On April 11 and 12, 2024, the Medicare Payment Advisory Commission (MedPAC) held a virtual public meeting, which included the following sessions:

• Considering approaches for updating the Medicare physician fee schedule;
• Telehealth in Medicare: Status report;
• Alternative approaches to lowering Medicare payments for select conditions in inpatient rehabilitation facilities;
• Assessing consistency between plan-submitted data sources for Medicare Advantage enrollees;
• Generic drug pricing under Part D; and
• Initial findings from analysis of Medicare Part B payment rates and 340B ceiling prices.

The full agenda for the meeting and the presentations for the sessions are available here.

COMMISSION DEBATES MACRA REPLACEMENT OPTIONS

The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) currently dictates how the Medicare Physician Fee Schedule (PFS) conversion factor (CF) is updated annually. The act has been criticized for its inability to keep up with inflation; MACRA set the yearly update for the PFS CF at .5% from 2015 through 2019 and froze all updates from 2020 through 2025. After factoring in budget neutrality, the CF decreased every year from 2021 to 2024. This lack of updates has required intervention from Congress in each of the last four years. Over the same time period, every other major payment system has had its annual updates tied to inflation. The incentives MACRA provided for clinicians to participate in value-based care – a key component of the act – have been unable to build momentum due to the pandemic, and the bonus for Advanced Alternative Payment Model (A-APM) participation, considered by many to be the most important value-based care path under MACRA, is slated to expire after 2026. Accordingly, the Commission explored options to fix the annual updates to PFS reimbursement and continue incentivizing providers to transition to value-based care.

Staffers Present Two MACRA Replacement Options that Would Tie Physician Reimbursement to the Medicare Economic Index (MEI)

The staffers began their presentation by reviewing the basics of payment under the PFS. Under the PFS, each code is assigned relative value units (RVUs) under three categories:

• Work RVUs account for the provider’s work and expertise when performing a procedure.
• Practice expense (PE) RVUs reflect the labor and overhead costs of maintaining a practice, such as administrative staff costs, medical supplies, and office equipment.
• Malpractice (MP) RVUs reflect the cost of professional liability insurance.

These RVU values are then added up and multiplied by the CF to determine the reimbursement rate for a given code. The annual PFS reimbursement updates happen through changes to this CF.

The staffers then briefly reviewed access to care measures discussed at the Commission’s January meeting, which found Medicare beneficiaries’ access to care was largely comparable to that seen under commercial insurance. Despite these findings, the Commission has concerns about future access to care.

The first concern is that MEI growth is expected to outpace PFS updates by more than it has in the past. Over the last twenty years, the average PFS update has been one percent lower than the MEI. However, this gap is projected to average between 1.7 percent and 2.3 percent over the next 8 years under MACRA. Additionally, the fact that payment updates for the Outpatient Prospective Payment System (OPPS) are tied to the MEI have led OPPS reimbursement to significantly outpace reimbursement under the PFS, meaning that clinicians are paid more for performing the same services at a Hospital Outpatient Department (HOPD) than at a freestanding clinician office. The growing gap in reimbursement caused by differences in these annual updates could contribute to vertical consolidation, as more and more physicians are employed by hospitals.  Finally, the Commission is concerned that MACRA’s approach to incentivizing A-APM participation could cause providers to leave A-APMs to participate in the Merit-Based Incentive Payment System (MIPS) in the late 2020s. Under MACRA, A-APM participants would receive a .75 percent payment update each year, compared to a potential nine percent payment adjustment available under MIPS. Given the commission’s longstanding concerns about the effectiveness of MIPS, and their favorable opinion about A-APMs, this would represent a major roadblock in the transition to value-based care.

To address these concerns, the staffers presented two options to replace the PFS updates under MACRA, and an additional option to better incentivize A-APM participation.

Under the first option, only the CF applied to PE RVUs would be updated annually. This update would be equal to the hospital MEI minus a productivity adjustment. The CF applied to work and PE RVUs would not be automatically updated, though Congress could still provide updates via legislation, as they have frequently under MACRA. This option would limit the difference in payment for practices expenses under the OPPS and PFS, reducing incentives for vertical integration. The staffers also pointed out that measures of clinician supply and beneficiary access did not indicate a need to update reimbursement for work RVUs.

