May 9, Re: Medicare Program; Part B Drug Payment Model; Proposed Rule; 81 Fed. Reg (March 11, 2016); CMS-1670-P

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1 Charles N. Kahn III President and CEO May 9, 2016 Andy Slavitt Acting Administrator Centers for Medicare & Medicaid Services Department of Health and Human Services Hubert H. Humphrey Building 200 Independence Avenue, S.W., Room 445-G Washington, DC Re: Medicare Program; Part B Drug Payment Model; Proposed Rule; 81 Fed. Reg (March 11, 2016); CMS-1670-P Dear Acting Administrator Slavitt: The Federation of American Hospitals ( FAH ) is the national representative of more than 1,000 investor-owned or managed community hospitals and health systems throughout the United States. Our members include teaching and non-teaching hospitals in urban and rural parts of America, as well as inpatient rehabilitation, psychiatric, long-term acute care, and cancer hospitals. The FAH appreciates the opportunity to provide comments to the Centers for Medicare and Medicaid Services ( CMS ) regarding the Part B Drug Payment model ( Part B Drug Demo ) proposed rule. In summary, the FAH has very serious concerns regarding this proposed Part B Drug Demo. While this proposal is intended to address concerns about high drug prices, its broad scope and design is unlikely to lead to the intended results and may, in fact, have unintended negative consequences on Medicare beneficiaries as well as posing particular challenges to hospitals. As we discuss in more detail below, we continue to have significant concerns about the overall proposal as well as specific concerns about implementation details of Phase I and Phase II. Given these concerns, CMS should not finalize this proposed rule. Instead, the Agency needs to go back to the drawing board to develop policy proposals that more directly and effectively address the problem of unsustainable increases in drug costs. However, if CMS decides to move forward on this ill-conceived proposal, it should reissue a proposed rule that reflects our comments and recommendations, especially regarding the limits of CMMI s demonstration authority, contained below th Street, NW, Suite 600, Washington, DC FAX

2 The FAH and its members are also concerned about hospitals ability to absorb and implement another wide-scale mandatory program in CMS s aggressive timeframe given the implementation of other programs, such as Comprehensive Joint Replacement Model (CJR), as well as statutory changes imposed by MACRA and associated regulations. GENERAL COMENTS I. FAH Questions Whether CMS Has the Authority to Mandate the Part B Drug Demo In the proposed rule, CMS cites its authority under 1115A of the Social Security Act (SSA) to implement the Medicare Part B Drug Payment Model (Part B Drug Demo). The FAH agrees that section 1115A authorizes demonstration projects carried out by the CMMI and that section 1115A sets forth the parameters and requirements under which those projects are to be implemented. These include requirements for selection of models to be tested as well as a two-phase testing requirement for a model tested under a demonstration project. Under Phase I (under 1115A(b)), a model is tested in certain geographic areas (but less than on a nationwide basis) and in Phase II (under 1115A(c)), the model may be expanded, including on a nationwide basis, if certain criteria for quality and or efficiencies are met. The FAH does not believe, however, that the Part B Drug Demo, as proposed, is within CMS s statutory authority as provided under 1115A. As discussed below, 1115A does not permit CMS to mandate provider participation in a CMMI model, nor does it permit CMS to mandate a nationwide demonstration during Phase I of a project. CMS Lacks the Authority to Mandate Provider Participation in CMMI Models In response to the request for comment in the FY 2016 IPPS/LTCH PPS proposed rule on the issue of whether CMS had the authority under 1115A to mandate participation of providers and suppliers under a CMMI demonstration, the FAH expressed significant legal and policy concerns about a proposal to implement a demonstration project under which provider and supplier participation would be mandatory. Notwithstanding those concerns, CMS believes, incorrectly in our estimation, that it may require mandatory participation of providers in a CMMI demonstration, as evidenced by the Comprehensive Joint Replacement Model (CJR) demonstration the first ever Medicare demonstration project to require mandatory participation which was limited to providers located in selected MSAs across the nation. The FAH is deeply concerned that CMS continues to maintain the position that 1115A provides the agency the authority to mandate provider and supplier participation and that it intends to apply it to the entire country under the Part B Drug Demo. Thus, we reiterate both our legal and policy concerns with CMS aggressive overreach of its use of CMMI authority, which is designed to test models and make recommendations to Congress for permanent or mandatory changes to the Medicare program. Specifically, CMMI s general authority is to test innovative payment and services delivery models to reduce program expenditures while preserving or enhancing quality of care ( 1115A(a)(1)). Additionally, the statute directs the Secretary to select from models where the Secretary determines that there is evidence that the model addresses a defined population for which there are deficits in care leading to poor clinical outcomes or potentially avoidable expenditures. ( 1115A(b)(1)(A).)

