Last week, as part of fulfilling President Trump’s promise to lower drug prices and cut down on foreign governments’ freeriding, HHS put forth a new way of paying for physician-administered drugs within Medicare, the International Price Index (IPI) Model.

The model aims to:

Reduce the price Medicare pays for a set of costly drugs to closer to what other countries pay. Remove perverse incentives that encourage the prescribing of more expensive drugs. Reduce physician burden associated with “buy and bill” by enabling private sector vendors to play a larger role in the purchase and distribution of these drugs.

To help people understand how the IPI model will accomplish these goals, we thought it would be useful to answer some questions that have been asked since the model’s release.

How much money will this save patients and Medicare?

The model is projected to save the Medicare and Medicaid programs more than $17 billion over its first five years, and more than $50 billion in its first eight years.

Because Medicare beneficiaries without other coverage pay 20 percent of physician-administered drug payments as coinsurance, they would see up to $3.4 billion in savings over the first five years. Here are two examples:

A senior who receives an eye medicine that currently costs Medicare $1,800 a month, but other countries just $300, would see the coinsurance drop from around $4,400 a year to around $900 a year after full implementation of the proposal.

Some Medicare beneficiaries use a drug to fight infection that currently costs Medicare $4,700 every time they receive chemotherapy. On average, it costs other countries $1,100. These beneficiaries would see their coinsurance drop from over $900 every time they use the drug to under $300 after full implementation of the proposal.

How will this model affect patient access? Could this change my Medicare benefits?

The IPI model does not include any restrictions on patient access or choice of drugs. This stands in marked contrast to proposals that would impose formularies in order to negotiate down drug prices. Given the size of the U.S. drug market and the fact that the U.S. will continue to pay 126 percent of what other countries pay, we believe manufacturers will be motivated to support the model.

If HHS believes in this proposal, why is it only being implemented in half the country?

This is a significant shift in how Medicare pays for these expensive drugs, and the administration wants to go about it in a deliberative process, taking into account the concerns of all stakeholders involved.

The size of the model and its gradual schedule for implementation gives manufacturers time to adjust their global pricing strategy as they wish, driving changes to their business model but not on an unrealistic timeframe.

The model is also being rolled out for half of hospitals and physicians, and gradually implemented, so that the various effects of the model —such as on drug prices, quality of care received, and patient adherence to medications—can be monitored and evaluated.

As the model is implemented, there is potential to scale it up further. Moreover, as payments within the model are reduced, the average sales price Medicare pays will drop, reducing what patients outside the model owe.

Is this a free-market model in keeping with the U.S. system that has served patients so well—or is it freeloading off of socialist price-setting systems?

The model replaces an artificially high price point currently used in the program—an average of what all private payers in the U.S. pay for a drug, the average sales price or ASP—with a more rational price point, between that average of private payers and the average of what foreign governments pay for these drugs.

Today, other countries use a variety of means to negotiate down prices, including “reference pricing,” which sets the price a government will pay based on what peer countries pay.

As pointed out in the President’s American Patients First drug-pricing blueprint, when the United States runs a reimbursement system without any meaningful way to obtain discounts on certain drugs, reference-pricing systems can continually drive prices down in other countries while manufacturers’ profits are supported by U.S. prices.

But under the IPI model—which uses other countries’ prices to calculate U.S. prices but does not aim to match them—all wealthy countries would now be using competitive models for pricing this set of costly drugs. The pharmaceutical industry would finally be pressured to fairly allocate the burden of funding innovation across wealthy countries.

The model will also boost free-market competition through its two other prongs: removing incentives created by the current Medicare payment system that encourage prescribing of expensive drugs and removing government barriers that prevent private-sector vendors.

The administration says this is taking advantage of discounts that drug manufacturers voluntarily give to other wealthy countries. Are those discounts really voluntary, or are they essentially mandatory in order to have access to European markets?

Drug companies choose to sell to other wealthy governments at significant discounts in order to take advantage of the volume those payers offer. They have decided this is a workable business model for them.

Under the IPI model, companies will be able to sell drugs to Medicare, a larger payer than any other, at a fraction of the discount they give other countries. This is a voluntary arrangement that would represent a rebalancing of market power between the U.S. and other countries.

Will this proposal harm incentives for investment in innovation?

The best way to support future pharmaceutical innovation is to build a sustainable market-based system for pricing prescription drugs, and that is the goal of this proposal.

While this proposal would aim to cut drug prices in the United States, and pharmaceutical industry profits could be impacted, the pharmaceutical industry has offered no evidence for how $17 billion in savings over five years, representing less than 1 percent of pharmaceutical R&D spending during that time, could have a meaningful effect on innovation. The $17 billion also represents the upper limit for what drug companies may see in decreased revenue in the first five years, because it assumes no change in pricing contracts with other countries.

In fact, bringing more reasonable pricing to physician-administered drugs will help rebalance a distortion created by the fact that Medicare currently overpays for these drugs, while paying more competitive prices for pharmacy-dispensed drugs in Part D—using negotiation tools that industry has resisted in Part B. This may be distorting incentives and encouraging the development of drugs paid for by Part B instead of Part D.

Could this drive up prices for private payers here in the U.S.?

If pharmaceutical companies end up reacting to lower prices in Medicare by pushing up prices elsewhere, commercial payers have negotiation abilities not available within Medicare to push back.

