MedPAC Considers Wage Index Reform, Drug Pricing, and Alternative Payment Models

October 18, 2021

The Medicare Payment Advisory Commission’s (MedPAC) October 2021 public meeting focused on Medicare payment issues, including concerns with the hospital wage index, how to address the high prices of pharmaceutical products and other technologies, and features of alternative payment models (APMs).

MedPAC is revisiting prior work and conducting new analyses of the Medicare hospital wage index. MedPAC raised several concerns about the wage index system, many of which were included in its 2007 recommendations on comprehensive wage index reform:

  • MedPAC believes the wage index data is circular, meaning hospitals cannot increase the labor costs that inform their wage data because their Medicare payments are low, yet the payments are low due to a low wage index
  • The wage index is calculated using data from acute inpatient hospitals only, yet it affects all provider types, including post-acute care facilities
  • The current labor market areas used for the wage index mask variation within areas, and large variation between adjacent areas can result in cliffs
  • The numerous hospital-specific adjustments within the index complicate the system and provide opportunity for gaming

MedPAC’s 2007 recommendations would use wage data from all employers, alter geographic wage area boundaries, smooth differences across areas rather than allow exceptions such as reclassification, and phase in any large wage index changes. The Commission will discuss these principles in spring 2022 and could provide new recommendations, with several commissioners expressing a desire to recommend comprehensive reform. GNYHA will continue to monitor the MedPAC deliberations and will model any proposals to gauge the potential impact on our membership.

MedPAC staff detailed the significant growth in Medicare drug spending and presented several policy options for discussion. The staff noted that for both Part B and Part D drugs, price increases have been the primary driver of spending growth, with spending highly concentrated among a relatively small set of products. Staff discussed drug price disparities between the US and comparable countries—with US drug prices roughly double—noting that higher launch prices and more post-launch price growth were the drivers. To address this, staff presented three potential policy options to reform how Medicare pays for drugs: 1) setting a value-based payment for some drugs using evidence on comparative clinical effectiveness and cost effectiveness, 2) applying reference pricing such as least-costly alternative pricing to Part B drugs that have therapeutic alternatives, and 3) revising the average sales price (ASP)-based 6% add-on payment.

MedPAC generally supported a different pricing regime for protected classes of drugs such as those benefitting from the accelerated approval process, reference pricing for Part B drugs, and changes to the ASP add-on. While there was limited support for value alignment, the commissioners supported including cost effectiveness in a broader pricing mechanism for these drugs.

The Consolidated Appropriations Act, 2021, provides MedPAC with new access to two sets of drug price data: 1) post-sale rebates and fees for Part D outpatient drugs (also known as direct and indirect renumeration [DIR] data) and 2) pricing data for provider-administered drugs under Part B and drugs covered by Medicaid, including ASP, average manufacturer price, and best price. MedPAC stated that potential future research topics for Part D drugs using the DIR data may include the interaction between rebates and competition, point-of-sale prices, and risk adjustment. Future research on Part B drug topics may include combined billing code policies, ASP variation within billing codes, generic drug pricing and utilization dynamics, and a comparison of Part B and Part D net price growth for similar product types. MedPAC will discuss its preliminary findings at the April 2022 meeting.

In its June 2021 report, MedPAC recommended that the Centers for Medicare & Medicaid Services implement a smaller number of APMs that are designed to work together. At the October meeting, MedPAC discussed how to expand on this broad recommendation. MedPAC staff identified four focus areas to improve APM consistency: spending benchmarks, risk adjustment, provider financial risk, and provider participation incentives/mandates. The commissioners discussed how they would design a framework for APMs going forward and focused on the appropriate level of risk, mandatory versus voluntary participation, and the relationship between population-based and episode-based models.