3 The law further directs CMS to evaluate each Phase I CMMI model, and only after taking into account this evaluation, if appropriate, CMS can enter into Phase II to expand the scope and duration of an existing Phase I model, provided certain requirements are met ( 1115A(c).), including a requirement for a separate notice and comment rulemaking for any expansion. CMS is required to report periodically to Congress on CMMI models and make proposals for legislative action on models it deems appropriate ( 1115A(g).) This means that any permanent or mandatory changes to Medicare payment systems must be enacted by Congress. This is not surprising, as Congress has always taken legislative action to make changes to Medicare payment systems, while allowing CMS to test new models. If any such authority was being ceded to CMMI in this regard, Congress would have been much more specific in stating so. We find nothing in the law or legislative history that supports such a delegation of authority, and in fact the limited legislative history on this provision indicates the exact opposite. Notably, nowhere does the law expressly state that CMS can make models mandatory. We believe the statutory construct is clear: as a first step, CMS is to test innovative models and can grant certain waivers to do so. Only after this step occurs and the evaluation has taken place, can CMS move to Phase II (through notice and comment rulemaking) under which it may expand effective models for broader testing as appropriate without the protection of waivers, and make recommendations to Congress for permanent or mandatory changes to the Medicare program for deserving models after rigorous testing. No reasonable reading of the statute would vest in CMS any authority to take unilateral administrative action to make a CMMI model permanent and/or provider or supplier participation mandatory, either at a regional or national level. Mandating participation in a particular program is simply not envisioned in what the law allows to expand the scope and duration of CMMI models in a Phase II. The authority given to CMS to elect to limit testing of a model to certain geographic areas ( 1115A(a)(5)) does not in any way give rise to an inference that testing in those areas under the model could be mandatory. Neither 1115A(a)(5) nor the waiver authority under 1115A(d)(1) (or any other provision of 1115A) vests that authority in CMS. CMS Lacks the Authority to Mandate a Nationwide Demonstration During Phase I The proposed Part B Drug Demo is not consistent with CMMI authority and Congressional intent as it imposes a hospital payment cut disguised as a demonstration. As noted above, the statute mandates that CMS evaluate CMMI models tested in Phase I to see if the demonstration meets criteria for quality of care and efficiency (including budget neutrality), and this must occur before permitting expansion of the model under Phase II (including a nationwide expansion) if appropriate, through notice and comment rulemaking after the evaluation of Phase I of the demonstration. Under this proposed Part B Drug Demo, CMS would use 7,048 of the 7,144 primary care service areas (PCSAs) in the United States, only excluding hospitals in Maryland because of their All-Payer Model. In phase 1 of the Part B Drug Demo, all hospitals are potentially subject to being assigned to the model test arm that would receive ASP+2.5% and the flat fee drug payment. After assignment in phase 1, hospitals in 50 percent of these geographic areas will be subject to the model test arm and 50 percent will be assigned to the control group. These geographic areas, however, will be interspersed within the United States and thus no state or geographic region would be excluded from the demonstration. This is even broader

4 than the CJR demonstration which affected approximately 800 hospitals in 67 selected MSAs. Under the proposed phase 2 of the Part B Drug Demo and the testing of value-based purchasing (VBP tools), an even greater number, 75 percent, of these PCSAs are subject to the ASP + 2.5%, the VBP tools, or a combination. Depending on the PCSAs selected, a higher percentage of hospitals than 75 percent could be subject to these provisions. Additionally, the Part B Drug Demo will impact reimbursement amounts for drugs under the demo; this will naturally impact the sales prices for those drugs, perhaps initially and most certainly in the outyears. These increases or decreases in the sales prices of the drugs will be reflected in the ASPs for the drugs. This means that the Part B Drug Demo will impact the ASPs of those Part B drugs for all providers of services and suppliers not just in the areas under which the demo requires a lower reimbursement rate. This means the demonstration is effectively nationwide. The result is that CMS has created a CMMI demonstration program that in Phase I of a CMMI demo is mandatory across the nation, and that CMS is usurping Congress role in setting national Medicare payment policy for Part B drugs. The proposed Part B Drug Demo violates both the intent of Congress in enacting the CMMI demonstration authority as well as the parameters and requirements for the conduct of the model under 1115A(b) and 1115A(c) which require an evaluation as well as notice and comment rulemaking before the model may be expanded nationally. Part B Drug Demo Must Address a Deficit in Care for a Distinct Population As noted earlier, CMMI models are to be selected from among models where the Secretary determines that there is evidence that the model addresses a defined population for which there are deficits in care leading to poor clinical outcomes or potentially avoidable expenditures. ( 1115A(b)(1)(A).) CMS does not explain or cite any evidence that the Medicare reimbursement rate of ASP+6 for Part B covered drugs has led to a deficit of care. However, stakeholders indicate that the proposed reimbursement rate under the demo will cause certain physician specialists to cease making Part B drugs available to their Medicare patients due to cost constraints. Those patients will have to seek alternative sites to receive their medicine, and in many cases causing beneficiaries to travel greater distances to access the services than they would otherwise have done absent the demonstration. In other words, for some Medicare patients, the Part B Drug Demo itself may result in a deficit of care that does not currently exist. It is also evident that the scope of the Part B Drug Demo applies to almost all Medicare beneficiaries, not a limited, defined population. Process for Selection and Implementation of VBP Tools CMS states in the proposed rule that VBP strategies for phase II of the demo would include one or more of the following: reference pricing, indications-based pricing, outcomes-based risk sharing agreements, and discounting or eliminating patient coinsurance amount. CMS would finalize the implementation of specific tools for specific HCPCS codes after soliciting public input on each proposal by posting the proposal on the CMS website. CMS would provide 30 days for public comment; a minimum of 45 days public notice would be provided before implementation. CMS notes that it would implement these tools through a contractor. CMS does not provide in the proposed rule any substantive details for any of its proposed VBP tools or how they would be operationalized; thus stakeholders have no insights on the viability or reliability of any of the proposals.

