Tuesday, April 03, 2018

The Mysteries of Pass-Through Status: Why Medicare and Seniors Are Now Paying More for Lower-Cost Biosimilars at Hospitals

An unanticipated combination of government policy changes has led to a truly bizarre circumstance: The Medicare program and individual Medicare patients are paying more for lower-cost biosimilars. Further, hospitals are earning windfall profits from these lower-cost biosimilars, though physician offices can’t access the same financial benefits.

Sound bonkers? You bet.

To understand this strange turn of events, I delve into the vagaries of Medicare Part B reimbursement and the recently implemented outpatient prospective payment system (OPPS) rule for drugs acquired under the 340B Drug Pricing Program.

As I explain below, the Centers for Medicare & Medicaid Services (CMS) recently made all biosimilars eligible for “pass-through payment status.” This obscure regulatory change (also explained below) altered reimbursement for some—but not all—biosimilars.

I illustrate the funky economics behind biosimilars’ newfound profitability and raise four crucial policy questions. Expect to hear more about this as politicians digest the spin from all sides of these tangled policies. However, it’s clear that CMS needs to act before this strange mix of policies disrupts the biosimilar market.


First, some fundamentals on Medicare’s Part B program.

In most circumstances, the Part B program uses a drug’s Average Sales Price (ASP) for reimbursing provider-administered drugs. For a detailed overview, see Section 3.1. of our 2017–18 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors. The statutory Part B reimbursement is 106% of ASP, a.k.a., ASP+6%. A Part B patient’s 20% coinsurance also is based on 106% of ASP.

In theory, biosimilars—biological products that are “highly similar” to an already-approved biological innovator product—will be less expensive than the innovator drug. However, a drug with a lower ASP will generate fewer dollars from the 6% markup.

To address this issue, Section 3139 of the Affordable Care Act (“Payment for Biosimilar Biological Products”) states that a biosimilar approved under the BPCIA pathway will be reimbursed at the biosimilar’s Average Sales Price (ASP) plus 6% of the reference drug’s ASP, rather than 6% of the biosimilar’s ASP.

This structure gives providers a small, incremental financial incentive for biosimilar substitution. A biosimilar with a lower ASP will yield a higher profit margin percentage compared with that of the innovator drug. A provider also has a cash-flow benefit from the biosimilar's lower acquisition cost. The magnitude of this financial benefit will depend upon the ASP gap between the biosimilar and the reference product.


Hospitals that purchase drugs under the 340B Drug Pricing Program generate substantial profits from the gap between the ASP+6% Medicare reimbursement and the 340B acquisition cost. For proof, see New OIG Report Shows Hospitals’ Huge 340B Profits from Medicare-Paid Cancer Drugs.

Due partly to these high profits, CMS implemented an important change in 2018 to the Medicare hospital outpatient prospective payment system (OPPS). The controversy surrounding this rule is beyond the scope of this article.

CMS reduced reimbursement for “separately payable drugs and biologicals (other than drugs on pass-through payment status and vaccines)” (emphasis added) acquired under the 340B Drug Pricing Program. For these products, reimbursement was reduced from ASP plus 6% to ASP minus 22.5%. I discussed the proposed rule last July in Understanding CMS’s Surprising Reimbursement Cut for 340B Hospitals. Fans of bureaucratese, however, can wade through the 282-page final rule.

Note that “drugs on pass-through payment status” are excluded from the new payment policy. These drugs will continue to be reimbursed at ASP+6%.

So, which drugs qualify for this mysterious status?

In this 2015 notice, CMS indicated that products qualifying for pass-through status included orphan drugs, drugs and biological agents used to treat cancer, and certain “new” drugs.

This definition might seem to exclude biosimilars, which are not really “new” products. They are intended to be copies of existing products.

Nonetheless, for the final OPPS 340B rule, CMS added the following crucial technical correction: “All biosimilar biological products will be eligible for pass-through payment and not just the first biosimilar biological product for a reference product.” (See page 59531.)

In other words, all biosimilar drugs have pass-through payment status.


Let’s run some numbers to illustrate the economic consequences that the OPPS rule will have on hospital profits for drugs purchased under the 340B Drug Pricing Program.

Consider a provider-administered product with an ASP of $100. Assume that the biosimilar has an ASP that is 15% lower than the innovator product’s ASP. Further, assume that the 340B acquisition cost is 35% below the respective products’ ASP, i.e., ASP*65%.

Under the normal reimbursement rules, the innovator is reimbursed at its ASP plus 6%. The biosimilar is reimbursed at its ASP plus 6% of the innovator’s ASP. In our example, the biosimilar’s reimbursement would be 14% below the innovator drug’s reimbursement.

