Facebook Twitter Tumblr Close Skip to main content
A Project of The Annenberg Public Policy Center

The Facts on Medicare Part B Policy Change

Beginning Jan. 1, Medicare Advantage enrollees may be required to use lower-cost alternatives to more expensive drugs for new prescriptions for medications administered by a physician or in a clinical setting.

Health and Human Services Secretary Alex Azar has described the new policy as “unleashing our Medicare Advantage plans to negotiate discounting on $12 billion of drugs.” Some patient advocacy groups, meanwhile, have described the policy as one that “could erect barriers to care for cancer” and put “insurers in control of treatment decisions.” Those are two sides of an issue called “step therapy.”

We’ll explain what the new policy entails.

What is the administration’s new policy regarding Medicare?

In an Aug. 7 memo to Medicare Advantage plans, the Centers for Medicare & Medicaid Services announced new guidance: Medicare Advantage plans — Medicare plans run by private insurers — “may use step therapy for Part B drugs, beginning January 1, 2019, as part of a patient-centered care coordination program.”

Step therapy is a practice of requiring patients to take less expensive, or preferred, alternatives to certain medications before moving on to the more costly options, or the drugs prescribed by physicians, if the original treatments aren’t effective for the patient. The new policy rescinds a 2012 memo prohibiting the use of step therapy.

Part B drugs are those administered by a physician or in a clinical setting; they’re typically intravenous medications. Medicare Part D is the prescription drug program for medications beneficiaries get from a pharmacy. Part D plans already employ step therapy practices. “What they’re trying to do is to allow the plans to make use of some of the strategies they routinely use for Part D,” including step therapy, Gail Wilenskythe head of the Medicare and Medicaid programs during the George H.W. Bush administration and now a senior fellow at Project HOPE, a health training and humanitarian organization, told us.

With Part B, explained Joseph Antos, the Wilson H. Taylor resident scholar in health care and retirement policy at the conservative American Enterprise Institute, physicians or health facilities purchase the Part B drugs for their patients. Step therapy could change prescribing patterns.

Medicare pays 6 percent more than the average sales price for the drugs, Antos said, and MedPAC, the agency that advises Congress on Medicare, has estimated that the average payment health care providers make for many drugs is 2 percent higher than the average sales price. The providers can then retain the difference. No doctor is going to prescribe drugs that won’t work for patients, he said, but where there’s a choice, there’s a “built-in incentive for physicians to prescribe the drug they’re getting the best deal on.”

“You can’t say how big an effect that is,” he notes, but step therapy could combat it.

The CMS policy would only apply to new prescriptions. Beneficiaries already receiving Part B medications won’t be affected.

Medicare Advantage plans that decide to use step therapy must disclose that to beneficiaries and “offer beneficiaries an opportunity to participate in drug management care coordination activities,” including reviews of all medications taken and consultations, CMS said. Beneficiaries can also request exceptions to step therapy requirements.

How does this involve negotiation of drug prices?

In an Aug. 16 Cabinet meeting, HHS Secretary Azar touted the negotiation aspects of this policy.

Azar, Aug. 16: In addition, for the first time in history, President Trump is bringing negotiation and discounts to our Medicare Part B drug program. That is the drug program where doctors administer the drugs for all of its history.  We simply pay sticker price for drugs — no discounting, no rebates, no control.

For the first time ever, we are unleashing our Medicare Advantage plans to negotiate discounting on $12 billion of drugs.  And every penny we save is going to be money that the patients save, because we’re mandating that over 50 percent of all savings be passed back to the patient from the work of these insurance companies negotiating against the drug companies.

How does negotiation come into play? Drug manufacturers of the more expensive remedies could lower their prices so that they don’t lose business to the lower-cost alternatives.

“It gives the Medicare Advantage plan a threat they can hold over the drug companies to get them to lower their prices in some instances,” Paul N. Van de Water, a senior fellow with the left-leaning Center on Budget and Policy Priorities, told us. MA plans could say, “unless you lower the price, we’ll make patients jump through more hoops” to get the manufacturer’s drug.

The policy gives some leverage to MA plans, Antos said — at least “for those drugs where leverage is possible.”

How much drug spending and how many Medicare beneficiaries would this affect?

That depends on several factors, including how many Medicare Advantage plans decide to use step therapy, what medical conditions patients in the plans develop, and how many drug therapies can be subject to the policy.

There are about 20 million people with Medicare Advantage plans; that’s one-third of the total Medicare enrollees. CMS said that MA plans spent about $12 billion per year on Part B drugs. But, of course, not all of that drug spending would be subject to step therapy. 