Increasing rates only for PE RVUs would have a disproportionate impact across specialties, with clinicians who frequently bill high PE codes in non-facility settings benefiting more than clinicians who bill more low PE codes in facility settings. For example, the staffers projected that, over ten years, this policy would increase payments for radiation oncologists by 16.8 percent, but only increase rates for emergency medicine providers by 4.9 percent.

Under the second option, the CF (across all types of RVUs), would be updated by the MEI minus one percentage point. To protect against negative updates in years with low MEI, there would be a floor on the update equal to half of the MEI. This policy would keep PFS updates on track with historic trends; on average, over the two decades preceding the pandemic, PFS updates have been roughly equal to MEI minus one percent.

The Commission estimated that the two options would have a relatively similar impact on aggregate physician payment updates over a ten-year period, with option one projected to increase payments by 11.4 percent and option two projected to increase payments by 12.7 percent. In comparison, current law would only increase payment by 6.2 percent for A-APM participants and 2.0 percent for other clinicians. Neither option was projected to fix the issue of payment differentials between the OPPS and PFS. Currently, HOPDs receive $238 more than freestanding offices for the removal of skin lesions[1]. This gap would grow under both options, to $298 under option 1 and $306 under option 2.

The staffers also presented a third option geared at fixing A-APM incentives. Under this option the differential updates between A-APM participants and other PFS payments would be replaced by either option one or two, and the A-APM bonus would be extended. This proposal was not as detailed as the other policy options, with the question of whether MIPS should be repealed, whether A-APM payment and patient thresholds should be restructured, and how the bonus itself should be applied all being left up in the air.

The staff then opened the floor to the commissioners to debate the merits of the two PFS update options and what to do with the expiring A-APM bonuses.

Commissioners Favor Extending A-APM Bonuses

The commissioners generally leaned towards option two. Many were concerned with the disproportionate impact option one would have across specialties, particularly in how it would hurt primary care and behavioral health providers when compared to option two. The relative simplicity of option two was also praised. Those who leaned toward option one appreciated the fact that it focused on practice expenses, which go up due to inflation and are completely out of clinicians’ control.

Regarding A-APM bonuses, while most commissioners believed that A-APM bonuses needed to expire eventually, they were concerned that allowing the bonuses to expire next year would hurt the transition to value-based care. Commissioners pointed out that this transition has the potential to mitigate volume and intensity increases in PFS billing and fix the mismatch between traditional FFS incentives and a rapidly aging population with chronic diseases. Given that roughly one in five clinicians is part of an A-APM currently and given the relatively slow speed at which major changes take place in the American healthcare system, many believe that we are not yet at the point where A-APM bonuses are no longer needed. The idea of getting rid of MIPS was generally supported.

MEDPAC REPORTS ON STATUS OF TELEHEALTH

The Covid-19 pandemic drastically changed the role of telehealth in the American healthcare system. In response to Congress and CMS granting a number of flexibilities for telehealth services, such as paying providers for telehealth visits with beneficiaries in their homes, adding over 140 reimbursable telehealth services, and paying for audio only visits, the technology went from rarely used to a major component of the healthcare system. However, with many of the flexibilities granted during the pandemic slated to expire in 2025, questions remain about the future role of the technology. Accordingly, MedPAC staffers presented on the status on telehealth in American healthcare under the Medicare Physician Fee Schedule (PFS).

Telehealth Utilization Stabilizes Post Pandemic

Staff first presented trends in telehealth, the use of which has predictably fallen since its peak during the pandemic. In 2020, 7.1 percent of all claims paid under the PFS included a telehealth service, as compared to 3.7 percent in 2022. Federally qualified health centers (FQHCs) and Rural Health Centers (RHCs) saw similar drops over the same time, from 26.4 percent to 16.5 percent and 9.5 percent to 4.2 percent, respectively. It is likely that the higher rates of telehealth services for FQHCs are driven largely by the fact that they provide disproportionate amounts of behavioral health care. Behavioral health accounts for a large and growing percentage of total telehealth services, rising from 26 percent in 2020 to 40 percent in 2022. Surveys on beneficiary satisfaction with telehealth have returned mixed results. While 90 percent of surveyed beneficiaries who had a telehealth visit in 2o23 were satisfied with the result, only 35 percent were interested in continuing to have telehealth as an option.

