As COVID-19 cases and hospitalizations continue to surge, Gilead has announced that it will charge most payers $3,120 for a five-day inpatient course of treatment with the anti-viral drug remdesivir and a lower price of $2,340 for government purchasers in the U.S. Remdesivir is not a cure for COVID-19, but it has been recommended for the treatment of hospitalized patients with severe COVID-19, based on preliminary evidence suggesting that it may shorten recovery time. Gilead donated the first 120,000 treatment coursesof remdesivir, and the federal government has announced it will be distributing 500,000 additional treatment courses of the drug to hospitals through September 2020 at the $3,120 price.
The lower price for remdesivir that is available for government purchasers will not be paid by Medicare. That price is reserved for entities buying directly from the federal government, which includes the Department of Veteran’s Affairs (VA), the Department of Defense, the Public Health Service, and the Coast Guard, which buy drugs directly from the federal government and get price discounts that are required by law. But unlike these other governmental entities, Medicare does not purchase prescription drugs directly for its beneficiaries.
Prescription drugs are reimbursed differently under Medicare Parts A, B and D. The cost of drugs that are administered in inpatient settings covered under Part A is included in Medicare payments to hospitals for each patient stay. Under Part B, Medicare reimburses providers for infused medicines that they purchase directly and administer on an outpatient basis, including many cancer treatments. The vast majority of spending on prescription drugs used by Medicare beneficiaries is through private prescription drug plans that contract with Medicare under the Medicare Part D program. Part D covers retail prescription drugs filled at a pharmacy, typically in pill form but sometimes injected by patients themselves.
Remdesivir is expected to be covered under Medicare Part A, which pays for inpatient care, because the drug was administered on an inpatient basis in clinical trials. In this brief, we discuss how drugs provided in inpatient hospital settings are covered and reimbursed for beneficiaries in traditional Medicare under current law.
How Are Drugs Covered and Reimbursed Under Medicare Part A?
In traditional Medicare, Part A covers inpatient hospitalizations and eligible stays in skilled nursing facilities (SNF). Any drugs that Medicare beneficiaries use during an inpatient stay in a hospital are reimbursed through Part A. Instead of reimbursing providers for those drugs directly, as is done for outpatient infusions covered through Part B, Medicare typically reimburses hospitals a fixed amount for all services received by each patient. Those fixed-amount payments are based on diagnosis-related groups (DRGs) – a payment that includes the cost of any medicines a patient receives during the inpatient stay, as well as costs associated with other treatments and services.
Each DRG has a payment weight assigned based on the average resources required to treat Medicare patients for a set of included conditions. Those weights are then adjusted for hospital-based factors such as local labor costs and case mix, as well as patient-specific factors such as severity and comorbidities. Hospitals that treat a higher share of low-income Medicare and Medicaid patients receive increased reimbursements, as do teaching hospitals. Medicare also makes additional so-called “outlier” payments to reimburse hospitals for cases that are particularly costly.
In some cases, Medicare payments to the hospital are increased for beneficiaries who receive a qualifying new technology, which could mean a new treatment modality, device, or drug. Because DRG payment rates are calculated annually and are based on previous Medicare claims, this can create a lag of two to three years before new technologies are factored into DRG payments. To address that lag, Congress created the “new technology add-on payment,” which is a temporary additional payment for hospitals using qualifying new technologies. In order to qualify for an add-on payment, the new technology is evaluated on several factors, including whether the technology significantly improves clinical outcomes for the Medicare population as compared to other available treatments.
A recent example of a new technology that qualified for an add-on payment is chimeric antigen receptor (CAR) T-cell therapy treatment for cancer. The CAR-T therapies currently on the market are made by Novartis and Gilead’s subsidiary Kite and cost between $373,000 and $475,000 for the treatment itself, with additional costs related to the hospital stay. The new technology payment for these medicines was originally set at $186,500 and was later increased to $242,450. In May 2020, CMS proposed a separate DRG for CAR-T therapies because the period when the treatments are eligible for the new technology add-on payment is set to expire later this year.
The process for applying for a new technology add-on payment takes time. Applications were due in the Fall of 2019 for an add-on payment for 2021. These new technology add-on payments do not need to be offset by other spending reductions, so they can increase overall Medicare spending. At the time Gilead made its pricing announcement, the company did not say if it was planning to ask for an add-on payment.