5 As noted earlier, the Part B Drug Demo would require that VBP tools be used in 50 percent of the PCSAs, representing roughly half the nation. The FAH believes that CMS is required to use Administrative Procedure Act ( APA ) rulemaking before employing the VBP tools in the Part B Drug Demo to afford the public adequate notice and opportunity to comment on the tools CMS proposes to require under the demo. The use of a subregulatory process to establish new payment rules for Part B drugs for 50 percent of the nation and for which the economic impact will be significant, runs afoul of meaningful engagement of the public for proposed regulatory action that will impact an enormous number of Medicare providers of services, physicians, and beneficiaries. Posting notice on the Website does not constitute adequate notice, and a 30-day comment period is inadequate given the fact many of the proposed tools have only recently been implemented on a small scale in the private sector and there is little practical experience with them. II. FAH Urges CMS Not to Finalize the Proposal and Consider Alternative Approaches and Refinements to Phase I of the Part B Drug Demo The current formula for reimbursing Part B drugs at average sales price (ASP) plus 6 percent is appropriate and is working and there is little to no evidence that physicians are making prescribing decisions to maximize reimbursement. The current formula accounts for both the variability in provider acquisition costs and the additional costs associated with the complexity of Part B drugs including shipping fees, administration, and complicated storage and handling requirements. For these and other reasons detailed below, the FAH urges CMS not to finalize the Part B Drug demonstration. Should CMS decide to move forward, it should significantly refine, scale down and narrow the demonstration. As indicated above, hospitals in 50 percent of these geographic areas will be subject to the model test arm in Phase I and hospitals in 75 percent of the United States will be subject to the proposed Phase II. The percentage of hospitals affected, however, could be much higher, depending on the PCSAs selected. This crudely designed demonstration will essentially shift payment from drugs primarily used in the hospital to drugs primarily used in physician offices. It will pay less for higher cost drugs used to treat complex conditions such as cancer, ophthalmological diseases and arthritis and pay more for treatments for less complex conditions provided in the physician s office. Instead of shifting payment within a class of drugs, it shifts payment by cost of drug under the faulty assumption that every drug has a lower cost substitute that would be reimbursed more favorably under the demonstration. Unfortunately, it s just not the case and will result in certain payment loss for providers such as hospitals regardless of a change in prescribing habit. A scaled down demonstration would be more appropriate, particularly in light of the limited evidence that supports CMS s concerns that that the 6 percent add-on creates an incentive to use higher-priced drugs when lower cost therapeutic alternatives are available. As stated, this is particularly disadvantageous to hospitals as the Part B Drug Demo, as designed, systematically results in lower payments to hospitals as the mix of drugs used in the hospital outpatient departments are higher-cost compared with the physician office. In its June 2015 report, MedPAC found that the top 10 drugs accounting for most Part B drug spending are in 3 areas: cancer, rheumatoid arthritis, and macular degeneration and account for 48 percent of Medicare spending at ASP+6%. 1 These drugs are administered predominantly in hospital 1 See page 66 of MedPAC. June 2015 Report to the Congress: Medicare and the Health Care Delivery System (Washington, D.C. June 2015).

