How Could the Price of Remdesivir Impact Medicare Spending for COVID-19 Patients?

On May 1, 2020, the Food and Drug Administration (FDA) issued an Emergency Use Authorization for remdesivir, a direct acting antiviral drug, for the treatment of COVID-19. 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. Remdesivir, branded as Veklury, is manufactured by Gilead. Gilead has donated the first 1.5 million doses of remdesivir at no cost, but the company has yet to set a price for the drug or make it commercially available. Because a relatively large share of COVID-19 cases and hospitalizations are among older adults, there is both optimism about the drug’s potential benefits for Medicare beneficiaries and concern about its potential cost to Medicare. If remdesivir has a high price tag, it could have implications for the fiscal health of hospitals and the Medicare program.

The vast majority of Medicare spending for prescription drugs occurs under the Medicare Part D program, which covers retail prescription drugs filled at a pharmacy, typically in pill form but sometimes injected by patients themselves. Medicare also covers drugs under Parts A and B. Part B covers infused medicines administered by physicians on an outpatient basis, including many cancer treatments. Remdesivir is expected to be covered under 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 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, 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.

What Are the Implications of the Price of Remdesivir?

Medicare’s payment system for inpatient services, and the lag time between adoption of new technology and the add-on payment for it, elevates the importance of questions about how much Gilead will charge for remdesivir. Ballpark amounts from the Institute for Clinical and Economic Review, or ICER, an independent drug pricing group, range from $10 (cost of production) to around $4,500 per treatment, which is a price designed to capture the value of the drug’s clinical improvements. Gilead has not yet released a price for the drug but stated it will not charge as much as $30,000 or $40,000. Hospitals often 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. However, the ability to negotiate significant discounts for remdesivir (if needed) may be limited since there are no competing products on the market. If similar drug treatments enter the market at a later date, that could increase GPO leverage to obtain discounts for remdesivir.

Currently, the DRG that CMS has told hospitals to use for COVID-19 patients reimburses them about $16,000 on average, after accounting for a temporary 20% increase in inpatient reimbursement for COVID-19. For the most severely ill patients who are on a ventilator for more than four days, reimbursement averages about $48,000. Because the DRG covers both prescription drug costs and other costs of a hospitalization, whether hospitals experience net savings or costs from the introduction of remdesivir depends on how any savings related to other hospital costs compare to the price paid for the medicine. This will drive whether there is a need for a new technology add-on payment.

Several possible scenarios can be played out based on different pricing levels for remdesivir. If the price of remdesivir is high relative to Medicare reimbursement, it may be more difficult for safety net hospitals to absorb the added cost than it is for hospitals that get a relatively large share of their revenue from private insurance, which tend to have higher margins. If the price of remdesivir is on the low end of estimates, the current Medicare reimbursement levels for COVID-19 patients may be sufficient to cover the cost of providing the antiviral drug as part of the standard course of treatment. With a mid-range price, it is possible that savings on other types of inpatient health care may offset the added cost of providing the drug to patients who need it, although the impact is likely to vary across hospitals, depending on their margins and the number of patients receiving remdesivir.

If the price of remdesivir is relatively high, Medicare may increase payments to hospitals to cover the new cost, such as through a new technology add-on payment. This could potentially exacerbate the current challenges facing the Medicare Hospital Insurance Trust Fund if it increases hospital spending above expected levels. Alternatively, extra funding could be made available outside of Medicare’s inpatient reimbursement system, potentially using some of the $175 billion allocated for grants to health care providers in the Coronavirus Aid, Relief, and Economic Security (CARES) Act and the Paycheck Protection Program and Health Care Enhancement Act. However, as MedPAC has noted in the context of policies to reimburse hospitals for expensive CAR-T therapies, the “establishment of special payment methods for high-cost products could create incentives for manufacturers to set high prices as a way to circumvent the normal payment systems.”

The potential direct 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. Further, if the cost of remdesivir results in higher per capita Medicare expenditures under traditional Medicare, Medicare spending for Medicare Advantage plans could rise.

While the cost of remdesivir could have non-trivial implications for hospitals and Medicare, beneficiaries who receive remdesivir during an inpatient stay will be largely shielded from those costs. What patients pay for inpatient hospital stays is generally unrelated to the cost of 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. There could be some impact on traditional Medicare beneficiaries’ out-of-pocket costs for Part A in the future, however, depending on the degree to which remdesivir affects Medicare Part A spending, because increases in Medicare’s Part A deductible and copays are based on percentage increases in payment rates to hospitals.

Uncertainty around 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 use the drug once the donated doses run out? 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.

Conclusion

While the out-of-pocket cost to Medicare COVID-19 patients will not change under any pricing scenario, the price of remdesivir could matter greatly to hospitals and the Medicare program, which might have to foot the bill for increased reimbursement to hospitals to ensure access to remdesivir, the only antiviral treatment currently in use to treat COVID-19.