Medicare Part B as in Biologic: A Descriptive Analysis of Medicare Part B Drug Spending and Policy Analysis Over the Last Decade

Medicare Part B drug spending represents one of the fastest growing sections of Medicare in terms of costs. Medicare is generally split into three parts; Parts A, B, and D, which are broken up by the types of medical services covered. Part A covers inpatient services, B covers outpatient services and therapies/infusions delivered by physicians, and D covers outpatient prescriptions filled at pharmacy counters. Part C Medicare is a separate program managed by private insurers that bundles the services offered in Parts A, B, and D. Over the past decade, spending growth in Part B Medicare has been largely driven by expensive specialty drugs called biologics that are administered in outpatient settings by providers (Figure 1). Biologics are large molecular therapies that often require special transfusions or a sub-specialized physician’s assistance in administration. From 2008 to 2021, 89% of Part B drug spending growth was due to the cost of biologics, growing at a rate of 12% annually.¹

Figure 1. Part B Drug Spending by Biologic and Non-Biologic Spending, 2006-2021

Biologics offer substantial therapeutic potential for a number of conditions and patient populations.² They also offer a wide array of legal and regulatory issues related to their availability and price. The complexity of biologic therapies at the molecular level compared to small molecules (constituted by brands and generics) translates to the complexity of regulating the competition and savings for these therapies. Biosimilars are the generic equivalent for biologic drugs, and their savings potential in producing price competition hinges on a number of issues related to how drug pricing, insurance formularies, and physician’s office incentives interact.^3,4 Spending is largely concentrated in a few biologic therapies, as the top 10 drugs ranked by spending comprise 46% of total program drug spending (Table 1). Drug spending in Part B is also centered on a small percent of beneficiaries which is consistent with national trends in drug spending in the U.S. For reference, only 4% of total beneficiaries comprise this 46% of spending.

Table 1. Top 10 Part B Drugs Ranked by Total Annual Spending in 2021

Prong 1 – Markets: Infusing Value into Part B

In light of this, the government’s two-pronged strategy takes both a market based as well as a regulatory approach to produce cost savings. To promote the first market-based prong of this strategy, the Center of Medicare and Medicaid Services (CMS) and Congress must strongly consider Part B reforms that can optimize price competition for biologics, such that the cheaper versions of nearly identical therapies are used more than expensive alternatives. Biosimilars are an important component to drug competition as they are effectively generics or less expensive alternatives to expensive biologic drugs. However, the uptake of biosimilars in Part B Medicare has been slow over the past decade. For reference, biosimilar spending comprised 5% of Part B drug spending in 2021 and 2% of service usage (Table 2).¹

Table 2. Medicare Part B Metrics in 2008 and 2021

The current system of reimbursement to providers for procuring biologic therapies is determined by the buy-and-bill system and average sales price (ASP) plus 6%. These systems aim to pay providers for the cost of obtaining and administering specialized biologic drugs in their clinics or outpatient departments. They are explained in detail in Table 3 but, generally speaking, both create incentives for providers to use the costliest biologic medications for a given condition because provider reimbursement is directly tied to the price of the drug administered.⁴ Thus, in many scenarios, the more expensive drugs offer a more generous reimbursement for providers, especially when cheaper alternatives exist. This trend towards more costly therapies has been studied in the literature and made evident when examining the prescriptions of expensive ophthalmology therapies for macular degeneration.⁵

Table 3. Misaligned Incentives in Medicare Part B and Police Reform Proposals

To reform these incentives, such that providers are more incentivized to use less expensive alternative therapies, CMS could pursue multiple strategies to promote value-based treatment choices. These include a drug-vendor program, blended-ASP reimbursements or least-costly alternative authorities (LCA).^6,7 The drug-vendor program would utilize private actors to push providers towards cheaper medications by rewarding vendors when less-expensive alternatives are administered. Blending-ASP would de-link reimbursement to the price of a drug and rather offer a standardized reimbursement across all drugs in a class of medications. This would make the reimbursement to a provider the same for an expensive or a cheaper alternative for a given therapy.

Finally, the LCA authority would arm Part B Medicare with legal authority to demand providers use cheaper therapies for certain specified medical conditions. These policy options are examined in detail in Table 3. While legislation describing the vendor program and LCA are available, both would require congressional action through modified or novel legislation to make these authorities a reality. In the past 20 years, LCA lost its legal teeth from a U.S. circuit court decision; past attempts at a vendor program have failed dismally due to poor adoption from providers; and modifications to the ASP or buy-and-bill system both require an act of Congress on rather convoluted health policy issues.^8,9,10,11

Regardless of the strategy pursued, the data display dismal effects of price competition under the current Part B Medicare structure justifying the need for reform to promote biosimilar use.¹² Given the recent wave of biosimilar approvals from the Food and Drug Administration (40 total approvals as of 2023), there is greater urgency to ensure these cost savings are not left on the table in the coming years.¹³ In addition to CMS, the FDA could play an important role by optimizing the market entry of biosimilars such that reference biologics nearing exclusivity expiration face price competition as early as possible.¹⁴