6 outpatient departments and not in physician offices and all would receive significantly lower reimbursement in the proposed model. The lack of lower cost therapeutic alternatives is not just a concern shared by us but by MedPAC as well. In the June 2015 report, MedPAC also expressed a concern that researchers have not been able to quantify the amount of total Part B drug spending accounted for by drugs that have lower priced substitutes and that such a calculation would prove to be challenging. Specifically, MedPAC stated the following:.. it is difficult to know the extent to which the percentage add-on to ASP has the potential to affect drug prescribing patterns and the resulting spending levels. 2 In addition, while cost is certainly a consideration, hospitals purchase and physicians prescribe drugs based upon clinical considerations choosing drugs that are the most effective while minimizing side effects. By establishing such a broad, mandatory demonstration, CMS is picking winners and losers in the hospital community. By CMS s own estimates, the hospitals chosen to participate in Phase I of the demonstration will see a decrease in outpatient drug reimbursement of more than 2% regardless of the limited actions they may be able to take to decrease Part B drug spending. Taking into account the potential behavioral shift of physicians referring patients to hospital outpatient settings for higher cost drugs, it is likely that CMS has significantly underestimated the negative financial impact on hospitals. This decrease in reimbursement is particularly disturbing given deep, chronic negative outpatient hospital operating margins negative 12.4% in 2013 according to MedPAC. To address these issues, if CMS decides to continue with the demonstration, the FAH urges CMS to considerably narrow the scope of Phase I. This could be accomplished, for example, by narrowing the Part B Drug Demo to a limited group of pharmaceutical classes, which are separately paid in both the physician office and hospital outpatient department settings, and for which lower cost therapeutic alternatives exist within the class. In addition, CMS should consider excluding oncology drugs. Further, for reasons detailed below, including Medicare s payment system for hospital outpatient departments as well as the fact that physicians practicing within a hospital decide which drugs are appropriate for their patients combined with the lack of evidence that there is a profit motive driving those decisions, CMS should consider excluding hospitals from the demonstration. Finally, CMS should closely monitor its data to ensure that the quality of care beneficiaries receive is not adversely affected. III. FAH Recommends That CMS Not Adopt Phase II at This Time Until CMS Can Provide Sufficient Detail on the Nature of its Proposals Under the CMS proposal, in phase II, CMS would implement VBP in conjunction with the phase I variation of the ASP add-on payment amount for drugs paid under Part B. Specifically, CMS proposes applying one or more tools, such as indication-based pricing, reference pricing, and clinical decision support tools to Part B drugs, and testing whether this affects expenditures and outcomes. In addition, CMS proposes that Phase II could begin as soon as January 1, CMS, however, does not provide sufficient detail on the nature of its proposals for Phase II, and thus the FAH urges CMS not to move forward with Phase II until such detail and specific proposals are provided. As currently constructed, this section is more consistent with a 2 See page 69 of MedPAC. June 2015 Report to the Congress.

7 Request for Information (RFI) rather than a detailed policy proposal. The proposed rule does not make any specific proposals; instead suggests options and requests comments about options and asks for additional recommendations. For example, more consistent with a RFI, CMS notes that the VBP tools would be adopted to apply to drugs as appropriate. There is not a specific proposal to apply VBP tools to drugs with specific characteristics discussed in its proposal. IV. FAH Urges CMS to Ensure Part B Drug Demo is Budget Neutral to Hospitals If CMS continues to move forward with this Part B Drug Demo and include hospitals, we urge CMS to make the Part B Drug Demo budget neutral with respect to hospitals and the Outpatient Prospective Payment System (OPPS) instead of the proposed approach of budget neutrality across the Medicare Physician Fee Schedule and OPPS. Instead of its current proposed approach, which would reduce hospital outpatient drug payments by 2.3 percent, the FAH urges CMS to make Part B Drug Demo budget neutral within the Medicare s OPPS payment system. The structure of the demonstration with a proposed flat fee option could remain the same along with the redistribution of dollars between settings and among hospital types; CMS could then calculate and apply a budget neutrality adjustment calculation with respect to the larger OPPS payment system that would account for reduction in OPPS payments due to the Part B Drug Demo. SPECIFIC COMMENTS ON PHASE I Under the CMS proposal, CMS proposes to utilize the same basic approach that was described (but not recommended) in the June 2015 MedPAC report: a fixed percentage with a flat fee. 3 Specifically, CMS proposes a fixed percentage of 2.5 percent and a flat fee of $16.80 per drug per day administered calculated using CY 2014 claims. CMS proposes to update the flat fee amount annually based on the percentage increase in the CPI Medical Care (MC) for the most recent 12-month period. This policy has several significant flaws that need to be addressed. I. FAH Urges CMS to Modify its Phase I Payment Methodology to Vary the Flat Fee Add-on Across Several Tiers of Drugs Based on Costs Current Proposal Significantly Overpays for Low-Cost Drugs The proposed payment policy results in significant overpayment for low-cost drugs, which may have the perverse incentive of encouraging physicians to overprescribe them and for pharmaceutical manufacturers to raise their prices for them. This is contrary to a longstanding Medicare principle of ensuring proper payment. Several of the high volume, low cost drugs already have local coverage determinations based on potential misuse and overprescribing by providers including vitamin B12 and testosterone cypionate injections. 4 For example, the cost per drug per day for a vitamin B12 injection was $2.18 under ASP + 6%, but under the CMS proposal a provider would receive $18.91 ($ $16.80) or almost 8 times the amount the provider currently receives. For the same reasons that CMS believes ASP + 6% induces providers to prescribe high-cost drugs, its proposal could well induce potential overuse of 3 MedPAC. June 2015 Report to the Congress: Medicare and the Health Care Delivery System (Washington, D.C. June 2015). 4 Medicare Local Coverage Determinations L33412 and 33967, which were both effective on or after October 1, 2015.