Under the new OPPS rule:
  • The innovator product is reimbursed at ASP minus 22.5%. The biosimilar, however, has pass-through status and is reimbursed at its ASP plus 6% of the innovator’s ASP. The reimbursement for the less expensive biosimilar is now 17% greater than reimbursement for the innovator drug.
  • A patient’s 20% coinsurance payment is also 17% higher for the less expensive biosimilar.
  • The hospital earns almost three times as much gross profit from the biosimilar than it does from the innovator product. The gross profit margin is also much higher.
[Click to Enlarge]


This situation raises at least four key questions:

1. Should Medicare pay more for a less expensive but comparable drug therapy?

By definition, a biosimilar product is “highly similar” to the already-approved biological product. Under the OPPS rule, a biosimilar with a lower ASP generates higher reimbursement and more profit for the hospital.

Note that the issue isn't the mere existence of different reimbursement amounts. CMS is apparently comfortable with similar products being reimbursed at different rates. The innovator and every biosimilar each has its own billing J-code. For instance, the code for Janssen’s Remicade is J1745. The billing code for Inflectra, the biosimilar marketed by Pfizer, is Q5103. The billing code for Renflexis, the biosimilar marketed by Merck, is Q5104. The payment rates that became effective on April 1, 2018, differ for all three products.

2. Should Medicare overpay hospitals in order to jump-start biosimilar adoption?

The U.S. biosimilar market has developed much more slowly than the European market. At last week’s CNBC’s Healthy Returns conference , Dr. Scott Gottlieb, commissioner of the U.S. Food and Drug Administration, bemoaned the commercial practices that are delaying the adoption of biosimilars:
“I still think the biggest impediment is market access and the ability for the biosimilars to actually get on the market. And I think they're impediments in the way that these are reimbursed in supply chain where you have these sort of stacked royalties sitting on top of the brand of drugs, and if a biosimilar wants to penetrate the market, even at a lower price, they can't move enough market share in order to offset the benefits that the branded company is paying to the supply chain, whether it's distributive PBM or the health plan with these kickbacks, these rebates.”
So, should Medicare “overpay” hospitals for biosimilars in an effort to accelerate adoption? As far as I know, this was not Medicare’s intention when implementing the OPPS rule for 340B drugs.

Further, such a strategy would work only if biosimilars’ pricing is lower than the innovator’s price after pass-through status for these product ends. In our hypothetical example above, the biosimilar’s ASP would need to be at least 29% below the innovator product for the reimbursement rate and patient out-of-pocket obligation to be equivalent. The OPPS rule provides no guarantee that this would occur, so Medicare may end up overpaying for nothing.

Consider the Remicade biosimilars. For the second quarter of 2018, Inflectra's payment limit is only 16% below the innovator, while Renflexis' payment limit is only 15% below the innovator.

3. Should Medicare provide hospitals with higher profits for biosimilar adoption when those incentives are not available to physician offices?

Over the years, Drug Channels has been tracking the decline and fall of physician buy-and-bill for specialty drugs. For example, hospital outpatient sites now constitute more than one-third of Medicare spending and have been crowding out physician offices. Part B payments to physician practices are growing much more slowly than are payments to hospitals. See New Part B Buy-and-Bill Data: Physician Offices Are Losing to Hospital Outpatient Sites.

The OPPS rule provides significant extra profits for 340B hospitals that use biosimilars. Physician offices, however, have neither the higher reimbursement for a biosimilar drug nor the lower acquisition costs of the 340B program. Is Medicare attempting to further advantage hospitals relative to physician offices?

4. Should one biosimilar of a biological drug be reimbursed substantially more than another biosimilar of the same drug?

In the 2015 notice cited above, CMS also noted: “Under the statute, transitional pass-through payments can be made for at least 2 years but not more than 3 years.”

Consequently, each biosimilar of a single innovator product could have a different time period for which it has pass-through status. One biosimilar could therefore be reimbursed at ASP-22.5%, while another could be reimbursed at ASP+6%.

I expect that biosimilars of the same product would have comparable ASPs. However, the biosimilar version with pass-through status would generate a Medicare reimbursement rate that would be 36% higher than that of the biosimilar version whose pass-through status has expired.

Thus, the current policy introduces substantial volatility in product sales. Such uncertainty will discourage investment by biosimilar manufacturers, who should worry that sales could shift based on certification of pass-through status rather than product and pricing strategies.

There also could be clinical implications due to non-medical switching among biosimilars of the same product. Biosimilars of the same product are tested only against the innovator, not against each other. What happens to patients when a hospital switches its “preferred biosimilar” because of a change in one biosimilar’s pass-through status?

At this point, I’m not prepared to suggest a specific regulatory fix for the complex and contradictory incentives that have now been introduced into the biosimilar market. Let’s see how/if CMS will alter its policies.

CORRECTION: In the original version of this article, the comparison of Remicade to its two biosimilars inadvertently referred to differences in ASPs. In fact, the figures represented differences in the payment limits for the three products. We apologize for any confusion.

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