At the same time, pharmaceutical companies are in the driver’s seat when deciding to sell their products at the prices negotiated in foreign markets. The model would encourage manufacturers to cut down on foreign freeriding through higher prices abroad, because pushing up prices abroad will lessen the discounts that pharmaceutical companies will be forced to offer here in the U.S. This will create a more balanced system of support for innovation

Will doctors and hospitals see cuts to the compensation they receive as add-on payments for administering drugs?

The model will increase the add-on compensation available for provider costs associated with drugs covered by the IPI model, by undoing a cut to compensation that was imposed by budget sequestration (from 6 percent of ASP to 4.3 percent). Further, ASP will still be used to calculate the overall level of add-on compensation available, so physicians would not see compensation cut because they are included in the model where prices are lower.

At the same time, physicians and hospitals would be relieved of the cost and activity involved in buying and holding drugs, which they would now contract out to private vendors.

We are open to comment on the exact details of how to distribute compensation in a way that minimizes disruption while making compensation independent of pricing (for instance, by paying based on overall spending by class of drug or specialty). The aim is to keep physicians and hospitals’ compensation whole while removing any incentives to administer more expensive drugs. For instance, the model would pay the same whether doctors prescribe a branded biologic or a lower-cost biosimilar, allowing patients to benefit from lower drug costs. HHS is eager to engage with providers on how to structure the new compensation system in a way that removes perverse incentives but keeps compensation steady.

Isn’t this going to cut the margins that 340B hospitals receive on drugs they purchase at a discount?

We are aware of the complex interaction between the 340B program and Medicare Part B compensation for drugs. HHS is open to better understanding how hospitals that invest significant resources into serving vulnerable populations could be impacted by the IPI model.

We are interested in comments on appropriate approaches to these addressed concerns. As Secretary Azar has said, HHS will look at how some of the substantial savings generated by the model can be used to ensure that disruption is minimized.

If this model works, why not apply the same thinking to Medicare Part D?

Medicare Part D successfully negotiates deep discounts for pharmacy-dispensed drugs—in some cases, lower prices than are paid by European countries. But Medicare Part B pays significantly higher prices than other countries do for the same set of physician-administered drugs, which is the challenge the IPI model addresses.

The President’s American Patients First blueprint for lowering drug prices and out-of-pocket costs raises the possibility of bringing the successful competitive strategies used by Medicare Part D to negotiate for drugs in Medicare Part B, but these proposals have met with resistance from the drug industry. The IPI model is a more direct approach, which can be implemented administratively, to use a new, international index to recalculate the amount the U.S. pays for these drugs.

The blueprint also lays out other ways to bring lower prices to all parts of the Medicare program, not just through the IPI model but also through new negotiating tools for Medicare Advantage and Medicare Part D.

How does this differ from the Obama administration’s Part B demo in 2016?

The IPI model is intended specifically to avoid some of the problems posed by the 2016 Part B demonstration, by taking a more deliberative approach and aiming to leave both Medicare providers and beneficiaries in a better position financially.

Providers: The IPI model would keep provider compensation steady—and actually undo cuts to compensation imposed by sequestration—while the Part B demo would have cut compensation for many prescribers of expensive drugs, by, in some cases, replacing the 6 percent add-on payment with a 2.5 percent add-on payment and a flat fee. The Part B demo proposed these cuts to physician compensation without addressing the underlying problem of runaway prices for physician-administered drugs.

Beneficiaries: Under the IPI model, as prices are cut, beneficiaries’ cost-sharing for most drugs will be reduced significantly. Under the Part B demo, cost-sharing for a given drug would not have changed significantly, or could have even gone up.

Scale: The Part B demo was also proposed for almost all drugs in Medicare Part B, and the significant majority of providers, while the IPI model would apply only to the most costly drugs with the greatest pricing differences at home and abroad, and to half of providers.

Why would vendors participate? How does the role for vendors in IPI differ from the Competitive Acquisition Program, which almost no vendors joined?

In the 2000s, the Competitive Acquisition Program (CAP) was implemented as an optional program that allowed physicians to buy Part B drugs from a private vendor rather than purchasing and holding the drugs themselves. There are numerous differences between the CAP and the IPI model.

More incentives for participation: Because the CAP was an optional program that removed physicians’ compensation for buying and holding the drugs, there was great uncertainty over whether physicians would participate, which made it an unappealing opportunity for private vendors. Under the IPI model, physicians will still receive an add-on payment even when private vendors take title to drugs.

More flexibility: Further, the CAP did not permit vendors to order drugs as needed, creating great financial risk in ordering drugs. The IPI model would include significant new flexibilities that will make it easier to operate as a vendor.

More choice of vendors: Under the CAP, only specialty pharmacies were allowed to act as vendors, while the IPI model would permit hospitals, physicians, pharmacies, manufacturers, group-purchasing organizations, Part D plans, or other entities to participate.

Shouldn’t something as significant as this go through Congress?

Congress has given the Secretary broad powers to test changes to payment policies within the Medicare program, through the Centers for Medicare and Medicaid Innovation and other means.

The IPI model is put forth through the most transparent means available to HHS—following two RFIs and coming in an Advance Notice of Proposed Rulemaking—and will take the form of a rigorously assessed payment and service-delivery model.

HHS would welcome action from Congress, however, on ideas put forth by the IPI model or other ways to introduce competition to how Medicare pays for physician-administered drugs.