Improving Medicare’s payment for Part B drugs: Requiring pharmaceutical manufacturer reporting of sales price data

CMS relies on pharmaceutical manufacturers to submit their average sales price (ASP) data to calculate Medicare’s payment rates for Part B drugs, but not all manufacturers are required to report such data. When Medicare lacks ASP data for a product, it typically sets the payment rate using list prices that are generally higher than ASP, resulting in higher than warranted Medicare payments. In 2017, MedPAC recommended a policy that requires all Part B drug manufacturers to report ASP data and gives the Secretary the authority to apply penalties to manufacturers who do not report required data. This policy would improve the accuracy of Medicare’s payments and protect beneficiaries and taxpayers from paying higher prices. 

Part B covers drugs that patients typically do not administer themselves but are instead administered by a clinician in physician offices and hospital outpatient departments, such as chemotherapy drugs and injections for rheumatoid arthritis. Medicare spending for drugs covered under Part B, including beneficiary cost sharing, has grown at an average rate of nearly 10 percent per year since 2009. The Medicare program and its beneficiaries together paid $32 billion dollars for Part B-covered drugs in 2017. Growth in Medicare’s payment rates under Part B is largely driven by rising drug prices and the launch of new, more expensive products and reflects the significant leverage that manufacturers have when pricing their products.

In 2017, to improve the tools Medicare has to limit spending growth for Part B drugs, the Commission developed a market-based alternative to the current payment system that would use private vendors to negotiate lower prices and share savings with providers and beneficiaries. The Commission also recommended several improvements to the current payment system, including improving manufacturers’ reporting of sales price data, which we outline here. Taken together, the Commission’s recommendations aim to spur competition, address price growth, and lower Medicare spending for Part B drugs.

Medicare pays for drugs in different ways across its various payment systems. Medicare pays physicians and outpatient hospitals for the Part B-covered drugs they furnish to beneficiaries. Medicare’s payment rate for a Part B-covered drug is based on the manufacturer’s reported average sales price, which reflects the manufacturer’s sales of a particular product to most purchasers, net of most rebates, discounts, and price concessions. Medicare pays providers 106 percent of a manufacturer’s average sales price (ASP) (i.e., 100 percent of the ASP plus a 6 percent add-on) for a drug, regardless of the price a given provider actually pays for the product.

Using the sales data submitted by manufacturers to the Centers for Medicare and Medicaid Services (CMS), the agency sets Medicare’s Part B payment rates for each product with available ASP data on a quarterly basis. (There is a two-quarter lag in the data used to set Medicare’s payment rates to allow manufacturers to submit ASP data and CMS to calculate and implement the new payment rates.) For most products paid as Part B drugs, CMS uses available ASP data to set an ASP-based payment rate. However, some products lack ASP data. For those products, Medicare has alternative methods of paying:

• For new drugs that initially lack ASP data, Medicare pays the wholesale acquisition cost (WAC) plus three percent for the first two to three quarters the product is on the market. WAC is the manufacturer’s list price for a product. After two or three quarters, CMS is able to collect ASP data and set payments.
• For drugs that lack ASP data for reasons other than being new—for example, in the case that the manufacturer is not subject to the ASP reporting requirement or the manufacturer had no sales in a reporting quarter, Medicare’s payment method varies. The payment may be 106 percent of WAC, 95 percent of the average wholesale price (AWP) (another list price set by the manufacturer), or in some cases invoice priced.

Section 1927(b)(3) of the Social Security Act requires manufacturers with Medicaid drug rebate agreements[1] to report the ASP and number of units sold for each of their Part B drugs on a quarterly basis. If manufacturers covered by this section do not report data within 30 days after the end of the quarter, they face civil monetary penalties (up to $10,000 for each day the data are not reported). However, some products paid as Part B drugs are approved by the Food and Drug Administration (FDA) as devices. These products, because they are not technically drugs, are not covered under Medicaid drug rebate agreements. As a result, manufacturers are not required to report ASP data to CMS for those products (though some may do so voluntarily). Requiring that all manufacturers of Part B drugs report ASP data would prevent CMS from having to rely on other, less appropriate list prices that do not account for discounts and rebates and, thus, prevent the Medicare program from making excess payments due to this loophole.

Indeed, payments for products that lack ASP data can be substantially higher than they would be under ASP-based payments. For example, sodium hyaluronate products, which are injected into the knee to treat pain resulting from osteoarthritis, are approved as devices and are not required to have Medicaid rebate agreements. We have observed that, over time, fewer of these products have ASP-based payment rates, which are published in Medicare’s ASP payment rate files on CMS’s website. In the second quarter of 2018, there were 10 sodium hyaluronate products with Medicare billing codes, and seven of those products had ASP-based payment rates published on CMS’s website. By the second quarter of 2019, there were 11 products with billing codes, but only three of those products had ASP-based payment rates published on CMS’s website. For the four products that appeared in CMS’s ASP payment files in 2018 but no longer did in 2019, we compared the products’ last payment rates listed in the CMS ASP payment rate files with the current WAC + 6 for the products. The WAC-based payment rates are substantially higher than the last ASP + 6-based payment rates for those four products: 15 percent, 91 percent, 97 percent, and 245 percent higher, respectively. As shown in the chart below, the Medicare payment rates to outpatient hospitals for the four products increased by these large magnitudes, and the payment rate increases coincided with the products no longer being listed in CMS’s ASP payment rate files. 

Outpatient hospital payment rates for Part B drugs missing ASP information

Note: Q1 (quarter 1), Q3 (quarter 3), Q4 (quarter 4). Chart displays the Outpatient Prospective Payment System (OPPS) payment rates for sodium hyaluronate drugs as published in the OPPS Addendum B on the CMS website. The last ASP-based payment rate displayed is for the last quarter during which the product is listed in CMS’s ASP pricing files. Current payment rates for these products appear to be based on WAC due to the unavailability of ASP information. 

Source:  MedPAC analysis of OPPS Addendum B and ASP payment rate files published on CMS’s website; MedPAC and Acumen analysis of Medicare claims data.

Sodium hyaluronate products accounted for over $460 million of Part B spending in 2017. About $170 million of that spending in 2017 was on the four products that experienced substantial increases in their payment rates between 2018 and 2019, coinciding with the products no longer being listed in CMS’s ASP payment rate files. While we cannot determine why these products are no longer listed in the ASP payment rate files, a possible explanation may be that manufacturers are choosing to no longer report ASP data because they are not required to do so, and, by not reporting, providers can receive higher list price-based payment for these products.

The Commission’s recommendation to require all manufacturers to report ASP data would be an important step to prevent such overpayments. Enhancing the per day monetary penalty for failing to report ASP data (e.g., from $10,000 to $50,000 per day) and maintaining the ability to exclude a drug from coverage after 90 days of failure to report could also improve the timeliness of ASP data reporting.  

Improving ASP data reporting would ensure that Medicare’s payment rates are set based on actual sales data, protecting the Medicare program and taxpayers from paying inflated list prices. Improving the accuracy of Medicare’s payments would also protect beneficiaries from unwarranted higher cost-sharing liability.

The Commission’s recommendation to improve ASP data reporting is included in its June 2017 Report to the Congress, and its analysis of the payment rates for sodium hyaluronate products is published in its June 2019 Report to the Congress.

[1] Under the Medicaid Drug Rebate Program, a drug manufacturer must enter into a national rebate agreement with the Secretary of Health and Human Services in order for states to receive federal funding for using the manufacturer’s product. In exchange for the rebates, state Medicaid programs must cover the participating manufacturer’s product.