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Tackling Drug Prices: CMS and PhRMA Propose Steps to Promote Value-Based Purchasing

Last week, the Centers for Medicare & Medicaid Services (CMS) and the Pharmaceutical Research and Manufacturers of America (PhRMA) released proposals to address recent criticism over rising drug prices.  CMS proposed to tackle the rising cost of drugs paid under Medicare Part B by testing an alternative payment model for Part B drugs and biologicals.  Only days after CMS released its proposed rule, PhRMA issued a set of policies to address the high-cost of drugs.  Central to both CMS’s proposed rule and PhRMA’s policies is the use of value-based purchasing.

CMS’s alternative payment model includes two phases.  If finalized, the first phase would change the statutory 6 percent add-on to Average Sales Price (ASP) that is paid to physicians and suppliers to 2.5 percent plus a flat fee of $16.80.  CMS believes that this change, and specifically the change to a flat fee, will minimize providers’ and suppliers’ financial incentives to prescribe more expensive drugs. 

The second phase involves the use of one or more value-based purchasing tools with the goal of testing approaches that would shift the market from a volume-based payment system to one based on improving patient outcomes.  Potential value-based strategies may include:

  • Reference pricing, which involves setting a standard payment rate for therapeutically similar drug products.
  • Varying the payment for drugs based on their clinical effectiveness for certain indications.
  • Entering into risk sharing arrangements with manufacturers where price adjustments are linked to payment outcomes.
  • Eliminating or potentially decreasing patient cost-sharing to promote the use of effective and cost-effective drugs.

CMS is also proposing to implement evidence-based decision support tools to assist clinical decisions for appropriate and safe prescribing.  This proposal is a continuation from HHS’s forum on prescription drug costs, which we previously covered.

CMS plans to test this alternative payment model through a 5-year demonstration program implemented in certain geographic regions.  CMS seeks to implement the demonstration no sooner than 60 days following the release of the final rule, which it anticipates releasing by fall 2016.

PhRMA’s policies include a list of proposals that focus on improving the health care industry and maintaining the affordability of drugs, several of which align with CMS’s Part B demonstration.  In addition to proposals that include modernizing the Food and Drug Administration’s (FDA) drug approval process, PhRMA proposes several regulatory solutions to promote the use of value-based purchasing.  These solutions include:

  • Update FDA regulations to allow manufacturers to share clinical and economic outcomes with payors and providers following FDA approval;
  • Update the Department of Health and Human Services (HHS) regulations or guidance, including fraud and abuse laws, to allow for better patient adherence programs and price reporting by manufacturers; and
  • Develop and improve value frameworks and assessments to assist in clinical decision making.

While PhRMA’s proposal is an attempt to make forward progress, the CMS proposal is sure to enflame the political controversy surrounding drug pricing.  The response from Congressional Republicans was swift and strongly critical of the CMS proposal.  If CMS moves to finalize the rule, it remains to be seen how far Congressional Republicans will go to halt the CMS proposal.  Given the recent proposals to repeal the government non-interference clause to allow CMS to directly negotiate Medicare Part D drug prices with manufacturers and voter initiatives in states to control the price of prescription medications, drug pricing is certain to remain front and center during 2016.


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Theresa advises clients on all aspects of the pharmaceutical supply chain, including counseling industry stakeholders on a range of business, legal, transactional, and compliance matters. She provides clients with strategic counseling and creative business modeling that considers legal restrictions and regulatory risk in light of innovation and business goals.
Lauren advises pharmacies, PBMs, managed care organizations, and other payors on transactional, regulatory, and fraud and abuse matters, drawing upon her experience working for the Federal Coordinated Health Care Office.