November 15, 2018

New Proposed Medicare Part B Drug Reimbursement Model Raises Questions

Holland & Knight Alert
Jeffrey W. Mittleman | Ilenna J. Stein


  • The Centers for Medicare & Medicaid Services (CMS) has announced a new proposed reimbursement model for certain Medicare Part B drugs and biologicals.
  • The proposed structure, called the International Pricing Index (IPI) Model, is premised on the idea that Medicare spending for Part B drugs is increasing and exceeds that of 16 other developed countries by 1.8 times. CMS aims to restructure the Part B drug reimbursement methodology so as to test whether it can more closely track international drug prices and reduce Medicare Part B spending.
  • CMS anticipates that it will issue a proposed rule in spring 2019 and that the IPI Model will be piloted between 2020 and 2025, but the proposed IPI Model itself raises a number of questions. CMS is soliciting comments on all aspects of the proposed IPI Model, with comments due by Dec. 31, 2018.

The Centers for Medicare & Medicaid Services (CMS), part of the U.S. Department of Health and Human Services (HHS), announced a new proposed reimbursement model for certain Medicare Part B drugs and biologicals (together, "drugs") on Oct. 25, 2018. The proposed structure, called the International Pricing Index (IPI) Model, is premised on the idea that Medicare spending for Part B drugs is increasing and exceeds that of 16 other developed countries by 1.8 times. Under Section 1115A of the Social Security Act authorizing CMS to waive certain Medicare requirements, CMS aims to restructure the Part B drug reimbursement methodology so as to test whether it can more closely track international drug prices and reduce Medicare Part B spending. On Oct. 30, 2018, CMS issued an Advance Notice of Proposed Rulemaking (ANPR) regarding its proposed framework for the IPI Model.1 CMS is soliciting comments on all aspects of the proposed IPI Model, with comments due by Dec. 31, 2018.

Current Part B Methodology

Currently, Medicare Part B reimburses2 providers and suppliers for certain drugs that are not reimbursed on a cost or prospective payment system basis, including, for instance, physician-administered drugs, separately billable drugs at independent dialysis facilities and certain statutorily defined drugs. These Part B drugs are reimbursed based on the lesser of the actual charge on the claim or 106 percent of the Average Sales Price (ASP).3 CMS contends that the ASP methodology incentivizes physicians to prescribe and furnish more expensive drugs because the reimbursement formula is a percentage of a drug's price.

Proposed IPI Model Details

Drugs and Participating Providers

As proposed, the IPI Model will be used to reimburse the costs of single-source drugs, biologicals, biosimilars and multiple-source drugs with a single manufacturer that are administered in physician practices and hospital outpatient departments in randomized geographic areas, which represent 50 percent of Medicare Part B spending on separately reimbursable Part B drugs.4 For physician practices and hospitals within the geographic areas that are yet to be determined, participation would be mandatory. CMS is soliciting feedback on whether to expand the IPI Model's scope to include additional drugs, how to incorporate newly approved or marketed drugs, whether other Part B providers and suppliers that administer the included drugs should participate or if certain providers or suppliers should be excluded from participation, how to operationalize participation by large provider networks and how to determine the geographic areas to include.


Instead of directly reimbursing providers, the IPI Model proposes utilizing and reimbursing private-sector vendors. The IPI Model contemplates that these vendors will assume the financial risk of negotiating for, taking title to and billing for the eligible drugs, and in turn, the vendors will distribute eligible drugs to participating physician practices and hospital outpatient departments. CMS envisions that these vendors will aggregate purchasing, negotiate volume-based discounts, and utilize electronic ordering, various delivery options and onsite stock replacement mechanisms.

CMS will allow providers to contract with multiple vendors, and CMS hypothesizes that the flexible methodologies employed by vendors will increase competition. The vendors, however, would be prohibited from paying physician groups and hospital outpatient departments rebates or volume-based incentive payments, and according to a press release by HHS, the vendors would not operate formularies. Furthermore, CMS suggests that the contracts vendors enter into with providers could include physicians and hospitals paying vendor services fees and perhaps covering some of the vendors' costs. CMS seeks input concerning, among other questions, the types of entities that could qualify as vendors, appropriate guardrails if manufacturers or healthcare providers can qualify as vendors, the responsibilities imposed upon the vendors and the permissibility of vendor contracts with providers including vendor costs.


