What Counts in the Benchmark

The single most important question about drug spend in any value-based arrangement is which drug spending counts. The answer determines whether an investment in pharmacy management pays the organization back or benefits someone else.

The Medicare answer

In the Medicare Shared Savings Program, the regulation is explicit. “Shared savings” means “a portion of the ACO’s performance year Medicare fee-for-service Parts A and B expenditures, below the applicable benchmark, it is eligible to receive payment for from CMS.”

Parts A and B. Part D is not in the benchmark.

The practical consequence is specific and frequently misunderstood:

Drug spending	In an MSSP benchmark
Part B administered drugs, such as infusions in a physician office or hospital outpatient department	Yes, as Part B expenditures
Part D retail and specialty pharmacy drugs	No

So an MSSP ACO has a direct financial stake in the infused oncology drug and no direct stake in the oral one dispensed by a pharmacy, even when they treat the same condition.

Why this creates a strange incentive

An ACO investing in medication adherence for heart failure improves outcomes and reduces admissions, which it captures as Part A savings. Good.

An ACO whose members switch from an infused therapy to a self-administered equivalent sees its Part B spending fall and its benchmark performance improve, while the total cost to Medicare may be unchanged or higher because the Part D spending rose. The ACO is rewarded for a shift that did not save the program anything.

That is not a criticism of anyone’s conduct. It is what happens when a benchmark boundary does not match the clinical reality, and it is the same class of problem as the episode overlap in the specialty course.

Carve-in and carve-out in commercial arrangements

Commercial and Medicare Advantage arrangements vary, and the question has to be asked deal by deal. The contracting course covered how to locate operative terms in exhibits rather than in the model name; this is one of the most consequential items to find.

The questions to ask of any arrangement:

• Is pharmacy spend in the total cost of care calculation? If not, pharmacy management benefits the payer or the PBM rather than the organization at risk.
• Which pharmacy spend? Retail, specialty, medical-benefit drugs, or some subset.
• Gross or net of rebates? A benchmark built on gross drug cost while rebates flow to the plan will systematically overstate what the organization can influence.
• Who supplies the data? An organization at risk for pharmacy spend it cannot see is in the position the employer course described.

Worth remembering: the rebate question is the one most often missed and it can invert a strategy entirely. If an organization is measured on gross drug cost, then switching a patient from a heavily rebated brand to a cheaper generic can look like savings while actually raising net cost to the payer, because the rebate disappeared. If it is measured on net cost, the calculation reverses. Nobody can run a rational formulary strategy without knowing which number they are being judged on, and that number lives in a contract exhibit rather than in any clinical guideline.

Key takeaways

• MSSP shared savings is defined on Parts A and B expenditures, so Part D sits outside the benchmark.
• Part B administered drugs are included, creating asymmetric incentives between infused and oral therapies.
• Commercial arrangements vary and must be checked term by term.
• Whether the measure is gross or net of rebates can reverse which formulary strategy appears to save money.

Sources

• 42 CFR 425.20, Medicare Shared Savings Program definitions (opens in a new tab)
• CMS, Shared Savings Program guidance and regulations (opens in a new tab)