Part D could save billions if CMS had negotiating power

Medicare Part D pays more for name-brand drugs than many other countries and even other U.S. government programs, such as Medicaid and the Veterans Health Administration (VHA). The Carlton University School of Public Policy and Administration found that, because brand-name drug prices are so high, many beneficiaries fail to fill prescriptions due to financial constraints. Reducing the prices would reduce premiums and co-pays, as well as taxpayer contributions used to fund Part D.

Part D

Part D is the largest federal drug program, with $69.3 billion spent on prescription drugs in 2013 and over 39.1 million people covered. Part D represents about 7 percent of the global prescription drug market, and about 58 percent of Part D spending goes to brand-name manufacturers. Plan sponsors are able to obtain rebates from manufacturers and pharmacies, but the HHS Office of Inspector General (OIG) has previously expressed doubts that these savings are passed on to beneficiaries in the form of lower premiums. Medicare itself is prohibited from interfering with these negotiations and therefore cannot leverage its purchasing power. Without congressional approval, CMS cannot reduce drug prices by securing rebates or discounts.


According to the study, due to CMS’ constraints, the Part D program pays 73 percent more than Medicaid and 80 percent more than the VHA for drugs. If Part D could secure the same prices as these other programs, it would save between $15.2 billion and $16 billion per year. However, even Medicaid and VHA pay higher prices than many countries in the Organization for Economic Co-operation and Development (OECD). The majority (21) of OECD countries cover 100 percent of their populations with a public drug plan, while the U.S. and Canada rely on private plans and have higher drug costs. Studies show that U.S. costs per capita for drugs are $1,010, while the OECD average is $498. Further, 19 percent of Americans chose not to fill prescriptions due to cost in 2014, which is a high ratio of cost related non-adherence (CRNA). Although the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) reduced the CRNA from 26 percent in 2010, other countries have ratios from 2 percent to 13 percent.

In 2014, Part D provided no coverage for the first $310 a beneficiary spent on drugs per year without a rebate, then covered 75 percent of spending between $310 and $2,850 with a rebate average of 17 percent. Between this amount and the catastrophic limit on out-of-pocket costs of $4,550, the study notes, there is limited coverage for generic and brand-name drugs although there is a mandatory discount of 50 percent for brand name drugs. The report notes that discounts and rebates are different, as rebates are reimbursed by manufacturers after the drug is purchased at full price and discounts are price reductions at the point of sale. Sponsor rebates lowered Part D payments to an average of 83 percent of official manufacturer prices.

Medicaid receives a mandatory rebate of at least 23.1 percent of the average manufacturer’s price for brand-name drugs. An inflation rebate is imposed if the average price rises faster than general inflation, and represents more than half of brand-name drug rebates. The VHA has four different options for receiving lower prices on drugs, and by utilizing the option that offers the lowest price, VHA paid on average about 46 percent of official manufacturer prices.


Proponents of the current system argue that public interference would undermine the competitive system used by plan sponsors. The report’s authors argue that Switzerland and the Netherlands also have managed competition models, like Part D, and that lower drug prices do not undermine competition among insurers and beneficiaries in these countries are subject to lower premiums. The authors also dispute the argument that reducing prices would also reduce research and development spending with by arguing that the Part D system offers few incentives for innovation, and manufacturers are more likely to produce new drugs that are extremely similar to existing drugs, but more expensive. They recommend that Part D should reduce brand name drug prices to at least match the levels of Medicaid or VHA, introduce mandatory discounts similar to VHA’s inflation discount, require generic substitution, and use these price reductions to reduce copays and deductibles.