“This is something that an MA plan is going to want to think about,” Antos told us. “This is not a walk in the park.” It could be complicated, particularly since Part B drugs typically tend to be used for serious illnesses. There’s always the possibility that an error would downgrade the quality score of the plan, he said. (CMS gives ratings for MA plans so consumers can compare them before selecting one.)

HHS also notes that while the Medicare open enrollment period is Oct. 15 through Dec. 7, beneficiaries with MA plans will be able to switch to a different plan or traditional Medicare through March 31, 2019.

How much money could this save?

We don’t know. Experts we consulted said it’s difficult to estimate what the savings might be, and they said the impact could be small.

Juliette Cubanski, the associate director of the Program on Medicare Policy at the Kaiser Family Foundation, told us a step therapy policy could indeed lower drug spending. “Certainly, this change could produce savings if enrollees are required to use lower-cost drugs rather than more expensive drugs – which, of course, is the aim of step therapy and other tools like tiered cost sharing – but it doesn’t necessarily mean prices on the more expensive drugs will fall,” she said.

“Nobody really knows to what extent there are going to be savings for the program,” Antos said, adding that there was “plenty of skepticism about how much is possible” because it depends on the patients, their conditions, the drug alternatives that exist and “how much effort the drug plan wants to put into this.”

Van de Water said the negotiation aspect “could end up reducing the prices for some drugs for some plans,” but it’s not clear there’s going to be a “huge effect in the aggregate.”

Since step therapy is common among private employer-sponsored insurance, experts said, we contacted AHIP (America’s Health Insurance Plans), a trade group for the insurance industry, to see if it had any data on how much step therapy can save on drug costs and spending. The most relevant report it pointed to showed that Medicaid could save 14.2 percent of total spending with an improved use of generic drugs and 1.3 percent by using lower-cost brand drugs over 10 years. The 2016 report, by the Menges Group, was sponsored by the Pharmaceutical Care Management Association.

Daniel Nam, executive director of federal programs for AHIP, told us the bigger gain could come a few years down the road, as MA plans learn lessons from the policy. If MA plans show that step therapy is cost-effective, it could lead to new federal regulation that allows step therapy “and perhaps other types of medical management that can be done” that would provide savings over the long term, Nam said. CMS has said it “will consider rulemaking related to step therapy that might be appropriate for 2020 and future years.”

AHIP supports the policy. Nam noted that there’s evidence that some health care spending goes to unnecessary care, and this policy is “very important in making sure clinical appropriateness is ensured.”

HHS has said that “private insurance plans negotiate discounts of 15 to 20 percent or more” for many drugs covered by Part B, but the agency did not cite a source for those figures. An HHS official told us they were based on observations of the industry.

How would Medicare Advantage beneficiaries see any savings?

The Trump administration has said MA plans, which already have set premiums for 2019, could pass along savings next year in the form of lower coinsurance or gift cards. In future years, premiums could be lowered.

Could this create “barriers to care,” as patient groups say? Is there an appeals process?

Patient groups are concerned about this; the step therapy policy is often referred to by critics as “fail first.”

But Wilensky noted that “it’s the strategies that are used by [pharmacy benefit managers] for the under 65 [population] and by Part D routinely.”

The American Cancer Society Cancer Action Network released a statement by President Chris Hansen that said: “In some instances, utilization management tools like step therapy can create an extra hurdle for cancer patients to go through before getting the appropriate drug they need to treat their cancer. Some patients may be required to try multiple therapies before they can access the one that was prescribed by their doctor.” 

It encouraged CMS to monitor the appeals and exceptions process. The American Cancer Society Cancer Action Network referred us to a 2018 article in Food and Drug Law Journal that said “step therapy may often save costs in the very short term but increase costs in the long term because of complications, health deterioration, and the patient’s need to seek more and more medical care in order to find relief.” 

The American College of Rheumatology called the policy “a gross affront to America’s sickest Medicare patients.”

The new policy can only be applied to new prescriptions, and there is an appeals process. HHS said that Medicare Advantage enrollees can request an exception from their Medicare Advantage plan to get a certain medication without first trying a required alternative. Such exception requests “will be reviewed as expeditiously as the beneficiary’s health condition requires (generally within 72 hours).”

And, as we said previously, enrollees will be allowed to switch to a different Medicare plan before March 31.

Antos noted that the new guidance on step therapy could be subject to lawsuits.

How does this policy differ from what the Democrats have proposed on drug negotiation?

In late July, House Democrats introduced H.R. 6505, the Medicare Negotiation and Competitive Licensing Act. It would require the HHS secretary to negotiate prices for drugs with pharmaceutical manufacturers under the Part D program.