The ability for clinicians to receive the same rate as in-person services for providing telehealth to beneficiaries in their homes has caused some concerns about “telehealth only providers,” who could be over-reimbursed by Medicare rates designed to account for the cost of maintaining an office and other expenses necessary for in-person visits. This overpayment could eventually lead more providers to only provide telehealth, jeopardizing access to in-person care. The staffers found these fears to be largely unfounded; outside of behavioral health, telehealth-only clinicians are almost non-existent, with only one percent of clinicians only providing telehealth services in 2021 and 2022. Among behavioral health clinicians, telehealth only rates rose from four percent in 2020 to 26 percent in 2021, before falling slightly to 21 percent in 2022. Given the longstanding lack of access to behavioral health services, the staffers believed that this recent rise in telehealth only providers could bolster areas where in-person care was lacking.

Finally, the staffers discussed upcoming behavioral health telehealth requirements. Starting January 1, 2025, telehealth visits in a beneficiary’s home must be preceded by an in-person visit 6 months prior to receiving telehealth services. In-person visits would then need to be provided annually. While CMS has modified this requirement to grant providers additional flexibilities, including waiving the requirement for certain established patients, the staffers were concerned that this could disrupt established care patterns and suppress the role telehealth has played in increasing access to behavioral health. These concerns are backed up by data; in Q1 2022, only 21 percent of behavioral health telehealth visits under the PFS were preceded by an in-person visit in the last year, so the requirement would cause a major shift in care patterns. Prohibiting “incident to” billing and applying increased scrutiny to outlier clinicians were then proposed as less disruptive guardrails policymakers could use to protect Medicare from unnecessary spending.

While Supportive of Telehealth, Commissioners Have Concern About Fraud and Abuse

The commissioners were unanimously opposed to the in-person visit requirement for behavioral health, echoing the staffers concerns that the requirement would reduce access to behavioral health care and adding that it could stifle innovation in the behavioral health space. Despite this support and an acknowledgment that current data points toward providers not abusing telehealth flexibilities, many commissioners also expressed concerns about fraud waste and abuse. The staff suggestions of prohibiting “incident to” billing and applying increased scrutiny to outlier clinicians were both seen as more acceptable ways to curb abuse than in-person requirements. Commissioners were also concerned about disincentivizing in-person care, particularly for non-behavioral health services, with the additional cost of maintaining in-person facilities coming up multiple times in the discussion.

The commissioners expressed support for audio only telehealth, as disadvantaged beneficiaries may not have the technology necessary for a video visit. There were also calls for better data on telehealth use across various demographics to better understand the health equity implications of the technology.

Commissioner Brian Miller noted how the pandemic exposed the flaws in existing policy that did not pay for telehealth due to fraud, waste, and abuse concerns, and touted the technology’s ability to support the healthcare workforce in the midst of burnout and staff shortages. He hoped that similar concerns would not hinder paying for other technological advances such as algorithms and highlighted the importance of giving beneficiaries a choice in how they receive services and then paying appropriately for those services.

COMMISSION CONSIDERS ALTERNATIVE APPROACHES TO LOWERING MEDICARE PAYMENTS FOR SELECT CONDITIONS IN INPATIENT REHABILITATION FACILITIES

MedPAC is required to report to Congress on a unified payment system for post-acute care. To facilitate this work, MedPAC staff presented on the different payment systems that Medicare uses for skilled nursing facilities (SNFs), home health agencies, inpatient rehabilitation facilities (IRFs), and long-term care hospitals (LTCHs), and looked for alternative approaches to lowering payments specifically in IRFs for select conditions that are also treated in SNFs. 60 percent of all admissions to IRFs must meet the compliance threshold (which requires beneficiaries to have at least 1 out of 13 conditions that typically require more intense rehab). The other 40 percent of admissions can be cases with other conditions, referred to as “noncompliant” cases. The staff presented on the differences in the level of services between IRFs and SNFs. IRFs have a daily therapy requirement of three hours per day and patients appear to be healthier, but MedPAC staff found that IRF patients may not be lower cost.