Prong 2 – Regulation: The Inflation Reduction Act and Negotiation Implementation

The other prong of this strategy includes drug-price negotiations granted through the Inflation Reduction Act of 2022. While this bill has many important provisions that could produce savings for Part B, such as inflationary rebates, the implementation of negotiations is crucial in optimizing savings for drugs that lack competitors in the market (Figure 2).¹⁵ Keytruda, the top drug in Part B by total spending, shares many traits with other high-cost biologics in Part B that are prescribed by specialists. As a candidate for negotiation, Keytruda offers a perfect example for agencies to establish precedent on the complexities of negotiation and biologics. For example, many biologics, like Keytruda, can treat multiple FDA approved indications, have no biosimilars in the pipeline, have Orphan Drug Act designations, and could produce significant savings for the Part B program if negotiated.¹⁶

Figure 2. Inflation Reduction Act Timeline for Relevant Part B Drug Provisions

A study in JAMA simulating negotiations has estimated that Part D (Part D negotiation starts in 2026 compared to 2028 for Part B) negotiations alone could have produced $26.5 billion of savings from 2018-2020, which was 5% of total Medicare drug spending during those years.¹⁷ This is compared to the CBO score for the Inflation Reduction Act that estimated the ten-year savings from select negotiations to produce $99 billion in savings.¹⁸ The potential of this bill is significant, yet the complexities of this authority for CMS are similarly daunting. These include defining negotiation eligibility for a drug, negotiation exceptions, establishing a definition of a drug for use in negotiation, managing re-negotiation for multi-indication drugs (i.e., biologics), fostering cooperation from manufacturers, and combating “gaming” opportunities from manufactures throughout the negotiation process.¹⁹

The regulatory future of this new authority lies in the hands of CMS as well as the U.S. administrative judicial system. The Pharmaceuticals Research and Manufacturers of America (PhRMA) spent nearly $205 million to block passage of the Inflation Reduction Act and its negotiation provision. CMS and HHS must prepare for an onslaught of incoming litigation already underway with cases against HHS from Merck, Johnson & Johnson and Bristol Myers Squibb, all of which will test the legal and constitutional integrity of the negotiation provision.^20,21 Given the Supreme Court’s current composition, there are significant risks in the improper implementation of negotiations and the constitutionality of the maximum-fair price calculations (i.e., the calculations used to determine the cost Medicare will pay for each negotiated drug).

In closing, biologics pose significant costs to the Medicare budget and its beneficiaries struggling with disease. Most notably, patients with cancer face significant care costs and risks of financial toxicity.²² Within the top 10 Part B drugs by spending, four of the oncology therapies had an average annual cost-sharing (i.e., the estimated cost burden to the patient) of $11,721.

Without focused reform, Medicare Part B drug spending will continue to grow at a faster rate than any other section in Medicare. While biologics can offer seemingly limitless potential for novel cures and treatments, thinking critically about how our country pays for these therapies begins to take new urgency given their role in Part B spending growth. Currently, most of the spending is highly concentrated on a very small number of total beneficiaries, with less than 5% of beneficiaries comprising almost 50% of spending on just 10 therapies. As biologics become a mainstay of modern disease management, novel policies are needed to manage the financing, competition, and regulation of these therapies.

