On March 2 and 3, 2023, the Medicare Payment Advisory Commission (MedPAC) held a virtual public meeting. The meeting included sessions on the following:

• Reforming Medicare’s wage index systems;
• Addressing the high prices of drugs covered under Medicare Part B;
• Mandated report: Evaluation of a prototype design for a post-acute care prospective payment system;
• Favorable selection and future directions for Medicare Advantage payment policy; and
• Aligning fee-for-service payment rates across ambulatory settings.

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

MEDPAC DISCUSSES REFORMING MEDICARE’S WAGE INDEX SYSTEMS

In this session, MedPAC continued its discussion on proposed changes to Medicare’s wage index system. The Commission previously considered an alternative wage index method in their June 2007 report to Congress.  More recently, the alternative wage index was revisited by the Commission with an update in September 2022.

Medicare’s prospective payment systems (PPS) use wage indexes to adjust Medicare base payment rates to account for geographic differences in labor costs. The Commission staff asserts that the current Medicare wage indexes are inaccurate and inequitable because they fail to accurately reflect differences in labor costs across geographic areas. Specifically, the Commission identifies the current wage index system’s limited data sources, the use of broad labor market areas, and the number of wage index exceptions that Congress and CMS have integrated over time to the inpatient PPS (IPPS) wage index, as contributing to inequity across providers. Additionally, the requirement for budget neutrality causes areas with high wage growth to negatively impact low wage areas. The Commission discussed the negative impact of certain exceptions to IPPS hospitals on the wage index and discussed how removing wage index exceptions could remedy inequities between IPPS hospitals and other providers. For example, under the current system, skilled nursing facilities (SNFs) have lower wage index values than IPPS hospitals within the same market, because only IPPS hospitals are eligible for exceptions.

The draft recommendation would serve as an alternative wage index method which would shift away from high wage index values and remove all IPPS hospital exceptions. The draft recommendation requests that Congress repeal the existing Medicare wage index system (including all exceptions) and that the Secretary of Health and Human Services introduce a new wage index system with a transitory period. The draft recommendation outlines a new wage index system that would: (1) use cross-industry, occupational-level wage data with different occupation weights for the wage index of each provider (2) reflect county-level differences in wages between and within metropolitan statistical areas and statewide rural areas (3) cap wage index differences across adjacent counties and (4) have no exceptions. According to MedPAC simulations, this alternative wage index methodology would more accurately measure relative labor costs, ensure more equity across providers, be less subject to manipulation, and reduce administrative burden. Because many IPPS hospitals and SNFs would be impacted by the transition to alternative wage index, the Commission additionally recommends that the alternative wage index be phased in over a fixed period time or managed through a stop-loss policy to limit changes in Medicare payments exceeding a threshold percentage attributable to the transition in any one year.

The Commission unanimously supported the draft recommendation. Commissioners will vote on a final recommendation during the April 2023 meeting.

COMMISSIONERS REVIEW DRAFT RECOMMENDATIONS ON ADDRESSING HIGH PRICES OF MEDICARE PART B DRUGS IN PREPARATION FOR LIKELY APRIL VOTE

Over the past five years, MedPAC has worked to address high prices of Part B drugs. In this cycle, MedPAC has been identifying approaches to balance incentives for drug innovation while maintaining affordability for beneficiaries and taxpayers. After refining policy options over several meetings, MedPAC presented three draft recommendations for addressing high prices of Part B drugs. MedPAC staff will further refine these recommendations based on Commissioner feedback for a likely vote during the April 2023 meeting. Additionally, Chair Commissioner Michael Chernew noted that while the Inflation Reduction Act has addressed some drug pricing concerns, it has not negated the need for additional policy options.