Moreover, instead of reimbursing the vendors for participating drugs at 106 percent of ASP, CMS proposes that under the IPI Model, it would pay vendors a Target Price, unless the ASP reimbursement rate is lower. The Target Price would be based on an international price index that includes pricing information from Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Netherlands and the United Kingdom.

Calculating the Target Price would entail the following: averaging the international price for each drug on a standard comparable unit, calculating the ratio of Medicare spending using the ASP prices, establishing the Target Price (which would vary for each drug) by multiplying the IPI by a factor that would result in approximately a 30 percent reduction in Medicare spending, and phasing in the Target Price over the five-year model period by blending the ASP rate and Target Price.5 CMS contends that the IPI Model will remove incentives for physicians prescribing more expensive drugs, as well as narrow the gap in drug prices between the United States and other countries. CMS seeks input regarding which existing and publically available data sources to rely on to establish the IPI in the short-term, whether to require manufacturers to report international sales data in the future, which countries to use in calculating the IPI and how to monitor the international market to account for changes.

CMS additionally intends to reimburse physicians and hospitals a "drug add-on amount," which could be a per encounter or per month amount that would not vary based on the price of the drug. By still providing physicians and hospitals with some reimbursement, CMS believes it will reduce providers' financial risk associated with purchasing and managing drug inventory. However, CMS is soliciting feedback as to whether to establish a payment amount for each drug class, physician specialty or physician practice, as well as whether to allow bonus pools to incentivize prescribing less expensive drugs or practicing evidence-based utilization.


CMS anticipates that it will issue a proposed rule in spring 2019 and that the IPI Model will be piloted between 2020 and 2025.

Impact and Uncertainties

In the ANPR, CMS seeks input regarding many aspects of its proposed framework; however, the IPI Model proposal itself raises a number of questions.

Is CMS Exceeding Its Authority?

First, it is unclear whether CMS has the statutory authority to bypass Congress in establishing a new payment methodology under Medicare Part B. Although CMS is authorized to waive certain provisions under Medicare to "test innovative payment and services delivery models to reduce program expenditures ... while preserving or enhancing the quality of care furnished,"6 adopting a mandatory test that accounts for 50 percent of national Medicare Part B drug spending may exceed that authority. To the extent the IPI Model will be mandatory and replace the statutorily based ASP methodology for half of Part B drug spending, CMS appears to be establishing a new Medicare reimbursement methodology, rather than merely testing a new model in a limited manner. If the IPI Model proceeds as currently proposed, CMS likely will face challenges and be required to defend its authority to pilot this wide-sweeping approach to Part B drug reimbursement.


Given the number of questions surrounding the vendors, it is unclear which entities will elect to participate as vendors. Likely, only those entities with an existing infrastructure in place to buy and distribute drugs would opt to participate, but even such entities may want to avoid receiving direct Medicare reimbursement and potentially be subjected to direct liability under federal healthcare laws, such as the federal False Claims Act and the numerous participation requirements related to Medicare compliance.

Moreover, while the IPI Model aims to reduce Medicare Part B spending, the proposed Model would essentially insert into the Part B drug supply chain a new intermediary entity that will need to not only cover its costs of doing business but also be profitable in order to incentivize vendors to participate. This design begs the question of whether the IPI Model will in fact be able to achieve its goal of reducing costs, or whether it instead will increase them. It is similarly unclear whether the IPI Model will effectively create or reduce efficiencies for providers, who already have purchasing agreements in place and would now have to contract with potentially multiple vendors to obtain included Part B drugs. Further, requiring providers to obtain included Part B drugs from vendors raises questions about unintended distribution issues that could potentially affect patient access and quality of care.


Fundamental questions also exist as to the appropriateness of comparing the Medicare Part B spending to international prices, especially those paid by single-payer systems, such as the United Kingdom's National Health Service (NHS). That is, while CMS certainly is within its authority to try to reduce Medicare Part B spending, it is unclear that international prices are the right index to use for comparison.