How Will Hospitals Obtain Remdesivir for Medicare and Other Patients?
According to the federal government’s agreement with Gilead, initial doses of remdesivir will be distributed to hospitals at the $3,120 price. This arrangement is unconventional but reflects the unique challenges associated with ensuring access to remdesivir while supplies of the treatment are constrained. More typically, hospitals purchase inpatient and outpatient medicines through group purchasing organizations (GPOs), which make bulk purchases of prescription drugs, devices and other items for many hospitals at one time. GPOs can often negotiate discounts on drugs, but their ability to negotiate significant discounts for a given drug may be limited if there are no competing products on the market. If new and effective COVID-19 drug treatments enter the market at a later date – or if drugs currently on the market for other purposes are shown to be effective alternatives to remdesivir for COVID-19 treatment – that could increase GPO leverage to obtain discounts for remdesivir in the future or shift utilization to lower cost therapies.
What Are the Implications of the Price of Remdesivir?
Currently, there are a range of DRG payments that hospitals can receive for Medicare COVID-19 patients, depending on a given patient’s principal and secondary diagnoses. According to recently-released Medicare claims data for COVID-19 patients, the average Medicare payment per hospitalization for patients in traditional Medicare is $23,000. For the most severely ill patients who are on a ventilator for more than four days, reimbursement is estimated to be about $40,000. These amounts include a temporary 20% increase in inpatient reimbursement for COVID-19, which was authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act and will last for the duration of the COVID-19 public health emergency.
Assuming no add-on payment or modification of these DRG payments, the price of remdesivir accounts for roughly 8% to 13% of total Medicare payments for DRGs associated with COVID-19. Because the DRG covers both prescription drug costs and other costs of a hospitalization, whether hospitals experience net savings or costs from using remdesivir for any given patient depends in part on the cost of other treatments provided to that patient and whether the use of remdesivir might yield savings through fewer inpatient days or lower utilization of other inpatient services.
The direct cost impact of remdesivir for Medicare, at least in the short term, is limited to spending under traditional Medicare, which covers two-thirds of Medicare beneficiaries. The other one-third of beneficiaries are enrolled in Medicare Advantage plans, which receive capitated payments from the federal government to provide all services covered under Parts A. Medicare Advantage plans negotiate prices directly with providers and the amount of those payments will not change in the near term to account for a newly approved medicine. There is some evidence that Medicare Advantage plans typically pay rates that are similar to payments under traditional Medicare. If Medicare rates per DRG increase under traditional Medicare, they may do the same under Medicare Advantage.
The price of remdesivir is only one side of the total Medicare spending equation. There is also great uncertainty about quantity, i.e., how many Medicare patients will receive the drug? Quantity depends on several factors that cannot yet be measured or known precisely, including how widely the coronavirus continues to spread, how many beneficiaries are infected and become seriously ill enough to require hospitalization, which types of patients receive the drug, duration of treatment, and whether treatment protocols change in the future in a way that modifies who gets the drug, in which setting, and how much is used.
How Does the Price of Remdesivir Affect Beneficiary Out-of-Pocket Costs?
For Medicare beneficiaries with COVID-19 who receive remdesivir during an inpatient stay, the price of drug treatment is not a factor in their costs. What patients pay for inpatient hospital stays is generally unrelated to the cost of any services they receive. Traditional Medicare beneficiaries pay a $1,408 deductible in 2020 and daily copays for extended stays; Medicare Advantage enrollees typically pay a flat amount for each hospital stay and/or day, and most Medicare Advantage plans have waived cost-sharing for COVID-19 treatment. If spending on remdesivir leads to higher Part A spending in the future, there could eventually be some impact on traditional Medicare beneficiaries’ out-of-pocket costs for Part A, because increases in Medicare’s Part A deductible and copays are based on percentage increases in payment rates to hospitals.
While the out-of-pocket cost to Medicare COVID-19 patients will not change under any current or future pricing scenario for remdesivir as long as it is provided as part of an inpatient hospital stay, the drug’s price matters to public programs and private payers. Based on the current $3,120 price of remdesivir for hospitals, it is uncertain whether, over time, Medicare’s current reimbursement for hospitalized COVID-19 patients will be appropriate to fully cover the cost of remdesivir for all patients who need it.