8 these low-cost drugs. Overall, our analysis of the Medicare Part B Drug Demo file (the data CMS posted on its Website) shows that about 80 drugs have an average price per day of less than $5.00, but account for about one-third of total volume (as measured by encounters). Under current policy, a physician within his office setting that administered a drug with an ASP of $5.00 would receive $5.30. Under the proposed policy, the same provider subject to the new ASP + 2.5% and a flat fee of $16.80 would now receive about $22 to administer the same drug, a 300 percent increase in payment or 4 times the amount previously paid by Medicare for the same drug. In fact, about two-thirds of the unique drugs and more than two-thirds of the volume would be overpaid relative to current policy of ASP + 6.0%. Current Proposal Penalizes Hospitals Due to the $100 packaging threshold As currently constructed, the proposed CMS policy systematically penalizes hospitals as hospitals would not receive the flat fee for drugs packaged into an APC for drugs less than $100 based on the $100 packaging threshold under OPPS for According to CMS data released as part of the proposed rule, about 57 percent of the per day volume of separately paid drugs under Medicare Part B are for drugs that average less than $100 per day. Based on our analysis of these data, nearly $400 million or 57 percent of the budget neutrality adjustment (paid based on one flat fee payment of $16.80) is redistributed based on this volume for this category of drugs; almost all of this goes to providers in the physician office setting as the number of encounters with drugs paid less than $100 in the hospital outpatient department is less than 1 percent. 5 This explains in large part why hospital outpatient departments lose about 2 percent or more of outpatient drug reimbursement irrespective of size, ownership status, geography, or teaching status. This policy also results in disproportionate gains by certain physician specialties, such as pain management and primary care specialties, and significantly overpays low-cost drugs. CMS Should Consider an Option That Varies the Flat Fee Add-on Across Several Tiers of Drugs In addition to its proposed approach, CMS sought comment on whether other variations of the ASP add-on percentage would be a useful complement to the proposed ASP+2.5 percent + flat fee, such as a tiered approach in which CMS would vary the percentage or flat fee add-on across several tiers of drugs defined based on cost. To examine this option, the FAH contracted with The Moran Company to examine additional options that would address having such a large add-on amount for low-cost drugs and result in a more equitable distribution of the flat-fee amount while maintaining CMS s intent of its proposed policy. Specifically, the Moran Company modeled two options: a two-tiered and a three-tiered approach that maintains the ASP and 2.5%, but varied the flat fee to maintain overall budget neutrality within Part B as proposed by CMS. In the two-tiered option, the first tier is ASP cost per day of $100 or less with a flat fee of $5.00, and the second tier includes those drugs with an ASP cost per day of greater than $100 with a calculated flat fee of $ In the three tiered option, the first tier is set at $100 or less cost per day (to coincide with the packaging threshold) with a $5.00 flat fee; the second tier is greater than $100/day and less than or equal to $480/day with a $16.80 flat fee (the $480 cost per day is the breakeven point where the 5 There could be some OPPS drugs that show up on the list due to how the packaging threshold is calculated and the claims data used.

9 proposed ASP add-on amount (2.5% + $16.80) is equal to the existing 6 percent ASP add-on amount); and those drugs greater than $480 would receive a flat fee of $ See figure 1 below for overall results. Figure 1: Impact of Part B Drug Payment Model on Hospitals and All Provider Specialties, by Tiers of Drugs Based on Cost Source: Analysis of Part B Claims by The Moran Company Note: All tiers use ASP + 2.5%, but the flat fee varies to maintain overall budget neutrality as proposed by CMS. In the first tier the flat fee add-on is $ In the two tier option, the first tier is $100 or less with a flat fee of $5.00, and the second tier $100 or greater has a calculated flat fee of $ In the three tier option, the first tier is $100 or less with a flat fee of $5.00, the second tier is greater than $100/day and less than or equal to $480/day with a flat fee of $16.80, and the third tier is greater than $480 with a flat fee calculated of $ The modeling results shown in figure 1 above clearly illustrate the adverse impact on hospitals using only a one tier option with a flat fee of $ As indicated previously, the proposed CMS policy systematically penalizes hospitals as hospitals would not receive the flat fee for drugs packaged into an APC for drugs less than $100 based on the $100 packaging threshold under OPPS for By not taking this into account, the proposed CMS policy arbitrarily redistributes dollars from the hospital setting to the physician setting without any clear policy rationale. The FAH believes that a better and more balanced approach would be for CMS to consider adding a lower nominal flat fee, such as the $5.00 modeled, as this would continue to provide some incentive for providers to use lower-cost drugs, without CMS grossly overpaying providers for low-cost drugs as with the current proposed policy. A three tiered option would be an alternate approach and has the advantage of addressing a concern noted by CMS of large changes or cliffs between payment amounts between groups. To correct this systematic bias against hospital outpatient departments, the FAH urges CMS to modify its Phase I payment methodology to vary the flat fee add-on across two or more tiers of drugs based on costs. CMS Should Trend Forward the Flat Fee Portion to 2016 Dollars For purposes of calculating the flat fee, the FAH recommends that CMS first calculate the flat-fee based on the most complete data and thus recommend that CMS continue to use CY 2014 claims data (updated for the final rule). The flat fee portion calculated using 2014 claims data, however, should be trended forward to represent 2016 dollars, just as CMS plans to annually update the flat fee beginning in January 2017.

