This controversial rule could change how doctors profit from using the most expensive drugs

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This story has been updated.

A controversial effort by the Obama administration to reform how doctors earn money from administering injection drugs would reduce their earnings on the most expensive drugs while making many older generics more lucrative, according to a new analysis.

A high-stakes debate exploded last month over the administration's drug payment pilot program, which would test a fundamental change in how doctors are reimbursed for giving chemotherapy and other injectable drugs through Medicare. Medicare has said the pilot would remove a perverse incentive for doctors to prescribe the most expensive drugs, while the drug industry, doctors and disease groups argue it would threaten small cancer practices and seniors' health.

The opposition to the pilot shared by drug companies and doctors -- parties that don't always see eye-to-eye on drug prices -- led Peter Bach, director of the Center for Health Policy Outcomes at Memorial Sloan Kettering Cancer Center to look more closely at how the policy would affect reimbursements for cancer drugs. In an analysis released Monday, his team reports that, for about half the drugs -- typically older, generic ones -- doctors would get better reimbursement under the pilot program. For the rest -- particularly the most expensive, new drugs -- they would get a less generous fee than they currently receive.

Bach's team also found that just a handful of commonly used, high-priced cancer drugs are driving doctors' and hospitals' income under the current reimbursement scheme. And they argue that the status quo also appears to allow drug companies to steadily increase prices in a way that mutually benefits doctors and pharmaceutical companies.

"What inspired me to look was the vehement opposition and coordination between the cancer doctors and drug lobbies," Bach said in an email. "That raised my antenna, because it suggested there was something happening that served both of them in the current system that would be upended by a shift to more flat fees, even if doctors were kept whole on balance."

The proposed Medicare pilot will fundamentally change how doctors are reimbursed for giving chemotherapy and other injectable drugs. Currently, doctors are paid by a simple formula: the average sales price of the drug, plus 6 percent (under the federal budget sequester, that amount has been cut to 4.3 percent). That means doctors see a bigger upside when they prescribe and administer the most expensive drugs. Under the pilot, doctors will receive an amount far less influenced by the drug's price: a flat fee, plus 2.5 percent of the price (0.9 percent under the sequester).

Since the Medicare pilot was unveiled in March, the opposition has been vocal and growing -- ranging from the trade group for the pharmaceutical industry to hundreds of physician groups and patient organizations, some of which receive funding from drug companies.

The pilot "is an inappropriate, potentially dangerous, and perverse experiment on the cancer care of seniors who are covered by Medicare," the Community Oncology Alliance, a nonprofit that represents providers, wrote in a letter to Medicare.

Meanwhile, consumer groups such as Families USA, AARP and Medicare Rights Center have come out in favor of the pilot as a way to provide high-value care to seniors.

The new analysis injects some data into this polarized debate.

Comparing cumulative drug spending under the proposed system to the current model, they found that if they excluded just the four high-priced, most-used cancer drugs, doctors' and hospitals' overall earnings would be the same under the proposed system as they are under the current rules. Those drugs are trastuzumab, denosumab, bevacizumab and rituximab.

"The reimbursement system has created an opportunity to charge very high prices, so much so that the profits of doctors on balance revolve around these very few drugs (really the top 10 or so) and that doctors' and hospitals' interests are entirely aligned with the prices of these drugs staying high (and going higher)," Bach wrote in an email.

Randy Burkholder, vice president of policy and research at PhRMA, the trade group for the drug industry, said that although he had not been able to review the report, those findings were not surprising.

"We're particularly concerned that the way they've structured it has a built-in bias against newer treatments," Burkholder said of the proposed drug payment program.

The risk that PhRMA and other opponents see in the pilot is that the smaller margin on high-priced drugs under the new formula could lead some doctors' practices to suffer. Even though doctors will still be receiving a premium over the average sales price of the drug, the fear is that smaller practices won't be able to secure as favorable a price on the drugs as larger health systems.

"Physician offices could be crushed, which will accelerate physician consolidation into health systems--and likely raise healthcare costs as the mega system extracts more from payers," Adam Fein, president of Pembroke Consulting said in an e-mail.

But the new analysis also suggests that a quirk of the current reimbursement system may provide wiggle room for drug companies to raise their prices in a way that benefits both pharmaceutical companies and physicians.

Currently, doctors giving chemotherapy drugs receive the average sales price of the drug, plus 4.3 percent from Medicare. But the average sales price is calculated using data from six months earlier. Bach and his team argue that the lag provides a margin for companies to increase the prices of their drugs modestly each quarter while still allowing physicians and hospitals to get a cut -- as long as the price inflation stays comfortably below 4.3 percent over that time period.

When the researchers examined the top 14 drugs by overall Medicare spending that lack generic competition, they found that the drug prices went up 1.7 percent every six months, on average. If the formula changes to a flat fee plus less than a percent of the price, that cushion will decrease.

Changing to a flat fee "will leave a lot less headroom for price inflation," Bach said. "Of course, drug companies would prefer an environment that favored continued inflation, but doctors, too, over time have benefited" because as the price of the drug increases, so does the share paid to doctors.

Burkholder said that many factors shape the average sales price of a drug, which is a market-based measure of how much providers pay for drugs after discounts and rebates. Older drugs with generic options tend to see price decreases over time. Data from Medicare shows that among the top 50 drugs, average sales price increased by 1 percent over the last quarter. For less than half of the top drugs, prices decreased or stayed flat.

Both sides point to different evidence to explain how the reimbursements affect prescribing practices. A 2010 Health Affairs study showed that after the formula went into effect in 2005, newly diagnosed lung cancer patients were more likely to receive chemotherapy -- and the treatment shifted away from low-margin drugs to a more lucrative one for doctors. A 2012 study in Journal of Oncology Practice found that when irinotecan, a drug used for metastatic colon cancer, went generic, its use declined compared to another drug used for the cancer.

On the other side are studies that suggest shifting away from a reimbursement based on the margin won't make a difference. For example, a 2014 study by UnitedHealthcare in the Journal of Oncology Practice found that eliminating financial incentives for chemotherapy simply increased the use of drugs.

The Medicare program has been proposed as a five-year pilot, in which three-quarters of providers would participate. After that period, the effects would be assessed.

To proponents, the program is a bold attempt to move toward high-value treatments. Opponents, many of whom benefit financially under the current system, say it's a dangerous experiment with American health. A comment period on the proposed pilot is open through May 9.