent co-insurance responsibility —thus reversing the incentives and encouraging use of Part D-covered oral and self-injectable medications. This situation creates an incentive for the patient to request certain therapies, based on his or her spend to date. The health outcomes implications of frequent therapeutic switching aside, this can result in differential usage of therapies for a patient depending on time of year and drug spend to date (see Figure) and, more broadly, between relatively healthy and sick beneficiaries. This reinforces suboptimal therapy choices and wastes resources.

FIGURE.

Patient drug costs vary depending on program and YTD patient drug spend

SOURCES: REDBOOK, CMS

Physicians also are affected by differing rules and regulations. They are constrained by their own business economics and patients’ personal finances when selecting a therapy a patient can afford to adhere to. In the past, Medicare payment was sufficient for physicians to withstand the financial effect of writeoffs (either CMS denials or patients’ inability to afford their 20 percent cost-sharing responsibility), but this may no longer be the case. (This situation would occur, for example, if Medicare provided denial of coverage for infused drug therapy and patients could not afford to pay out-of-pocket for the cost.) In the future, with the MMA having reduced physician fees, physicians will have to ensure that patients can adhere to, and pay for, a therapy before starting treatment.

FURTHER READING.

Medicare Prescription Drug, Improvement, and Modernization Act of 2003

Medicare Modernization Act	«http://www.cms.hhs.gov/medicarereform»
Frequently asked questions	«http://www.cms.hhs.gov/medicarereform/drugcoveragefaqs.asp»
Prescription plans	«http://www.cms.hhs.gov/pdps»
Special guidance materials	«http://www.cms.hhs.gov/pdps/specguidncmaterials.asp»
Medicare Replacement Drug Demonstration	«http://www.cms.hhs.gov/researchers/demos/drugcoveragedemo.asp»

Thus, the recommended treatment may be more a function of reimbursement than best clinical practices. There is concern that physician practices facing dire financial circumstances may drop infusion care, forcing patients to seek such care in hospitals under Part A or to utilize oral or self-injectable therapies under Part D instead.

Adherence to therapy is a major factor in ensuring positive clinical outcomes — and one with which physicians routinely struggle. A patient whose financial constraints force inferior decisions, such as deferring needed therapy or selecting a course of treatment based purely on delivery mechanism, risks poor outcomes from nonadherence.

In addition, such perverse incentives compromise CMS’s ability to redefine standards of care through its own forward-looking initiatives (e.g., CCIP) because of poor outcomes.

Risks to patients and costs to Medicare aside, there is another notable effect. A system of differential rules creates unnecessary uncertainty and risk in drug development. It creates redundant development costs by creating a need for parallel development programs for oral and intravenous versions of therapies. Ondansetron (Zofran) and granisetron (Kytril), two anti-emetics, were developed with oral and infused formulations, which addresses this differential. In addition, such variation in rules could reduce the value of pursuing biologic therapies for which there typically are no oral therapies available. This uncertainty and the resultant increased cost could mean fewer therapies reaching commercialization or increased time to market as programs are cancelled and time-lines changed due to uncertainty about reimbursement.

THE SOLUTION

The MMA will benefit many patients who are elderly — particularly the chronically ill and those who have low incomes. The inconsistencies discussed herein, however, threaten to weaken this initiative.

CMS has an opportunity to rectify this situation. CMS can begin by considering the following:

• Defining the standard of care and coordinating benefits through links between medical and pharmacy benefits

• Logically linking medical and drug benefits, to create an incentive to cover the most medically appropriate, lowest-cost therapy

• Acting on what is learned through information technology demonstrations (real-time cost/benefit information versus retrospective drug-utilization review)

• Merging therapy components of Parts B and D in the long term (in the near term, CMS can work to ensure a consistent set of rules and regulations across Medicare)

Physicians, patients, and therapy researchers, developers, and manufacturers, can work to support positive changes to the current model and thus realize the basic objectives of Medicare’s overhaul. Specifically, physicians and patients can work with CMS and other participating agencies to highlight access issues, the resulting effect on healthcare delivery and, ultimately, patient care.

In addition, drug development organizations and manufacturers, while engaging in the debate, should consider the disparities between Parts B and D in the process of making portfolio assessments.