The draft recommendations and Commissioner feedback are as follows:

1. Addressing payment for accelerated approval drugs

The Congress should give the Secretary the authority to cap the Medicare payment rate of Part B drugs and biologics that are approved under the accelerated approval program if they meet any of the following criteria:

1. Did not complete their postmarketing confirmatory trial within the deadline established by the manufacturer and the Food and Drug Administration;
2. Offered a clinical benefit that is not confirmed in postmarketing confirmatory trials;
3. Are covered under a coverage with evidence development policy; or
4. Have a price that is excessive relative to the upper bound estimates of value.

MedPAC developed this policy to address payment for drugs with uncertain clinical benefit. This policy would be expected to decrease Medicare program spending and generate savings for beneficiaries through lower cost sharing without adversely affecting beneficiaries’ access to needed medicines. MedPAC does not expect the policy to have an overall impact on providers’ willingness and ability to serve beneficiaries. Additionally, MedPAC would expect there to be more rapid development of information about clinical outcomes for accelerated approval drugs.

MedPAC outlined implementation considerations, noting the cap on the payment rate could revert to current reimbursement once a manufacturer verifies a drug’s clinical benefit. In most instances, the Secretary could set the payment cap based on the clinical benefit and cost of the accelerated approval drug relative to the standard of care. The cap could be operationalized under a rebate in which manufacturers pay Medicare the difference between the otherwise applicable average sales price (ASP)-based payment amount and the cap based on the use of the drug for the accelerated approval diagnosis. MedPAC staff suggested this rebate could be similar to the inflation rebate process under the Inflation Reduction Act.

Commissioners were strongly in favor of criteria A-C and suggested strengthening the language to say the Secretary should use its authority to cap payment for accelerated approval drugs meeting criteria A-C, rather than only giving the Secretary the authority to do so. There was concern around the language in criterion D, “have a price that is excessive relative to the upper bound estimates of value” and if the Department of Health and Human Services (HHS) has the tools to gauge whether the price is excessive. MedPAC staff will refine the language in the policy in preparation for the April meeting. Commissioners also noted the need for exceptions.

Regarding implementation, some commissioners were concerned with how net clinical benefit would be determined for the purpose of the price cap. Commissioner Stacie Dusetzina suggested including some of the Inflation Reduction Act language regarding factors for drug price negotiations.

2. Improving price competition among drugs with similar health effects

The Congress should give the Secretary the authority to establish a single average sales price-based payment rate for drugs and biologics with similar health effects.

The goal of this policy is to spur price competition among drugs with therapeutic alternatives. This policy would be expected to decrease Medicare program spending and generate savings for beneficiaries through lower cost sharing without adversely affecting beneficiaries’ access to needed medicines. Payments to providers would be expected to decrease, but profitability might increase due to the two-quarter lag in ASP payment rates, declining prices, and providers choosing lower-priced products.

To implement this policy, MedPAC suggested each product could remain in its own billing code, but payment could be based on the volume-weighted ASPs of all products in the reference group. To define reference groups, the Secretary could consider various factors, including ease of implementation, beginning with 1) biosimilars, 2) 505(b)(2) drugs and related brands and generics, and 3) drugs for which reference pricing has been implemented or considered previously.

Commissioners continued to be supportive of this policy but requested additional clarification on how it would be implemented, particularly as the level of clinical expertise needed to determine reference groups would increase as the policy as implemented (e.g., the level of clinical expertise required to determine reference groups for biosimilars would be lower than the level of clinical expertise required to determine referencing pricing for drugs for which reference pricing has not been implemented or considered previously). Commissioners also noted the need for exceptions.

3. Improving financial incentives associated with Part B drug add-on payment

The Congress should direct the Secretary to reduce add-on payments for Part B drugs paid based on average sales price (ASP) to improve financial incentives, and to eliminate add-on payments for Part B drugs paid based on wholesale acquisition cost.

MedPAC’s rationale for this policy is to improve financial incentives under the Part B drug payment system, given that financial considerations such as the ASP add-on payment can play a role in provider prescribing decisions. The Commission has developed a three-part approach to restructure the ASP add-on; the current example approach would use the lesser of 6 percent, 3 percent + $24 or, $220 per drug per day.