The majority of the commissioners agreed that there were multiple issues with the lack of data and ‘muddiness’ around who benefits from IRFs and the definitions of compliant patients versus noncompliant patients. Currently, if a patient is “noncompliant” (does not have 1 of the 13 conditions), physicians can still recommend they receive treatment from an IRF. There is no real process surrounding who gets recommended and who does not. Commissioners wanted more data on who is admitted, and potentially a more streamlined process in the recommendation once the data is obtained. Additionally, there was debate on if the benchmark of 60 percent compliant patients affects how many patients IRFs accept and what kinds of patients IRF accepts. Some commissioners requested more time to gather information on this issue and wanted time to clarify what compliant versus noncompliance in IRFs mean, while some other commissioners suggested raising this benchmark back up to 75 percent. Most commissioners agreed that because of the three hours of therapy a day, some patients may be over-treated, and therefore, this potentially raises costs. They discussed that three hours of therapy a day seems to be an arbitrary number but reiterated that they wanted more data on what kinds of patients are benefiting from IRFs.

In the presentation, MedPAC staff presented three different approaches to lower IRF payment rates for noncompliant cases. IRF payment rates could be lowered to equal: 1) SNF payments, 2) IRF costs (in aggregate), or 3) a blend of current IRF payments and costs. The first approach would have the largest reductions, then approach two, and finally approach three would have the smallest reductions to rates and would have the lowest impact on IRF admitting practices. Commissioners had differing opinions on which of the three alternative approaches to lower IRF payments were the best. Some suggested that approach two was headed in the right direction, while others preferred approach one or three. Most commissioners requested more time to gather data before a recommendation is released, but MedPAC is required to provide a recommendation update. Chair Commissioner Dr. Michael Chernew noted that there is also a cost to taking more time in addition to the resources that would be used. He emphasized that MedPAC will make the required update recommendation with all the information available, and that one of these three approaches does not need to be chosen.

COMMISSIONERS EXAMINE CONSISTENCY BETWEEN PLAN-SUBMITTED DATA SOURCES FOR MEDICARE ADVANTAGE ENROLLEES

In the April 2024 meeting, as a follow-up to the March meeting, MedPAC staff presented on Medicare Advantage (MA) encounter data compared to other data submitted by MA plans, such as bid data and Healthcare Effectiveness Data and Information Set (HEDIS) data, to assess the completeness of provider-submitted feedback and the data quality. From the comparisons, staff found that data, and data sources with information about MA enrollees’ use of services are incomplete. By comparing MA encounter data against bid data, MedPAC found that a difference in inpatient days calculated from encounter data and plan bids occurs from incomplete encounter data, encounter records for payment denial, variation in encounter submissions and processing methods, and differences in plans’ internal and administrative data. By comparing MA encounter data with HEDIS quality data, MedPAC found that inconsistent treatment of exclusions in 2021 MA HEDIS data led to inconsistencies with encounter data, highlighting that HEDIS specifications were not applied consistently by MA plans.

Commissioners first discussed why enrollment figures differ greatly and staff suggested the two main contributors are the differences in the plan’s internal enrollment data versus Medicare data and the reorganization of plan offerings between years. One commissioner also stated the importance of understanding that if there was complete encounter data then the HEDIS data would be a strict subset of such data, providing for no discrepancies. Another commissioner brought forth the idea of providing incentives to provide complete reporting as seen in fee-for-service and highlighted that this is an opportunity to think about reporting differently and not just as a data capture. Commissioners also voiced the concern that it is not effective to force better data outcomes as this will continue to deliver the same errored results.

Many commissioners highlighted that, so little is known about MA data which makes it difficult to assess effectiveness. Commissioners emphasized the importance of data infrastructure underlying the entirety of Medicare. Chair Commissioner Dr. Michael Chernew closed the session by highlighting the issue of not knowing if a better policy would positively impact data or if better collected data will allow for an improved policy as well as acknowledging that the Commission is not in the recommendation stage on this topic at this time.

