Controlling the cost of pharmaceuticals through the EAPG payment system

October 16, 2015 / By Norbert Goldfield, MD, Richard Fuller, MS

In a recent blog we made the case for quantifying the net effect of drugs upon health expenditures so as to make more rational decisions. Providing information about costs and outcomes and then realigning incentives are important big picture approaches for handling new drugs covered by patent protection – an issue that is getting swept up in the brushfire of national political debate. Older drugs no longer covered by patent or exclusivity rights also provide plenty of challenges – ones that need better approaches than CMS’ Average Sales Price (ASP) plus fixed mark-up approach, which directly passes through the cost of utilization and provides more revenue for using higher cost drugs. This blog demonstrates how we have addressed this issue using the Enhanced Ambulatory Patient Group (EAPG) payment system, which is now in use by a number of State Medicaid programs and private commercial payers for outpatient encounters.

The EAPG classification system takes Diagnosis Related Groups (DRGs) as its template for incentives. DRGs are predicated upon the belief that the more components of care paid for within a bundle of services, the more a provider is incentivized to manage the bundle to maximize their returns. With respect to pharmaceuticals prescribed or delivered during an encounter, it is difficult to have one bundled price for all services delivered at a visit as the price of the medication and the route of delivery can vary widely and may actually be more expensive than the reason for the visit.

To address these issues, EAPGs bundle drugs sparingly with associated procedures and physician encounters. Instead, the system creates incentives to manage drug utilization efficiently through a different mechanism. The EAPG drug groups begin with a division between chemotherapy and pharmacotherapy drugs, recognizing the difference between major specialty uses of drugs. Drugs are thereafter assigned to one of thirteen different tiers based upon their HCPCS code. Unlisted/unclassified drug codes are automatically assigned to the lowest tier to avoid an incentive to undercode. Each drug code is assessed using either drug data utilization or industry literature to predict an average cost per encounter for a particular drug. This assessment is followed by a provisional placement of a drug in an EAPG drug tier. This initial placement is followed by a detailed review by clinicians and pharmacists to identify drug similarities and reassign drugs to the same EAPG groups when fulfilling a similar function. In this way, payment for a single drug is reimbursed an average amount based upon its typical use and typical cost regardless of the actual dose, actual acquisition cost or specific drug within a class of drugs.

Here is an example of how the assignment process works. Provenge (sipuleucel-T) is one of several options for the treatment of metastatic prostate cancer. As a newer drug , the expected pricing and typical dosage was gleaned from literature review and, as a result, was given a provisional assignment to the highest tier with visit costs expected to be in the $30,000 range. Subsequent clinical review determined that existing treatments may serve as effective alternatives and, consequently, some institutional payers had opted not to cover Provenge due to the lack of improved outcomes or quantifiable advantage and an anticipated extreme increase in cost. Since EAPGs don’t mandate which services a payer should cover nor place restrictions upon the population (necessity) that receives them, a final assignment was made placing sipuleucel-T (Q2043) in tier 7 chemotherapy drugs, alongside docetaxel and cabazitaxel. This assignment is not an evaluation of cost-benefit but rather that the use of the drug should form part of the average treatment cost considerations when treating patients that require drugs within the group. This is clearly a different approach than ASP-based pricing within the Medicare Outpatient Prospective Payment System (OPPS) in which the cost of any drug use is paid at ASP plus a margin over that cost is paid to the provider for using it. In essence, the EAPG system rewards restraint while the OPPS system rewards use.

The EAPG approach to drug payments attempts to move the “pay per click” paradigm to a system of rewarding efficient management – that is, selecting the lowest cost, effective alternative with the least waste. An efficient provider should expect to receive sufficient payment to cover their drug cost when delivering care to cases that generate profit and loss versus the acquisition cost. Providers that are highly efficient managers of drug use will generate profits while inefficient providers will experience losses, in keeping with DRGs. Overall the EAPG approach to drug payments recognizes that if we wish to have a more dynamic push from providers to reign in exploding drug costs we have to pay them differently.

Richard Fuller, MS, is an economist with 3M Clinical and Economic Research.

Norbert Goldfield, MD, is medical director for 3M Clinical and Economic Research.

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