Kusserow on Compliance: CMS moves to ease Stark rules for providers and for CMS

In the face of the landmark Tuomey case decisions that have added teeth to the enforcement of the Stark laws, CMS has learned what providers have known for years: vagueness in the law requires more interpretation. CMS has been overwhelmed by the number of self-disclosures that require interpretation, especially those involving technical violations. Previously, the agency may not have been sympathetic to calls from providers about the burden, but once the Office of Inspector General (OIG) announced that it would not handle any Stark referrals not implicating the Anti-Kickback Statute (AKS), CMS was forced to accept all the self-disclosures. Once that occurred, need for some clarifications in the regulations became dramatically clear. In response to this problem, CMS published a Proposed rule, which, if implemented, would update the Stark law regulations to account for recent changes relating to health care reform and advancements in patient care and payment methodologies (Proposed rule, 80 FR 41686, July 15, 2015). CMS is requesting information from the health care community on whether “additional guidance or rulemaking is needed to relax or remove barriers to health reform initiatives without compromising fraud and abuse prevention.”

The focus of the Proposed rule is on some of the technical requirements, which should not rise to enforcement levels. These changes were included in the 2016 Medicare physician fee schedule regulation and address many potential modifications to the Stark law, including the creation of new exceptions and guidance on CMS’ interpretation of existing Stark law exceptions. The most significant changes would involve: (1) new exceptions under the law for time-sharing arrangements with physicians; (2) recruitment incentives for non-physician practitioners; and (3) recognition that certain technical violations, such as expired agreements, would not necessarily arise to a fraud or abuse enforcement action.

Time-sharing agreements

CMS proposed a new Stark exception for time-share arrangements recognizing that it is a common practice for hospitals to rent space to physicians for a small amount of time during a defined period of time to permit patient visits at a location other than their primary office, for the convenience of the patients, the physician, or both. Under the Proposed rule, this would be permitted if physicians pay their hospital-landlord on a prorated basis for the time they occupy the space, and for the staff and equipment they use. However, such rentals would have to comply with Stark exception requirements (e.g., leases, equipment rentals), the agreement would have to be in writing, and it would have to reflect payment at fair-market value (FMV).

Non-physician practitioners

CMS has taken note of the fact that there is a looming shortage of primary care physicians and has proposed a limited exception for hospitals, federally qualified health centers (FQHCs), and rural health clinics (RHCs) to provide remuneration to physicians to assist with recruitment and employment of non-physician practitioners who receive remuneration from the hospital. This could add more non-physician practitioners to fill the gap. The exception would include many of the standard Stark safeguards, such as a written agreement signed by the hospital and the physician as well as remuneration that does not take into account the volume and value of referrals. Comments are also being sought as to whether this exception should also apply to non-physician practitioners who are recruited as independent contractors.

Technical issues

CMS also noted receiving numerous self-referral disclosures that are procedural in nature with providers saying they are unclear whether an arrangement has to be memorialized in a single document that covers all aspects of the arrangement. CMS reported that while a single document provides “the surest and most straightforward means” of compliance, “a collection of documents evidencing the course of conduct between the parties may satisfy the writing requirement.” This could extend to a variety of arrangements.


CMS is requesting comments from the industry to assist them with these changes. The agency can expect nothing but support from the industry for these proposed changes. For those interested in reviewing the entire draft rule and provide comments, such must be done by September 8, 2015. This is also an opportune time for hospitals to have their physician arrangements reviewed for current compliance and to understand the implications of the Proposed rule changes. This should not be done by anyone involved in development of them, but by independent experts under direction of legal counsel.


Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

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Copyright © 2015 Strategic Management Services, LLC. Published with permission.


MedPAC proposes cure for what’s ailing hospital payment policies

According to Mark Miller, Executive Director of the Medicare Payment Advisory Commission (MedPAC), as a result of health care reform and changing trends in care settings, several areas of the fee-for-service (FFS) hospital payment policies need to be improved to ensure that payments are accurate. Miller provided testimony before the House of Representatives Committee on Ways and Means that summarized the MedPAC’s findings relating to hospital payment trends and its recommendations for improving the accuracy of FFS payment rates.