MEDPAC HIGHLIGHTS VARIATION IN GENERIC PART D DRUG PRICES, WITH COMMISSIONERS CONCERNED ABOUT THE IMAPCTS OF CONSOLIDATION

Based on MedPAC’s analysis of Part D prescription drug event (PDE) and direct indirect remuneration (DIR) data from CMS, which does not include postsale pharmacy fees, generic drug prices in Medicare Part D are often higher than cash prices and can vary widely. This may increase costs for both beneficiaries and the Medicare program. From 2015 to 2022, postsale pharmacy fees for generic drugs increased more than 30 percent per year on average, going from $0.5 billion in 2015 to $3.5 billion in 2022. Gross part D spending, however, grew by less than 3 percent per year on average throughout this time. To further understand this issue, MedPAC staff presented an initial analysis of generic pricing under Part D and responses from stakeholder interviews on generic drug marketplace dynamics.

Analysis of Part D Data

To better understand generic price variation in Part D, Acumen LLC analyzed 2021 Part D data on select generic drugs, based on the highest total number of annual fills and/or gross spending. A total of 108 unique chemical molecules were assessed, representing about 570 pharmaceutically equivalent products (PEPs) with different dosage forms and strengths, and about 5,900 unique National Drug Codes (NDCs). These selected drugs accounted for about 60 percent of total gross generic drug spending in 2021.

MedPAC found that generic price variability depends on how drug and price are defined, with lower variation when a drug is defined more narrowly, and higher variation when the price includes dispensing fees and postsale pharmacy fees. The analysis also showed that lower-priced products tended to have higher variability, and that price variability patterns differed across therapies, products, and at the individual NDC level (note that this analysis has not been made publicly available and results have only been presented to commissioners in pre-meeting materials). Variations based on pharmacy types or individual plans may explain some of the price variation for a given product, but not all of it.

Stakeholder Interviews

To further understand generic drug price variation, the Commission contracted with B&J Health Policy LLC to conduct interviews with 14 pharmaceutical supply chain participants, which included pharmacies, pharmacy benefit managers (PBMs), plan sponsors, wholesalers, and other stakeholders. Interviews focused on how generic drug prices are determined and the interactions of supply chain participants, how Part D plans set their reimbursement rates for generics, and other factors impacting generic price variation. Based on these interviews, the Commission identified the following themes:

1. Acquisition costs for the same generic drug vary across pharmacies, generally due to prices charged by wholesalers rather than manufacturers.
2. Generic drug prices from wholesalers may be tied to brand-name drug prices, referred to as “tying arrangements,” where discounts for branded drugs are tied to the volume and price of generic drugs purchased.
3. Medicare Part D payments do not reflect pharmacy acquisition costs or manufacturers’ prices, and payments are generally based on PBMs’ maximum allowable cost (MAC).
4. POS payments may not accurately capture prices paid by Part D plans.
5. Pharmacy services administrative organizations (PSAOs) do not typically negotiate reimbursement contract terms with PBMs, with PSAOs primarily serving as facilitators for pharmacies to relieve contractual and administrative burdens.
6. Independent pharmacies may still face financial uncertainties due to pharmacy fees.
7. Generally, Part D plan payments do not contribute to drug shortages, with several interviewees noting that large purchasers contribute to “race to the bottom” pricing dynamics where prices eventually reach a level that is too low for some generic manufacturers to operate profitably.

Commissioner Discussion

In discussion, several commissioners highlighted concerns with the impact of consolidation and vertical integration on pricing and supply chain dynamics. Chair Commissioner Dr. Michael Chernew noted that while consolidation is clearly important, it is difficult to fully understand, making it important for MedPAC to keep considering before developing any potential solutions. Several commissioners also expressed concerns about the impact of price variation on the economic sustainability of independent pharmacies, and some expressed concerns about drug shortages.

Regarding stakeholder interviews, Commissioner Dr. Brian Miller expressed disappointment that these interviews did not include a generic drug manufacturer or a contract manufacturer, given the role these stakeholders play in generic drug marketplace dynamics, and suggested that at minimum, the Commission should talk to a trade association representing manufacturers. He also suggested the Food and Drug Administration (FDA) and Federal Trade Commission (FTC) be involved in these discussions. Regarding drug shortages and access issues, Commissioner Dr. Stacie Dusetzina suggested a focus on wholesalers.