Impact on the 340B Program

CMS acknowledges in the ANPR, without much discussion, that the IPI Model has the potential to affect the 340B Program,7 which enables covered entities, including certain hospitals, to purchase heavily discounted outpatient drugs in order to earn a profit when billing for those drugs. CMS states that the IPI Model could affect the maximum price a manufacturer can charge for a covered drug under the 340B Program (340B ceiling price) to the extent the IPI Model could affect a drug's Average Manufacturer Price (AMP) or Best Price, both of which are utilized in the calculation of the 340B ceiling price and could be potentially lowered by sales to vendors under the IPI Model.8

However, to the extent that vendors, not hospitals, would now be responsible for buying and obtaining reimbursement for Part B drugs, 340B hospitals in the participating IPI Model geographic region may no longer have the opportunity to buy and bill for drugs under the 340B Program, and they would lose the revenue generated through the 340B Program. CMS fails to discuss this impact, but the IPI Model may need to be redefined to exclude 340B hospitals from participating in the IPI Model so as not to adversely affect the 340B Program.


Finally, in light of the number of questions on which CMS seeks input and the many details yet to be determined concerning the IPI Model's framework, it seems unlikely that CMS will be able to meet its ambitious goal of publishing a proposed rule in spring 2019 and setting an implementation date of spring 2020. To do so, CMS would have to resolve all of its questions, publish a proposed rule and a final rule, and operationalize all aspects of the IPI Model. From a practical perspective, operationalizing the Model would entail, for instance, establishing a process and enough time for vendors to submit – and CMS to evaluate and award – bids to participate in the Model; allowing enough time for vendors to obtain appropriate licensure to buy and distribute drugs to the extent additional state licensure is necessary; enabling vendors to negotiate with manufacturers and participating providers; analyzing the international data; and determining the Target Price for each drug.

Notwithstanding the number of logistical obstacles the IPI Model appears to face prior to its implementation, affected industry players are encouraged to weigh in and submit comments by Dec. 31, 2018, to shape any future iteration of this proposed Part B pricing model. For questions about the specific effect that the IPI model could have on your organization or for assistance with the comments process, contact the authors or another member of Holland & Knight's Healthcare & Life Sciences Team.


1 83 Fed. Reg. 54546 (Oct. 30, 2018).

2 From 2006 to 2008, CMS also allowed physicians to participate in the competitive acquisition program (CAP), in which physicians could elect to purchase Part B drugs from an approved vendor who provided the drug to the physician's office, billed Medicare and collected patient co-pays. See 42 U.S.C. §1395w-3b; 42 C.F.R. §§414.906, 414.908. Payment under the CAP model was tied to ASP, only one vendor participated in the program, and the CAP model has been suspended as of Jan. 1, 2009. See 83 Fed. Reg. at 54549 (discussing the CAP model).

3 42 U.S.C. §1395w-3a(b)(1); 42 C.F.R. §§414.900, 414.904(a). ASP is defined as the manufacturer's sales price, inclusive of all discounts, to all non-excluded purchasers in the U.S. for drug in a calendar quarter, divided by the total number of units sold by the manufacturer of the drug in the calendar quarter. 42 U.S.C. §1395w-3a(c)(1), (3).

4 CMS proposes excluding end-stage renal disease drugs, radiopharmaceuticals, drugs that the U.S. Food and Drug Administration (FDA) identifies as being in short supply, and drugs paid under miscellaneous or "not otherwise classified" codes, such as compounded drugs.

5 In the ANPR, CMS provides a chart that in Year 1, reimbursement would be based 80 percent on ASP and 20 percent on the Target Price; by Year 5, CMS would reimburse 100 percent of the Target Price.

6 42 U.S.C. §1315a(1).

7 See 42 U.S.C. §256b.

8 The 340B ceiling price is calculated utilizing a drug's Average Manufacturer Price (AMP) minus the Medicaid Best Price. AMP is the average price paid to manufacturers in the U.S. by wholesalers and retail community pharmacies purchasing directly from the manufacturer, though with respect to inhalation, infusion, instilled, implanted or injectable drugs (5i drugs), 5i AMP includes sales to physicians and hospitals, among other entities. 42 C.F.R. §§447.504(a), 447.504 (d). Best Price is the lowest price available from the manufacturer for brand-name drugs to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity or governmental entity in the U.S. under any pricing structure. 42 C.F.R. §447.505(a).

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.

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