Inpatient discharges for Medicare patients declined 4.4 percent between 2012 and 2013. Notably, the use of outpatient services increased 33 percent for Medicare FFS Part B beneficiaries over the past seven years, which according to MedPAC, represents an increasing trend in providing care in outpatient settings. It also reflects the increasing number of hospitals that are purchasing and converting freestanding physician practices into hospital outpatient departments (HOPDs). This has resulted in a market shift away from freestanding practices and higher Medicare spending because the program pays higher rates in such settings than in freestanding offices.

Payment adequacy

Private insurers pay at higher rates, which allow hospitals to have higher costs that make Medicare payments appear inadequate. Hospital consolidation has allowed hospitals to gain a greater market power than private insurers. Therefore, hospitals do not receive pressure from private insurers to contain their costs.

Recommended payment changes

MedPAC recommended a number of changes to hospital payment policies, including outpatient rates should be equal or made closer to physician office rates for similar set of services. Similarly, standard payment rates for long-term care hospitals (LTCHs) should be paid only for patients who are truly chronically, critically ill (CCI). Services provided to LTCH patients who are not CCI should be paid based on inpatient prospective payment system (IPPS) rates.

IME and DSH payments

MedPAC has determined that only 40 to 45 percent of indirect medical education (IME) payments can be justified as covering the higher costs of Medicare inpatient care, which leaves $3.5 billion paid to teaching hospitals with little accountability.

Additionally, the disproportionate share hospital (DSH) payment policy does not relate to the cost of treating low-income patients. Section 2551 of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) revised the DSH system by requiring that Medicare payments be divided between one pool for traditional DSH and another pool for non-Medicare uncompensated care costs. While MedPAC has raised concerns about how the uncompensated payments are allocated, the amount of such payments will decline as the uninsured rate decreases.


According to MedPAC, the graduate medical education (GME) system is not aligned with delivery system reforms. Medicare payments for GME should be decoupled from the inpatient FFS payment system and GME resources should be devoted solely to programs that meet high educational standards. Medicare payments to teaching hospitals should be more transparent, and there should be studies of workforce needs, specialty residency programs, and medical school diversity.

Readmissions penalty

MedPAC recommends that the hospital readmissions penalty established by Section 3025 of the ACA should be continued, but recommends expanding the penalty to cover certain post-acute care providers. It recommended setting a fixed target for readmission rates and the readmission rates of hospitals that treat a large share of low-income patients should be compared based on peers serving a similar amount of Medicare beneficiaries.

Two-Midnight Rule

In response to the highly controversial, “Two-Midnight Rule,” MedPAC recommended that Recovery Audit Contractor (RAC) audits be focused on hospitals with the highest inpatient stay rates. The RAC contingency fees should be adjusted to make them more accountable for claims denials, and the RAC look-back period and rebilling window should be better aligned. MedPAC recommended withdrawing the Two-Midnight Rule completely because it will eliminate RAC oversight of a large number of inpatient claims.

Eliminate beneficiary liability

In order to address issues of beneficiary liability for short hospital stays, legislators should revise the three-inpatient-day hospital eligibility requirements for SNF care coverage so as to allow up to two outpatient observation days to count toward the requirement. Acute care hospitals should also be required to timely notify beneficiaries that they are in observation status and that it may affect their financial responsibility.

Lastly, MedPAC suggested that Medicare should create severity diagnosis-related groups that are specifically designed for one-day hospital stays. Alternatively, Medicare could adopt a site neutral payment policy that makes payments equal for similar short inpatient and outpatient stays.

Kusserow on Compliance: Breaking News: OIG issues Advisory Opinion on hospital discounts

The Office of Inspector General (OIG) issued an advisory opinion regarding the use of a preferred hospital network as part of Medicare Supplemental Health Insurance (“Medigap”) policies, whereby the requestors would indirectly contract with hospitals for discounts on the otherwise-applicable Medicare inpatient deductibles for their policyholders. In turn, the requestors would provide a premium credit of $100 off the next renewal premium to policyholders who use a network hospital for an inpatient stay (“Proposed Arrangement”).

