Finsights Blog

Sequestration is here. Reimbursement for drugs under Medicare Part B will decline by roughly 30%

There was hope this would not happen.  Hope by hospital outpatient facilities and  physician offices such as oncologists, rheumatologists, and urologists.  Starting today reimbursement of drugs administered under Medicare Part B benefit decreases from Average Selling Price (ASP) + 6% to ASP + 4% approximately.  To a health care provider (HCP), this represents roughly a 30% reduction in their reimbursement of drug costs that they will receive from the Federal government in addition to the 2% cut they will receive on services.  Based on data from Covance in the National Ambulatory Medical Care Survey (NAMCS), Medicare represents 59% of patients to the average physician office and 52% to the average hospital outpatient setting.  So the impact of this sequestration will be devastating to these provider channels and is likely to have ripple effects into commercial plans too.

Payer Mix Graphic

The impacts are likely to be as follows:

–          To physician office settings  – they will carefully need to pharmacoeconomically re-evaluate the therapies being provided to patients – those with good clinical pathway and reimbursement analysis  tools will be sharpening their pencils.  If they come to the conclusion that they will lose money, they will either be looking to procure drugs at a better price, or move the patient to self-administered therapies (orals or self-injectables – if this option exists), or make a decision to not treat the patient and refer them to an alternate site of care (such as hospital outpatient setting) to mitigate this financial liability.

–          To hospital outpatient settings – they simply revert back to the reimbursement from 2012 as they just received the bump from ASP +4% to ASP +6% January 1, 2013. But, they will likely see an increase in number of patients due to physician office setting potentially deciding to not treat medicare patients, so increased volume is increased revenue.  And if they are able to procure product at 340B prices, it is a windfall.

–          To specialty pharmacy providers (SPP) – expect them to message around this opportunity to reach into the physician office clinics to suggest the increased option of using them to manage this financial hit.  But since the SPP can’t do Assignment of Benefits (AOB) for Medicare Part B patients, this is only applicable if the commercial payers change their reimbursement.  We’ll have to stand by to see if there is a 1-2 punch from commercial.

–          To commercial payers – it would make sense for them to use this as an example to further pressure the whole buy-and-bill model and begin to convince clinics the time has come to move to either give them the buy-and-bill volume or move to SAAs, but again this will be a potential ripple (not a direct) effect of this change to Medicare.

–          To full-line wholesalers  – there should be a modest lift as they service the hospitals and SPPs that are likely to pick up volume from this transaction, but as I’ll explain below this volume shift is not good for distributors with large SD businesses because margin overall will decline.

–          To specialty distributors (SDs) such as AmerisourceBergen’s ASD, Besse, Oncology Supply and McKesson’s McKesson Specialty – they will be pressured by their clinic customers for further price concessions.  And if these SDs won’t, this profitable volume is likely leave.  It’s a lose-lose situation for the SD.

–          To manufacturers  – If their product has significant utilization by Medicare Part B beneficiaries, utilization may decline if there are alternative therapies such as orals or generic injectables.  Expect pressure from physician office customers to increase the level of contracted discounts , but this is a double-edged sword because offering incremental discounts will only further reduce that product’s ASP in the future and create a longer term problem.

–          To manufacturers of alternative therapies  – this may be an opportunity to partner more deeply with the SPP with hopes they wage a campaign to physician offices to further reconsider the use of SAAs.  Again this won’t solve or impact the Medicare Part B portion of the equation since SPPs cannot do AOB on that Medicare volume.

Other impacts?  Some new models may evolve and expand.  To infusion therapy providers – is this a win for them?  Can they make a model of treating medicare patients work?  The challenge is how they balance it with the stronger commercial patient base as well…that is the trick for a physician office – they need to have a balanced mix of patients – the more commercial patients, the better!  We’d expect new channels to rise from this – whether sequestration is sustained or not.

To the buy-and-bill model in general, this is a hit.  Payers and SPPs are probably cheering if they can successfully message that this trend spills over to commercial. Physician offices and SDs are not having a good day.  I’m sure there’s much more to come on this.  If you’re into the world of Specialty, it will surely be one to watch.




  1. As the conservation deepens, I’ve been asked privately to share more finsight…the first year impacts are the move are less impacting from ASP + 6% to ASP + 4.3% (due to the timing of when the sequestration cut occurred). If sequestration stands for a full year, the net impact is ASP + 3.88%. The impacts to clinics will vary upon their dependency on Medicare Part B and the size of the clinic. Those that are heavily dependent 50% + and small (less than $3M/year in drug spend) that typically cannot buy well (not near ASP), this impact will be devastating. And to those with the inverse payer mix and size (commercial and large), this impact will be negligible. So this is truly an “eye of the beholder” problem and the stated impacts above still apply.

  2. Thus the begs the question: For those clinics that infuse with 50%+ Medicare or low drug spend, what will they do with Medicare patients they infuse? Some of those patients have or are eligible to have the “Low Income Subsidy” provided by the Social Security Administration which wholly or partially eliminates the Part-D gap. This would make a self-injectible alternative (where available) financially viable. What is an efficient way for clinics to identify this subset of Medicare patients among those already being infused?

    1. Mike, the likely reaction we hear discussed most often is that clinics would turn these patients over to out-patient hospitals. These outpatient hospitals have been operating off of an ASP + 4% structure since MMA was enacted and can are operationally and financially equipped to handle the transition. As you point out, the Self-Administered Agents (SAA) are another option, but the concerns of the oncology practice are access and compliance. Patients struggle sometimes to find the product, gain proper access to them and then they may not take their medications at times they feel either good or bad. This is of concern and one of the main reason oral oncolytics struggle with their overall marketplace acceptance. Then you still have the issue of supportive care. There are no current SAA alternatives for management of the red and white blood cell therapies as the patient contends with the chemo. So for all these reasons, the easy solution is to turn them to out-patient hospital. If the practice really wants to consider options to hold the patient, this is where the pathways technologies can really become useful to a practice (offerings like P4). They can help slice and dice the practice patient population and apply guidelines and review various therapies and the economic implications to the practice. Hope that’s helpful. And apologies on the delayed response. I was traveling abroad for a couple weeks. Cheers.

  3. Can you share how you were able to arrive at the ASP+4.3%? I thought it was due to the sequestration only affecting the 80% that Medicare is responsible for vs. a timing issue?


    1. Mike, from what has been explained to me, because of the timing of when the cuts were go into effect, the 2% reduction is applied in a prorated basis (9 months vs 12 months). So come 2014, if the sequestration cuts stand the reimbursement drops to ASP + 4% like you would think. This 4.3% is the number that the buy&bill manufacturers are using to run their impact 2013 estimates. I have a team of people that focus on this stuff in our Managed Markets practice. If you would like more detail, shoot an email to me at and I’ll get that team to give you more detail. We have a company meeting coming up at the end of this week and we’re going to hit this topic pretty intensely because there’s still a bunch of back and forth for CMS to fix some of the impacts as opposed to letting the sequestration hit universally as well as let some of the cuts stand even post-sequestration. Just let me know. Thanks.

    2. Mike, I just met with our pricing and reimbursement team and I do have a clarification. My earlier comment was incorrect. The net net impact on Part B is a 1.6% reduction based upon the portion of the payment that the government is responsible for (80% as you correctly call out) that was reduced by 2%. Sorry – was moving very quickly when I responded and I had not challenged the opinion offered to me by a large manufacturer. Hope that is helpful and apologies again for the confusion.

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