10 The FAH urges CMS to use the producer price index (PPI) for Pharmaceuticals for Human Use (Prescription) instead of the CPI-U Medical Care to trend forward the 2014-calculated flat fee to 2016 and for use in updating the flat fee for January 2017 and annually thereafter. The PPI index is the more appropriate price proxy for goods and services that facilities purchase as inputs than a CPI index that measures changes in the prices of final goods and services purchased by the typical consumer. In its own words, CMS has stated that it only uses CPIs if an appropriate PPI is not available, or if the expenditure more closely resembles a retail rather than a wholesale purchase. 6 II. FAH is Concerned that Payment Policy Could Have Unintended Consequence of Impaired Beneficiary Access to Necessary Care The FAH is also concerned about how this reduced payment would impact a provider s ability to purchase a particular drug and the potential consequence of a Medicare s beneficiaries access to care. MedPAC in its June 2015 report, expressed a similar concern that how the flatfee add-on is structured would be important as otherwise providers might have difficulty purchasing very expensive drugs within the Medicare payment rate. With a breakeven price point of $480, a reduction in payment for moderate and high cost drugs may make it challenging for community providers to acquire and maintain an inventory of Part B drugs. The add-on payment provides handling and overhead costs, including the costs associated with maintaining an inventory and storage, and to account for additional mark-up in distribution channels that are not captured in the reported ASP. Given the capital costs associated with acquiring and keeping an inventory of these drugs, certain providers may find that doing so is no longer economically feasible. This would have the unintended consequence of requiring patients to travel to receive such services at specialty clinics or outpatient hospital settings and disrupt care coordination efforts. This concern was also acknowledged by MedPAC that price variation across purchasers would persist, and smaller oncology practices might decide to send patients to the larger oncology practices or hospital outpatient departments for certain expensive drugs. This behavioral response would amplify the already negative financial consequences for hospitals. As proposed, beneficiaries could have reduced access to needed higher cost drugs and could receive overtreatment from low cost drugs that would now be overpaid. The current proposed design fails to address this issue, which is a surprising omission given that Potential for Quality Improvement is a key CMMI model design factor criterion with respect to the development of new alternative payment models. 7 In addition, there is also no information in the proposal on how CMS plans to evaluate its policy on access issues. CMS needs quality metrics and oversight-protection to ensure that their policy is not having unintended consequences. 6 See CMS document titled Market Basket Definitions and General Information. See Reports/MedicareProgramRatesStats/downloads/info.pdf 7 See