The requestors wanted to know whether the Proposed Arrangement would constitute grounds for the imposition of sanctions or other enforcement actions. The OIG concluded that, although the Proposed Arrangement could potentially generate prohibited remuneration under the Anti-Kickback Statute (AKS) if the requisite intent to induce or reward referrals of federal health care program business were present, it would not impose sanctions in connection with the Proposed Arrangement.

The requestors are licensed offerors of Medigap policies and other insurance products. The Proposed Arrangement would apply to the requestors’ Medigap plans other than: (1) Medigap plans that fall under the category of Medicare SELECT policies described in section 1882(t)(1) of the Social Security Act; and (2) Medigap plans that may not fully cover the Part A deductible. The requestors proposed to participate in an arrangement with a preferred hospital organization, which has contracts with hospitals throughout the country (“network hospitals”). Under these contracts, network hospitals would provide discounts of up to 100 percent on Medicare inpatient deductibles incurred by the requestors’ Medigap plan policyholders (the “policyholders”) that otherwise would be covered by the requestors. The discounts would apply only to the Medicare Part A inpatient hospital deductibles covered by the Medigap plans, and not to any other cost-sharing amounts. The network hospitals would provide no other benefit to the requestors or their policyholders as part of the Proposed Arrangement. Each time the requestors receive this discount from a network hospital, the requestors would pay the physician hospital organization (PHO) a fee for administrative services. If a policyholder were to be admitted to a hospital other than a network hospital, the requestors would pay the full Part A hospital deductible, as provided under the applicable Medigap plan.

The Proposed Arrangement would not affect the liability of any policyholder for payments of covered services, whether provided by a network hospital or any other hospital. The PHO’s hospital network would be open to any Medicare-certified hospital that agrees to discount all or a portion of the Part A deductible for policyholders. Further, requestors certified that policyholders’ physicians and surgeons would not receive any remuneration under the Proposed Arrangement in return for referring patients to a network hospital.

A portion of the savings resulting from the Proposed Arrangement would be returned directly to any policyholder who has an inpatient stay at a network hospital. The savings would be shared with the policyholder in the form of a $100 credit towards the policyholder’s next renewal premium owed to the requestors. This feature would be announced to policyholders in an initial notification letter and a program identification card containing an icon indicating the participation of the plan in the network. Policyholders would also receive information biannually regarding the participation of network hospitals. These materials would make it clear that use of a non-network hospital would have no effect on a policyholder’s liability for any costs covered under the plan, nor would the policyholder be penalized in any other way for the use of a non-network hospital. Savings realized under the Proposed Arrangement would be reflected in the requestors’ annual experience exhibits filed with the various state insurance departments that regulate the premium rates charged by Medigap insurers, so as to be taken into account when state insurance departments review and approve the rates.

The OIG concluded that, in combination with Medigap coverage, the discounts offered on inpatient deductibles by the network hospitals, and the premium credits offered by the requestors to policyholders who have inpatient stays at network hospitals, would present a sufficiently low risk of fraud or abuse under the AKS for five reasons:

  • Neither the discounts nor premium credits would increase or affect per-service Medicare payments.
  • It would be unlikely to increase utilization.
  • It should not unfairly affect competition among hospitals.
  • It would be unlikely to affect professional medical judgment.
  • It would operate transparently in that policyholders have the freedom to choose any hospital without incurring additional liability or a penalty.

Richard P. Kusserow served as DHHS Inspector General for 11 years. He currently is CEO of Strategic Management Services, LLC (SM), a firm that has assisted more than 3,000 organizations and entities with compliance related matters. The SM sister company, CRC, provides a wide range of compliance tools including sanction-screening.

Connect with Richard Kusserow on Google+ or LinkedIn.

Subscribe to the Kusserow on Compliance Newsletter

Copyright © 2015 Strategic Management Services, LLC. Published with permission.