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  • Washington Highlights

    MedPAC Discusses Wage Index, Part B Drug Prices, Payment Alignment


    Katherine Gaynor, Hospital Policy and Regulatory Analyst
    Mary Mullaney, Director, Hospital Payment Policies
    For Media Inquiries

    The Medicare Payment Advisory Commission (MedPAC) met on March 2-3 to discuss a variety of policy issues, including recommendations for the Medicare wage index, Part B drug prices, and aligning payment rates across ambulatory settings.

    Medicare Wage Index

    The commission staff provided a presentation of their proposed changes to Medicare’s wage index system based on updates from their June 2007 report and additional updates from September 2022. The key concern of the current wage index system expressed by staff is the failure to accurately reflect differences in labor costs across geographic areas, thereby creating inequities across providers. Further, areas with high wage growth negatively impact low wage areas due to the requirement for budget neutrality.

    Staff asserted that certain exceptions available to hospitals paid under the Inpatient Prospective Payment System negatively impact the wage index. Also, staff stated that the current wage index system disadvantages skilled nursing facilities. Staff stated the draft recommendation provides an alternative to the current system and would move away from higher wage index values in favor of lower ones. No exceptions would be allowed under the alternative, eliminating hospitals’ ability to impact those values.

    The chair’s draft recommendation presented an alternative to the current wage index system, asking Congress to repeal the existing Medicare wage index system (including exceptions) and require the secretary of Health and Human Services to phase in a new wage index system. The new wage index system would: (1) use all-employer, occupation-level wage data with different occupation weights for the wage index of each type of provider, (2) reflect local area differences in wages between and within metropolitan statistical areas and statewide rural areas and counties (up to approximtly5%), and (3) smooth wage index differences across adjacent local areas by capping wage index cliffs at 10%.

    The commission staff emphasized that an alternative wage index consistent with the proposed approach would more accurately measure relative labor costs and create more equity across providers. Staff also highlighted that this proposal would more accurately reflect variation within broader labor market areas and mitigate differences across adjacent areas, creating a less gameable and administratively burdensome program.

    Commissioners will vote on a final recommendation during the April 2023 meeting; however, they voiced unanimous support for the draft recommendation.

    Medicare Part B Drug Prices

    MedPAC staff continued its discussion on high-cost drug prices in Medicare Part B [refer to Washington Highlights, Sept. 9]. Staff presented the chair’s draft recommendations to address prices of certain drugs, spur competition among drugs, improve financial incentives, and maintain incentives for innovation. Staff stated that the chair’s final recommendations to Congress will be presented in the April meeting, and there will be a chapter in the June 2023 report to Congress.

    The first policy recommendation would cap the Medicare payment rate of Part B drugs and biologics approved under the Food and Drug Administration accelerated approval program if they miss certain criteria to demonstrate clinical benefit. Once a manufacturer verifies a drug’s clinical benefit, the cap on the payment rate could cease and revert to current law.

    The second policy recommendation would institute reference pricing by establishing a single average sales price-based payment rate for drugs and biologics with similar health effects. Each product would remain in its own billing code and payment would be based on the volume-weighted average sales price of all products in the reference group. Reference products could be organized by clinical indications, drug classification, and ease of implementation.

    The third policy recommendation would reduce the Part B drug add-on payment for drugs paid based on average sales price. It would also eliminate the add-on payment for Part B drugs paid based on wholesale acquisition price. Instead, separate drug administration payment rates would be developed. Drug administration payment rates should be adequate to ensure access, and utilization patterns among providers should be monitored. All three draft recommendations are expected to decrease program spending, as savings would accrue to beneficiaries through lower cost sharing.

    Aligning payment rates across ambulatory settings

    Staff revisited the discussion on aligning fee-for-service payments for the same services furnished at different sites of care, specifically those furnished at hospital outpatient departments, physician offices and ambulatory surgical centers [refer to Washington Highlights, Nov. 4, 2022]. The draft Chair’s recommendation presented would ask Congress to more closely align payment rates across ambulatory settings for selected services that are safe to provide in all settings.

    While commissioners generally agreed that payment rates often differ for the same services among these different sites of care, commissioners voiced concern that decreasing payment simply based on site of service could result in beneficiaries not having access to those services. Commissioners also noted that it is important to ensure that services can be coded to reflect resource use and patient acuity.  Most commissioners were supportive of the draft recommendation. The impact of the recommendation on access and on government and rural hospitals remain a concern for those who did not fully support the recommendation.