BLOG: Medical vs. Pharmacy Benefit: A Look at UM Differences

Medicare medical and pharmacy benefits are very different in their utilization management (UM). As such, it is valuable to know the distinctions between benefits, as strategies differ depending on which ones apply.

The most significant differentiator is the fact that utilization is typically greater under the medical benefit, as Medicare does not do any prior utilization management. Rather, physicians can prescribe any medical benefit, including off-label use. The only prospective review the Centers for Medicare and Medicaid Services (CMS) provides is in the form of guidance through Local or National Coverage Determinations, although this is rarely used. Even less used is CMS retrospective review through claims or chart reviews to identify issues of fraud, waste or abuse.

This is vastly different from the pharmacy side, where utilization is tightly managed through private prescription drug plans (PDP) that manage the Medicare Part D benefit. These plans control utilization through prior authorization (PA) review, which includes the use of step therapy (ST), co-payment differences, quantity limits (QL) and exclusion from a plan’s formulary. As a result, utilization management is significantly more restrictive under the pharmacy benefit over the medical benefit.

 Medical Pharmacy
DefinitionMD or DME administeredDrugs except certain vaccines
Medicare BenefitPart BPart D
AdministratorCMSPrivate Part D Plans
PhysicianBuy & Bill 
IncentivePositive margin from Buy & Bill of higher-cost treatments because of margin 
FinanceOpen-endedCMS -> PDP / capitated amount responsible for loses
PriceASP + 6%Negotiated between PDP and pharmaceutical manufacturers
ACOIncluded in total cost of care, so motivated to decrease medical utilizationNot included in total cost of care, so motivated toward utilization to improve accountable clinical and financial outcomes
Utilization ManagementCoverage determination

retrospective review for fraud, waste or abuse

Prospective PA, ST, Tiering, QL and formulary exclusion
CoverageOpen6 protected classes that follow USP model formulary, but PDPs may have closed formularies
OOP20% although Medigap and duals $0100% – 25% – 5%
PAPNot allowed

Utilization differences also exist with prescribers and Accountable Care Organizations (ACOs). Here the medical benefit enjoys prescribers’ incentives that favor the use of more expensive treatments, as prescribes are reimbursed through Buy & Bill and receive ASP + 6%. This is opposed to the pharmacy benefit, where prescribers have no financial incentive. These incentives are counter-balanced by the motivations of ACOs. Even though ACOs are responsible for total cost of care by law, this does not include the Medicare Part D pharmacy benefit but does include the medical benefit. As a result, in therapeutic areas that have treatments in both pharmacy and medical benefits, an ACO would favor use of the pharmacy benefit, as it looks to lower its total cost of care through reducing use of medical benefits.

How a product or service is defined is not always clear, as the definitions for pharmacy and medical have a great deal of grey area. The Food and Drug Administration (FDA) Statutory definitions of “drug” (for pharmacy benefits) in the official United States Pharmacopoeia (USP), official Homoeopathic Pharmacopoeia of the United States, official National Formulary (or any supplement to any of them) is “intended for use in the diagnosis, cure, mitigation, treatment, or prevention of disease; and intended to affect the structure or any function of the body.”

The FDA defines “device” (for medical benefits) as “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including any component, part, or accessory, which is also recognized in the official National Formulary, or the USP, or any supplement to them, intended for use in the diagnosis of disease or other conditions; or in the cure, mitigation, treatment, or prevention of disease; or intended to affect the structure or any function of the body; and which does not achieve its primary intended purposes through chemical action within or on the body and which is not dependent upon being metabolized for the achievement of its primary intended purposes.” Critical to note here is the power of USP in deciding whether a product/service falls under the drug or device category.

For the new class of treatments, such as digital therapeutics, there exist questions as to which benefits class these best fit – medical or pharmacy. The answer is, of course, based on perspective. For CMS, if digital therapeutics existed under the pharmacy benefit, the responsibility for utilization management and costs would fall on the prescription drug plans. For manufacturers, utilization management would be greater under the Medicare medical benefit, as CMS currently does not perform any prospective authorization.

The other stakeholders are patients, who have a range of out-of-pocket (OOP) expenses with no ability for patient assistance programs under either benefit. Under medical, for those with Medigap or dual eligibility, patients access this benefit at $0 OOP, while on the pharmacy side, it depends where on the benefit they fall with a 100% deductible – 25% and 5% catastrophic, which currently has no maximum OOP. In this situation, utilization would be higher under the medical benefit for those enjoying $0 OOP.

Knowing these unique differences between medical and pharmacy benefits under the Medicare benefit is critical to navigating coverage. But some manufacturers may have an ability to direct, at least, which channel they follow – medical or pharmacy.

Schedule a meeting with one of our experts today.

Dr. Richard Stefanacci
Chief Medical Director

Richard has focused his career on improving health outcomes, especially for some of the most vulnerable populations. This has been achieved through several avenues, beginning with his continued active role as a treating internist/geriatrician.…