MedPAC intends to continue to monitor prices and access in Medicare Part D but does not plan to make recommendations on this topic at this time.

MEDPAC ESTIMATES MEDICARE PAYMENTS SUBSTANTIALLY EXCEEDED 340B CEILING PRICES IN 2022

The 340B Program[2] was established to support certain safety-net hospitals and other providers (covered entities) by providing certain covered outpatient drugs to their patients at discounted prices.[3] Currently, Medicare pays for drugs acquired through the 340B Program at the average sales price (ASP) plus 6 percent. However, from 2018 to 2022, CMS reduced the payment rate for 340B-acquired drugs under the Outpatient Prospective Payment System (OPPS) to ASP minus 22.5 percent in response to concerns that Medicare payment rates for drugs purchased through the 340B Program exceeded the costs providers paid for these drugs. Following litigation and a Supreme Court ruling,[4] CMS reinstated payments for 340B drugs under the OPPS to the full ASP plus 6 percent rate in the calendar year (CY) 2023 OPPS final rule.

Until recently, MedPAC lacked access to the confidential National Drug Code (NDC)-level pricing data used to determine 340B ceiling prices, which is the maximum statutory price a manufacturer can charge a covered entity for the purchase of a covered outpatient drug. However, the Consolidated Appropriations Act of 2021 granted MedPAC access to the data to calculate 340B ceiling prices, allowing for a closer examination of the relationship between Medicare payments for 340B drugs and hospitals’ acquisition costs. In this session, commissioners reviewed and discussed its updated analysis of the difference between payment for Part B drugs and 340B ceiling prices.

Using 2022 NDC-level pricing data, MedPAC estimated 340B ceiling prices based on average manufacturer price (AMP) and best price (BP) and compared them to Part B payment rates. The analysis included hospitals paid under the OPPS that bill Part B for drugs under the 340B Program and excluded those paid under alternative payment systems and retail pharmacy drugs. The study evaluated 189 billing codes for single-source drugs, biologicals, and biosimilars, representing 97 percent of OPPS spending for 340B products. In cases where billing codes had multiple NDCs, NDC-level ceiling prices were aggregated to the billing code level using volume-weighted calculations.

Among the 189 single-source products examined, MedPAC found that Medicare and its beneficiaries paid OPPS hospitals $11.9 billion for products purchased through the 340B Program in 2022. Moreover, aggregate payments made by FFS Medicare and beneficiaries exceeded 340B ceiling price costs by 48 percent, or $3.9 billion. Specifically, payments for cancer products exceeded 340B ceiling prices by 42 percent, while non-cancer products surpassed them by 57 percent.[5] In total, 10 percent of products had a Medicare payment rate at least 145 percent above the 340B ceiling price (90^th percentile). MedPAC intends to update the analysis as new data becomes available.

Commissioners deliberated on the impact of the 340B Program on hospital finances and potential unintended consequences of reducing 340B payments. Commissioners emphasized how addressing underpayments for 340B drugs is essential alongside efforts to resolve overpayments for drugs. Additionally, commissioners discussed the importance of recognizing the significant benefits of the 340B Program on covered entities and eligible patients when making policy recommendations. They emphasized the program’s role in enhancing access to affordable medications for vulnerable populations and supporting the financial sustainability of safety-net providers.

The Commission does not currently plan to make recommendations on this topic.

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This Applied Policy® Summary was prepared by Emma Hammer with support from the Applied Policy team of health policy experts. If you have any questions or need more information, please contact her at ehammer@appliedpolicy.com or at 202-558-5272.

[1] This procedure was chosen by the staffers to demonstrate the difference in payment between the two options due to its high proportion of PE RVUs.

[2] https://www.hrsa.gov/opa/index.html.

[3] Safety-net providers (covered entities) generally provide Medicare and Medicaid services to low-income and vulnerable populations regardless of their ability to pay.

[4] Am. Hosp. Ass’n v. Becerra, 142 S. Ct. 1896 (2022)

[5] For this analysis, cancer products were defined as drugs, biologics, and biosimilars in the antineoplastics therapeutic class.