11 III. CMS Needs to Address Several Claims-Based Issues That Cause Undue Administrative Burden to Hospitals To reduce the administrative burden on hospitals with respect to the Part B Drug Demo, the FAH believes that CMS needs to address several operational issues. In the proposed rule, CMS notes that it anticipates using a G-code that providers and suppliers billing in geographic areas assigned to ASP + 2.5% + flat fee approach would use to bill for the flat fee portion of the payment. Pharmacists within our member based hospitals have indicated that it would be difficult and burdensome to incorporate adding a G-code to the claim, particularly as it is on a per day basis. This would take significant training by the pharmacists as these codes would only be used for Medicare patients and for certain drugs that are separately payable. In addition, the hospital s information technology systems are not set-up in such a way to make recording or tracking these visits in a comprehensive and systematic way. Consequently, each Medicare Part B claim with a separately paid drug will require a manual review to ensure that the G code is appropriately added. Hospital providers will also be unable to use third-party applications to automate this functionality as these applications do not allow customization based upon the proposed geographic areas. Such a policy would likely lead to inaccuracies and potential inconsistent reporting among hospitals. The FAH is opposed to the use of the G-code on the claim for determination of the add-on payment. We believe a better alternative is for the CMS contractors to make this determination and calculation based on the comprehensive data available to them as part of the claims processing process. CMS also proposes (and FAH agrees) that drugs classified as in short supply would continue to be paid using the existing statutory methodology. CMS indicates that it will update this list on a quarterly basis, but FAH urges CMS to recognize in its claim processing process that this short supply list is updated more frequently than on a quarterly basis, and in fact is updated on a daily basis. According to the FDA website, it updates the drug shortages searchable database on a daily basis based upon regular updates provided by manufacturers. 8 By not updating its list on a more frequent basis, CMS may pay less for these drugs than what is required by the statute. At the time of payment and based on when the drug was provided, the contractor should be able to examine whether the drug is on the short supply list and pay the provider appropriately. Without this additional step, CMS may pay less for these drugs that what is required by statute. SPECIFIC COMMENTS ON PHASE II I. More Evidence is Needed on VBP Tools CMS Plans to Use Before Implementation As Part of the of a Broader Part B Drug Demo In phase II of the model, CMS proposes to implement VBP tools for Part B drugs using tools that are used by commercial health plans, Medicare Part D plan sponsors, Pharmacy Benefit Managers (PBMs), hospitals and other entities that manage health benefits (both drugs insured under the medical benefit as well as those paid for under a prescription drug benefit) and drug utilization because, when appropriately structured, they may be adaptable to Part B to improve patient care and manage drug spending. 8 See the FDA frequently asked questions about the FDA Drug Shortages database:

12 As noted above, the FAH has a broader concern that CMS does not provide sufficient detail on the nature of its proposal and thus we urge CMS not to move forward with Phase II until such detail and specific proposals are provided. As currently constructed, this section is more consistent with an RFI rather than a detailed policy proposal. In addition, VBP tools are just now being tested in the private insurance market without any consistent evidence that they maintain quality, improve access, and reduce costs. There is not sufficient evidence to know the potential impact these VBP tools may have on Medicare beneficiaries. While many have aspects/features that could show promise, their success will be highly dependent on their design and implementation. For example, there could be potential value for indication specific pricing where Medicare would vary prices for a given drug based on its clinical effectiveness for treating different indications. 9 However, there is general consensus among insurers, pharmacy benefit management firms, and others that a number of significant hurdles/issues would need to be addressed for this tool to be effective including, but not limited to, insufficient data systems and analytic capabilities, unintended pricing effects related to Medicaid best price provisions, restrictions on negotiations related to off-label indications, and anti-kickback laws creating legal concerns. More specific detail would need to be provided by CMS on how it plans to implement a particular VBP tool, before the FAH could provide informative comments on their merit. II. Phase II Tools Must Go Through a Notice and Comment Rulemaking The FAH strongly disagrees with this make it up as you go approach to establishing policy. We do not believe that the subregulatory process CMS proposes for use in adopting specific VBP tools for testing is sufficiently transparent and rigorous for policies with such broad implications for hospitals and other stakeholders. Under the proposed policy, the FAH and its members would have to check postings on a CMS website to know whether CMS is considering a specific VBP and would only be allowed 30 days for public comments. There is no prescribed timing of these postings as they can be initiated at any time by CMS. CMS would not have to respond to comments publicly from stakeholders and this process only provides 45 days of public notice after the close of public comments before implementation. The proposed CMS subregulatory process is grossly inadequate for the purposes of adopting VBP tools for the Part B Drug Demo. We believe that CMS should not adopt VBP tools proposals through a subregulatory mechanism. Rather, as discussed above, CMS would be required to implement Phase II tools through a proposed rule process with notice and comment, with a final rule that addresses the public comments. This rigorous notice and comment process is not only required, but it also would lead to better VBP tools with a higher likelihood of success given these policies would have benefited from suggestions about specific proposals from knowledgeable stakeholders with sufficient time to consider and respond to the proposals. 9 See Indication-specific Pricing of Pharmaceuticals in the U.S. Health Care System: A Report from the 2015 ICER Membership Policy Summit. This report can be found at: content/uploads/2015/03/final-report-2015-icer-policy-summit-on-indication-specific-pricing- March-2016_revised-icons-002.pdf

