Association for Public Policy Analysis & Management

Medicare Part B covers drugs administered by infusion or injection in a physician’s office or hospital outpatient department. In 2015, Medicare spent $26 billion on Part B-covered drugs and biologics and spending has been growing 9% per year in the last decade. There is concern that this growth in spending is driven in part by the system by which Medicare reimburses providers for administration of drugs in Part B. Specifically, payment is based on the average sales price plus 6%; by tying reimbursement to price, this system may create incentives for physicians to choose higher-priced drugs. Further, Medicare accounts for 50%+ of the market for about a quarter of the most expensive Part B drugs. Because Medicare has no option to eliminate coverage of a drug and pays based on average sales price no matter how high, manufacturers have little incentive to lower prices when Medicare makes up such a large part of the market.

In this paper, we sought to understand (1) the characteristics of drugs driving Part B spending, (2) the types of physicians with high Part B drug spending and whether this spending is concentrated among a small group of physicians or widespread, and (3) whether physicians respond to Part B drug reimbursement incentives by switching to more expensive formulations in the context of a shortage of a low-cost Part B drug. We found that the top 10 drugs in terms of costs make up 50% of Part B drug spending. The most common indications for these drugs are Cancer, Macular Degeneration, Rheumatoid Arthritis, and Crohn’s Disease. There is wide variation in terms of whether these drugs are administered in physician offices versus hospital outpatient departments. Seven of the top 10 drugs were approved before 2010, and all are biologics. While nearly 40% of Part B drug spending is on Cancer drugs, most utilization is of Central Nervous System drugs and hormones.

We found substantial variation across provider specialties in the percent of physicians that engage in any Part B prescribing (76% in Rheumatology vs. 32% in Internal Medicine). Average Part B spending at the physician level also varied widely across specialties, from under $600 annually among Family Medicine physicians to over $145,000 among Oncologists. Finally, we found that, in the context of a shortage of low-cost iron dextran, and with several other formulations of iron available, physicians increased usage of the more expensive formulation. We attribute this behavior at least in part to the nature of Part B reimbursement, which pays physicians more for prescribing higher-priced drugs.

Our results suggest that it will be important for policymakers to consider ways to lower spending on Part B drugs, including changing physician reimbursement incentives. Based on our analyses, we will discuss policy approaches that have been tried before (e.g., the Competitive Acquisition Program) and proposed (e.g., moving Part B drugs into Part D and external reference pricing, as proposed by the Administration,) as well as other potential opportunities (e.g., including drugs in bundled payments).