This policy would be expected to decrease Medicare program spending and generate savings for beneficiaries through lower cost sharing without adversely affecting beneficiaries’ access to needed medicines. Add-on payments to providers would generally decrease, except for low-cost drugs. There would be increased financial pressure for some providers, but MedPAC does not expect the policy to have an overall impact on providers’ willingness and ability to serve beneficiaries.

Regarding implementation, MedPAC noted CMS should assess the separate drug administration payment rates to ensure they are adequate and monitor utilization patterns among providers.

Commissioners remained strongly in favor of this policy but requested clarification on the role sequestration would play in the percent add-ons in terms of the effect on payment providers would receive and explicit note in the chapter that sequestration would be applied on top of the add-on. The current 6 percent ASP-add on payment is 4.3 percent after sequestration.

MEDPAC CONTINUES EVALUATION OF PROTOTYPE DESIGN FOR A POST-ACUTE CARE PROSPECTIVE PAYMENT SYSTEM

MedPAC staffers reviewed their third presentation to prepare a mandated report on a prospective payment system (PPS) for post-acute care (PAC). The Improving Medicare Post-Acute Care Transformation (IMPACT) Act of 2014 required MedPAC to create prototypes for a unified PAC payment system for each type of provider with payment rates based on patient characteristics, instead of the setting. The IMPACT Act also mandated three reports. MedPAC completed the first report in 2016 with recommended design features, CMS and the Assistant Secretary for Planning and Evaluation (ASPE) in the Department of Health and Human Services (HHS) finalized the second report in 2022 with a prototype design, and MedPAC will submit the third report with recommendations by June 30, 2023.

PAC settings include skilled nursing facilities (SNFs), home health agencies (HHAs), inpatient rehabilitation facilities, and long-term care hospitals. MedPAC’s interest in a PAC PPS stems from the four settings treating overlapping patients at varying payment rates, shortcomings in the designs of the HHA and SNF payment systems, and difficulty comparing patients.

MedPAC and CMS/ASPE concluded that a unified payment system is viable, could establish correct payments, and could create nearly uniform profitability. However, staffers said that while the CMS/ASPE prototype is a decent starting point, it adjusts payments by setting and undermines the design’s uniformity. To align PAC payment and guarantee the payment system’s efficacy, staffers reviewed potential companion policies such as establishing uniform benefits and cost-sharing, common base rates and payment adjusters, common conditions of participation, and a post-acute value incentive program. Designing the payment system will be far simpler than executing these policies, and policymakers may choose to implement smaller-scale, site-neutral policies.

Commissioners were highly supportive of the unified PAC PPS and draft report. They did not formally vote on sending the report to Congress and, instead, discussed various concerns that could arise from unifying payments across the four settings. One commissioner suggested analyzing unified payments across different demographic groups to account for the social risk factors. Others suggested adding outcome, patient experience, overuse of care, and functional status measures.

Much of the conversation focused on the nuances of implementing the companion policies and problems that could emerge. Commissioners discussed whether the cost sharing companion policy is necessary. While one thought a uniform cost-sharing policy would not be essential if PAC providers had a value-based system, another argued that a low-level of cost sharing could ease continued concern about overpayments. Commissioners mentioned the abuse of cost sharing in HHAs and one commissioner noted her concern for patients’ likelihood to refuse care due to cost-sharing if their supplemental plan does not cover it.

MEDPAC DISCUSSES APPROACHES TO SETTING MEDICARE ADVANTAGE BENCHMARKS

In this session, MedPAC staff reviewed the challenges of determining Medicare Advantage (MA) payment rates and alternative approaches to setting benchmarks. Medicare currently uses Fee-for-Service (FFS) spending to set MA benchmarks, and new MedPAC analysis shows that this is becoming less feasible because of favorable selection in MA and decreasing FFS enrollment. MA county benchmarks depend on FFS spending estimates, so FFS-enrolled beneficiaries in each county must continue to provide a basis for calculating benchmarks. Material from this session’s discussion will be used as part of an informational chapter without recommendation in MedPAC’s June 2023 report to Congress.