13 III. CMS Should Consider Separate or Multiple Voluntary Small Scale Demos for Phase II Instead of Current Approach The FAH urges CMS to not finalize its proposal related to Phase II and reassess its approach to testing the effectiveness of these VBP tools. Instead of a broader scale demo for Phase II, we recommend that CMS consider instead a separate or multiple voluntary small scale demos that incorporate and test aspects of VBP. This would allow CMS to work on addressing policy and operational issues before disseminating them more broadly across the United States. We believe that there will be significant operational issues for hospitals and Medicare to work through before implementing these tools nationwide, and several small scale demos would be able to identify and develop solutions for such issues. CMS could also consider implementing aspects of the VBP tools into its existing CMMI initiatives, such as Pioneer and Next Generation ACOs. IV. FAH Has Concerns About the Proposed Clinical Decision Support (CDS) Tool The FAH is concerned that the development of a CDS tool based upon Medicare claims would potentially be flawed as hospital outpatient departments are not required to report HCPCS codes for drugs that receive packaged payment per packaging threshold of cost <$100/day, or policy packaged drugs. Because of this incomplete database, the use of Medicare claims data for clinical decision support would be insufficiently robust to permit appropriate clinical decision-making. In addition, most hospitals have some level of CDS tools built into their existing EHR. It may be confusing to the clinician if the CDS tools provided by the facility which have been thoroughly vetted by local medical staff based upon examination of patient data are in conflict with CDS recommendations provided by CMS. In addition, the CMS tool would be inadequate to provide feedback to an individual physician on their drug claims pattern compared with local or national data. Although this may be practical in a solo physician office practice, hospital outpatient claims do not require an NPI of the prescriber for each drug charge line. Often hospital outpatients (e.g. observation patients) may have multiple specialists consulting and individually ordering drugs. It would be onerous to require a hospital to provide this information as part of the claim, and there are no provisions in 5010 standards to allow this level of detail. Therefore, providing an attending provider a comparative analysis of all drugs billed on his patients would not provide meaningful information that can be used in clinical decision-making. The FAH believes that there are significant differences in the models developed for cost containment for drugs dispensed in retail pharmacies and their applicability to the Part B settings. For retail prescriptions, patients are given an opportunity to review treatment options based upon formulary tiers and have adequate time to consider options based upon costs. Most plans provide an option for the patient to pay the difference between a covered medication and an off-formulary medication leaving the decision to the patient. However, the proposed rule does not allow for balance billing of the beneficiary for any difference in pricing so that the hospital provider is liable for the difference when a prescriber exercises appropriate medical decision-making to order a higher cost drug when a lower cost drug may be available.

14 SPECIFIC COMMENTS ON OTHER ISSUES I. Proposed Appeals Process is Inadequate to Protect Beneficiary Access The proposed appeals process is inadequate to protect beneficiary access to Part B drugs. For example, under the proposal a beneficiary would not be able to challenge a reimbursement rate of ASP which could in turn impact beneficiary access to a particular drug. The FAH is also concerned that the VBP contractor would be making decisions on appeals. We recommend requiring that those decisions be made by a neutral third party to ensure impartiality of the hearing official involved. This concern is based in part on the proposal to give substantial deference to both a VBP pricing policy and the decision by the VBP contractor in the pre-appeals process. This does not give the beneficiary much confidence that decisions would be made with the impartiality expected of a neutral third party. II. Proposed CMS Evaluation Approach is Insufficient As part of its evaluation, CMS states that it would collect data to test the hypothesis that the alternative payment design would lead to higher quality, more affordable care, and reduced Medicare expenditures. CMS notes the evaluation design would focus primarily on the impact of the proposed model interventions at the PCSA level, and that the analysis will be based primarily on secondary data sources such as Medicare FFS claims. The FAH is very concerned that there is no information in the proposal on how CMS plans to evaluate how its proposed policy would affect access to needed higher cost drugs for Medicare beneficiaries. As part of the evaluation, CMS should examine the extent to which beneficiaries received appropriate treatment; beneficiaries access to needed higher cost drugs was reduced, and whether the overpayment of low cost drugs results in overtreatment. In addition, CMS is silent on how it plans to evaluate the various VBP tools, and how CMS would be able to isolate the effect of a particular VBP intervention if multiple ones are being implemented in the same area within the same timeframe. Without a clear evaluation plan, CMS would be unable to provide sufficient evidence that certain VBP tools are effective and should be implemented more broadly within the Medicare program. III. Alternative Approaches Exist to Addressing Pharmaceutical Price Increases As we have stated, the FAH appreciates the urgent need to address soaring drug price increases. It is an issue that hospitals are attempting to manage on a daily basis. Unfortunately, this demonstration as designed will not address the fundamental issues driving these price increases. Fortunately, there are a number of actions the Department of Health and Humans Services could take to help address the source of the problem. The Campaign for Sustainable Rx Pricing recently released a number of proposals that will bring additional transparency, competition and value to the market place. Among the actions that should be taken, the Administration, working through the FDA, should prioritize action on drug approvals in both the brand and generic spaces where no competitor drug exists and should scrutinize activities taken to extend the exclusivity period of high cost drugs through the gaming of the current regulatory process. ***************************

15 We appreciate your consideration of our recommendations regarding the Part B Drug Demo proposed rule. The FAH believes that while this proposed rule was intended to address concerns about high drug prices, the proposed rule, as designed, could have serious negative implications for Medicare beneficiaries and providers, and thus should not be finalized. If you have questions about our comments or need further information, please contact me or Steve Speil, Paul Kidwell, or Katie Tenoever of my staff at (202) Sincerely,