Considering Factors in Rising Prescription Drug Costs

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The Centers for Medicare and Medicare Services (CMS) released a report last week on increased prescription drug spending in the United States with projections for such spending to grow more quickly than overall health care spending. Later CMS announced new pilot projects to test the effects of current physician-payment policy on which physician-administered drugs get prescribed in Medicare.

CMS estimates that in 2015 Americans spent $457 billion on prescription drugs — 16.7 percent of overall personal health care services. CMS also estimates that from 2010 to 2014, 30 percent of the growth in drug spending was driven by an increase in prescriptions per person, and another 30 percent was driven by either switches in the types of medication prescribed or increases in drug prices.

That last segment is largely what the CMS drug-pricing tests will examine. Presently, physicians who administer drugs in their offices under Medicare Part B are paid based on a percentage of the drugs’ average sale prices. Health economists often note the resulting perverse incentives: Physicians benefit monetarily from prescribing more expensive — but not necessarily more effective — drugs.

The CMS pilot projects will follow recommendations from the non-partisan Medicare Payment Advisory Commission by testing the impact of reducing the piece of physician payments directly tied to drug prices. Another test will look at whether reducing cost-sharing for patients impacts which drugs get prescribed.

The results from these pilot projects will likely be watched closely by private insurers and those concerned with Medicare spending growth.

External links:
Observations on Trends in Prescription Drug Pricing (HHS)
Fact Sheet on Planned Tests (CMS)
Officials Propose Test Program on Medicare Drug Costs (Wall Street Journal)
2015 Report to Congress (Medical Payment Advisory Commission)

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