Staff presented alternative approaches for setting MA payment rates that are less dependent on FFS spending data, including: (1) using plan bids to calculate benchmarks (competitive bidding), (2) using both FFS and MA data to calculate benchmarks, and (3) setting benchmarks and updating them using a fixed growth rate instead of FFS spending growth rates.

MedPAC commissioners supported this work and discussed the various policy options. In evaluating the first option regarding plan bids, multiple commissioners shared concern over market power, administrative complexity, the likelihood of leading to a “race to the bottom,” and greater MA consolidation but noted interest in seeing additional work on this option. For the second policy option on additionally using MA data to calculate benchmarks, commissioners discussed the need for a better understanding of dynamics and scenarios, including the ultimate level of MA penetration, competitive game theory behaviors of MA players under equilibrium scenarios and guardrails against undesirable behaviors, and potential beneficiary access issues and plan switching. One commissioner supported this option because it addresses the decreasing FFS enrollment and favorable selection, but others said selection issues would still exist. Commissioners were least supportive of the third policy option to use a fixed growth rate. Several agreed that it would be more susceptible to political intervention and budget politics. Others expect its administrative complexity could hinder long-term planning and lead to more lagging dynamics.

Commissioners requested additional analytical work from the staff to inform an eventual policy option determination, such as quantifying the extent to which bids are relied upon, the rates of MA beneficiaries who switch back to FFS within two to five years and do not understand the penalty if they try to switch to FFS, and frequency of Medigap plan rejections.

MEDPAC DISCUSSES DRAFT RECOMMENDATION ON SITE NEUTRALITY

There are three distinct payment systems for three ambulatory settings: physician offices, hospital outpatient departments (HOPDs), and ambulatory surgical centers. Across these settings, payment rates often differ for the same service among ambulatory settings, with the Outpatient Prospective Payment System (OPPS) having higher payment rates than the Physician Fee Schedule (PFS) and the ambulatory surgical center (ASC) payment system for most services. The different rates across settings can increase Medicare spending and beneficiary cost sharing. Building on previous work to address this issue, MedPAC presented a draft recommendation on the topic:

The Congress should more closely align payment rates across ambulatory settings for selected services that are safe to provide in all settings.

MedPAC does not expect spending changes as a result of aligning payment rates in the short term, but there are potential long-term savings. Beneficiaries would likely face lower cost sharing for some services, with no expected effect on access to care. Some providers would face increased financial pressure, but overall, the policy is not expected to affect providers’ willingness or ability to furnish ambulatory services.

To identify services for which payment rates could be aligned, MedPAC collected services into ambulatory payment classifications (APCs), the payment classification system used in the OPPS. Using data from 2016-2021 (not including 2020), MedPAC determined the volume in each ambulatory setting for each APC and then applied the following methodology:

• If offices had the highest volume, aligned OPPS and ASC rates with PFS rates, plus additional for packaging.
• If ASCs had the highest volume, aligned OPPS rates with ASC rates; kept PFS rates the same.
• If HOPDs had the highest volume, no alignment; payment rates unchanged in each setting.

Under this methodology, MedPAC identified 66 APCs where payment could be aligned. OPPS and ASC rates would be aligned with PFS rates for 57 APCs, and OPPS rates would be aligned with ASC rates for 9 APCs. MedPAC noted that adjustment for patient severity does not appear to be needed, though HOPD patients have slightly higher risk scores than office patients.

While several commissioners were supportive of the overarching concept of better aligning payment rates across ambulatory settings, some had concerns with patient access in rural settings and the ability to create exceptions in cases where a beneficiary would benefit from having a service performed in one setting over another, even if it may be more costly. Commissioners also noted data limitations in identifying pricing of FFS services and the intensity of severity of disease in certain settings. MedPAC staff will refine the language surrounding the recommendation and commissioner discussion will continue in a future meeting.

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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.