1. Nguyen X. Nguyen, T. Anders Olsen, Steven H. Sheingold, and Nancy De Lew, “Medicare Part B Drugs: Trends in Spending and Utilization, 2008-2021,” U.S. Department of Health and Human Services, Issue Brief, June 9, 2023, https://aspe.hhs.gov/sites/default/files/documents/fb7f647e32d57ce4672320b61a0a1443/aspe-medicare-part-b-drug-pricing.pdf. ↩︎
2. Agata Dabrowska, “Biologics and Biosimilars: Background and Key Issues,” Congressional Research Service, June 6, 2019, https://sgp.fas.org/crs/misc/R44620.pdf. ↩︎
3. Favour Danladi Makurvet, “Biologics vs. Small Molecules: Drug Costs and Patient Access,” Medicine in Drug Discovery 9 (March 2021): 100075. https://doi.org/10.1016/j.medidd.2020.100075. ↩︎
4. Rena M. Conti, Francis J. Crosson, Allan Coukell, and Richard G. Frank, “Reform Medicare Part B to Improve Affordability and Equity,” Health Affairs (June 2021). https://doi.org/10.1377/forefront.20210622.349716. ↩︎
5. Sean R. Dickson and Katelyn E. James, “Medicare Part B Spending on Macular Degeneration Treatments Associated with Manufacturer Payments to Ophthalmologists,” JAMA Health Forum 4, no. 9 (2023): e232951. https://doi.org/10.1001/jamahealthforum.2023.2951. ↩︎
6. Conti, Crosson, Coukell, and Frank, “Reform Medicare Part B to Improve Affordability and Equity.” ↩︎
7. James E. Mathews, “Payment Policy for Prescription Drugs under Medicare Part B and Part D,” Medicare Payment Advisory Commission, April 30, 2019, https://www.medpac.gov/wp-content/uploads/import_data/scrape_files/docs/default-source/congressional-testimony/04_30_2019_medpac_drug_testimony_for_eandc.pdf. ↩︎
8. Nitzan Arad, Derick Rapista, Marianne Hamilton Lopez, and Mark McClellan, “Originator Biologics and Biosimilars: Payment Policy Solutions to Increase Price Competition While Maintaining Market Sustainability in Medicare Part B,” Realizing the Benefits of Biosimilars: Part B Payment Approaches, October 15, 2021, https://healthpolicy.duke.edu/sites/default/files/2021-11/Realizing%20the%20Benefits%20of%20Biosimilars%20Part%20B.pdf. ↩︎
9. Daniel R. Levinson, “Least Costly Alternative Policies: Impact on Prostate Cancer Drugs Covered Under Medicare Part B,” Office of Inspector General, Department of Health and Human Services, November 2012, https://oig.hhs.gov/oei/reports/oei-12-12-00210.pdf. ↩︎
10. Kristi Martin and Jeremy Sharp, “Old Lessons for the New Medicare Part B Drug Payment Model,” The Commonwealth Fund, November 26, 2018, https://www.commonwealthfund.org/blog/2018/new-medicare-part-b-drug-payment-model. ↩︎
11. Fiona Scott Morton and Zack Cooper, “Paying for Biologic PADs in Medicare Part B,” 1% Steps for Health Care Reform, ↩︎
12. Sarfaraz K. Niazi, “The Coming of Age of Biosimilars: A Personal Perspective,” Biologics 2, no. 2 (2022): 107–127. https://doi.org/10.3390/biologics2020009. ↩︎
13. Judith Stewart, “What Biosimilars Have Been Approved in the United States?,” Drugs.com, February 27, 2024, https://www.drugs.com/medical-answers/many-biosimilars-approved-united-states-3463281/. ↩︎
14. Michael Furrow and Whitney Meier, “Biosimilars and the Biologics Price Competition and Innovation Act (BPCIA),” Practical Guidance Journal, February 22, 2019, https://www.lexisnexis.com/community/insights/legal/practical-guidance-journal/b/pa/posts/biosimilars-and-the-biologics-price-competition-and-innovation-act-bpcia. ↩︎
15. Juliette Cubanski, Tricia Neuman, and Meredith Freed, “Explaining the Prescription Drug Provisions in the Inflation Reduction Act,” KFF, January 24, 2023, https://www.kff.org/medicare/issue-brief/explaining-the-prescription-drug-provisions-in-the-inflation-reduction-act/. ↩︎
16. Shira Stein, “Pharma Lobby Readies Legal Firepower for Drug Pricing Measures,” Bloomberg Law, August 9, 2022, https://news.bloomberglaw.com/health-law-and-business/big-pharma-likely-to-aim-legal-firepower-at-drug-price-measures. ↩︎
17. Benjamin N. Rome, Sarosh Nagar, and Alexander C. Egilman, “Simulated Medicare Drug Price Negotiation Under the Inflation Reduction Act of 2022,” JAMA Health Forum 4, no. 1 (2023): e225218. https://doi:10.1001/jamahealthforum.2022.5218. ↩︎
18. Congressional Budget Office, “Estimated Budgetary Effects of Public Law 117-169, to Provide for Reconciliation Pursuant to Title II of S. Con. Res. 14, September 7, 2022, https://www.cbo.gov/system/files/2022-09/PL117-169_9-7-22.pdf. ↩︎
19. Kaustuv Basu, “Drug Price Law to Spur Creative Claims as Industry Readies Fight,” Bloomberg Law, September 29, 2022, https://news.bloomberglaw.com/health-law-and-business/drug-price-law-to-spur-creative-claims-as-industry-readies-fight. ↩︎
20. Kevin Dunleavy, “Since Biden Took Over, Big Pharma Has Spent $205 Million to Protect Drug Price Status Quo, Analysis Finds,” Fierce Pharma, August 16, 2022, https://www.fiercepharma.com/pharma/biden-took-over-big-pharma-has-spent-205-million-protect-drug-price-status-quo. ↩︎
21. Annika Kim Constantino, “Federal Judge Tosses Lobbying Group’s Lawsuit Challenging Medicare Drug Price Negotiations,” CNBC, February 13, 2024, https://www.cnbc.com/2024/02/13/medicare-drug-price-negotiations-judge-tosses-phrma-lawsuit.html. ↩︎
22. Juliette Cubanski, Nolan Sroszynski, and Tricia Neuman, “Medicare Part B Drugs: Cost IMplications for Beneficiaries in Traditional Medicare and Medicare Advantage,” KFF, March 15, 2022, https://www.kff.org/medicare/issue-brief/medicare-part-b-drugs-cost-implications-for-beneficiaries-in-traditional-medicare-and-medicare-advantage/#methods. ↩︎