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Medicare's Drug Payment Proposal Puts Patients First

Medicare wants to test new ways to pay for prescription drugs, which include many expensive treatments for multiple sclerosis and cancer. Officials think that by changing the incentive, they can improve patient care while saving both patients and taxpayers money.
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A patient in your average doctor's office, Ms. Myers, has rheumatoid arthritis. Her physician, Dr. Jones, administers an injectable immunotherapy drug, Remicade, as her treatment. Medicare pays Dr. Jones 106 percent of the average sales price (ASP) for the drug, which comes to more than $3,000 every two months. The extra six percent is supposed to cover the drug's ordering, tracking, storing, and processing, as well as to account for the variation in prices that drug companies charge different doctors.

Commission-type arrangements might sound like something you'd only see for sales positions-especially in the retail or automotive industries, where many companies pay sales personnel a percentage of sales in order to incentivize greater sales volumes and sales of higher priced items.

A car salesman who gets a percentage of the car's sales price has a strong interest in selling you a BMW 7 Series rather than a 3 Series. The ASP plus six percent payment structure creates a similar incentive when physicians administer drugs to treat Medicare beneficiaries. After all, six percent of a $100 drug is just $6 -- but six percent of Ms. Myers $3,000 drug is $180.

This incentive also happens to bolster drug company profits. Under the current "plus 6 percent" system, drug companies don't have to worry about the usual trade-off between higher price and lower demand. In fact, the reverse is true; the "six percent" payment structure gives higher priced drugs a marketing edge, which in turn further increases revenues for both doctors and drug companies.

There is, however, one loser in this system: patients like Ms. Myers.

While Medicare pays 80 percent of the ASP plus six percent price of the drugs, patients are responsible for the other 20 percent. Many patients have supplementary Medigap coverage for this 20 percent, but as many as six million Medicare beneficiaries don't. Paying 20 percent of a $3,000 drug comes in at $600 every other month for seniors. And even if a senior has a Medigap policy that pays for most or all of the 20 percent, their Medigap premiums will increase because Medigap is paying for more of the expensive specialty drugs, which raises everyone's premiums.

The good news is that Medicare wants to test new ways to pay for these drugs, which include many expensive treatments for multiple sclerosis and cancer. Officials think that by changing the incentive, they can improve patient care while saving both patients and taxpayers money.

Instead of paying the ASP plus six percent, Medicare is proposing to provide a flat fee to physicians for administering a drug regardless of its price along with a smaller percentage add-on payment.

The notion behind Medicare's proposal is that by making the payment to physicians for administering drugs slightly more uniform, it will reduce the financial incentive to prescribe the most costly drug and remove money from prescribing decisions. Doctors can focus exclusively on what is clinically most beneficial to patients instead of what is most financially lucrative. Medicare is proposing to study this change in a few geographical areas, and compare prescribing patterns and patient outcomes between the areas.

Given how much they benefit from the current system, it's no surprise that the drug industry and some physician groups oppose Medicare's proposal. They raise two objections. First, financial incentives don't drive physician prescribing behavior and, second, patients will be denied the medicines they need.

Unfortunately, the data do not support the claim that physicians' judgments aren't influenced by how much they are paid. In a classic study, Professor Newhouse and his Harvard colleagues showed that when Medicare previously changed its payment formula to the "six percent" arrangement, cancer doctors shifted from prescribing a lower cost chemotherapy drug for lung cancer patients to a clinically equivalent but much higher cost drug. Money does talk, even in medicine.

But the claim that patients will be denied necessary drugs is just a scare tactic. Indeed, Medicare's proposal seeks to ensure that doctors' recommendations are made solely on clinical benefits for patients, not on doctors' paychecks. Medicare isn't penalizing physicians for prescribing expensive drugs like Remicaide -- it's just not incentivizing the choice of more expensive drugs.

There are other potential benefits of Medicare's proposal, too. For example, another change Medicare hopes to test is lowering or even eliminating the current 20 percent patient cost-sharing requirement. That would be good for patients both clinically and financially. But even standing alone, Medicare's proposal to study the add-on payment is an important step away from the harmful status quo.

Ezekiel J. Emanuel is a Senior Fellow at American Progress and Chair of Medical Ethics and Health Policy at the University of Pennsylvania. Maura Calsyn is the Director of Health Policy at the Center for American Progress.

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