Medicare Outpatient Drugs
Program Payments Should Better Reflect Market Prices Gao ID: GAO-02-531T March 14, 2002In some cases, Medicare pays significantly more for covered outpatient drugs than the actual costs to the physicians and pharmacy suppliers. Attempts to reduce these payments have been met with provider claims that overpayments for the drugs are needed to cover underpayments for administering or delivering them. Medicare's method for establishing drug payments is flawed. Medicare pays 95 percent of the average wholesale price (AWP), which, despite its name, is neither an average nor a price that wholesalers charge. Instead, it is a number that manufacturers derive using their own criteria. There are no requirements or conventions that AWP reflect the price of actual drug sales. Widely available purchase prices for drugs in 2001 were substantially below AWP. For both physician-billed drugs and pharmacy supplier-billed drugs, Medicare payments often far exceeded widely available prices. Physicians and pharmacy suppliers contend that the excess payments for covered drugs are necessary to offset what they claim are inappropriately low Medicare payments or no such payments for services related to the administration or delivery of these drugs. Although physicians receive an explicit payment for administering drugs, Medicare's payment policies for delivering pharmacy supplier-billed drugs and related equipment are uneven. Pharmacy suppliers billing Medicare receive a dispensing fee for one drug type--inhalation therapy drugs--but not for other covered drugs, such as infusion therapy or covered oral drugs. Other payers and purchasers, such as private health plans and the Department of Veterans Affairs (VA), use different approaches to pay for or buy drugs that may be instructive for Medicare. In particular, VA uses the leverage from the volume of federal drug purchases to secure verifiable data on actual market transactions, and it uses the prices paid by manufacturers' best customers to set Federal Supply Schedule prices.
GAO-02-531T, Medicare Outpatient Drugs: Program Payments Should Better Reflect Market Prices
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United States General Accounting Office:
GAO:
Testimony:
Before the Subcommittee on Health, Committee on Finance, U.S. Senate:
For Release on Delivery:
Expected at 10:00 a.m.
Thursday, March 14, 2002:
Medicare Outpatient Drugs:
Program Payments Should Better Reflect Market Prices:
Statement of Laura A. Dummit:
Director, Health Care”Medicare Payment Issues:
GAO-02-531T:
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here as you discuss Medicare's payments for covered
outpatient prescription drugs. As you know, Medicare pays for only a
limited number of outpatient drugs and biologicals-”largely those that
cannot be self-administered or require certain medical equipment to be
administered.[Footnote 1] The covered drugs are typically provided by
a physician, as is the case for chemotherapy drugs, or through
pharmacy suppliers, as for respiratory drugs.
Medicare's payments for covered drugs have been scrutinized for
several years. Recent studies by the Department of Justice and the
Office of the Inspector General (OIG) of the Department of Health and
Human Services (HHS) show that Medicare's payment for covered
outpatient drugs in some cases is significantly higher than the actual
costs to the physicians and pharmacy suppliers who bill Medicare for
them.[Footnote 2] Yet attempts to reduce these payments have been met
with provider claims that overpayments for the drugs are needed to
cover underpayments for administering or delivering them. In September
2000, the Health Care Financing Administration (HCFA)-”now the Centers
for Medicare and Medicaid Services (CMS)[Footnote 3]-”took steps to
reduce Medicare's payment for covered outpatient drugs by authorizing
Medicare carriers, the contractors that pay drug claims, to use prices
obtained in Justice Department investigations of providers' drug
acquisition costs in setting payment rates. HCFA retracted this
authority in November 2000 following concerns raised by providers that
reducing Medicare's drug payments could affect beneficiary access to
these drugs and related services. In December 2000, as part of recent
Medicare legislation,[Footnote 4] the Congress directed us to study
Medicare's payments for covered outpatient drugs and make
recommendations for payment methodology refinements. In September
2001, we reported our findings and made recommendations.[Footnote 5]
In October 2001, we also reported on the adequacy of Medicare payments
to oncologists for administering chemotherapy drugs as directed by the
Congress.[Footnote 6]
My remarks today will focus on (1) Medicare payment policies for
covered outpatient drugs and related services to administer or deliver
the drugs and (2) opportunities to improve the appropriateness of
Medicare's payments by adapting key features of other federal payers'
reimbursement policies. My comments are based primarily on our studies
of Medicare payments for covered outpatient drugs and for administering
chemotherapy.
In summary, Medicare's payment for covered outpatient drugs is
significantly higher than prices widely available to providers.
Medicare's method for establishing drug payments is flawed. Medicare
pays 95 percent of the average wholesale price (AWP), which, despite
its name, is neither an average nor a price that wholesalers charge.
Instead, it is a number that manufacturers derive using their own
criteria; there are no requirements or conventions that AWP reflect
the price of any actual sale of drugs by a manufacturer. Manufacturers
report AWPs to organizations that publish them in drug price
compendia, and Medicare carriers base providers' payments on these
published AWPs.
We found that widely available prices at which providers could
purchase drugs in 2001 were substantially below AWP. For both
physician-billed drugs and pharmacy supplier-billed drugs, Medicare
payments often far exceeded widely available prices. Despite concerns
that the discounts available to large purchasers would not be
available to physicians with a small number of drug claims, these
physicians with low volumes reported that their purchase prices were
the same or less than the widely available prices we documented.
Physicians and pharmacy suppliers contend that the excess payments for
covered drugs are necessary to offset what they claim to be
inappropriately low Medicare payments or no such payments for services
related to the administration or delivery of these drugs. For
administering physician-billed drugs, such as those used in
chemotherapy, Medicare makes explicit payments under the physician fee
schedule, typically through the practice expense component of the
payment. Our October 2001 report on practice expense payments under
the fee schedule showed that, overall, payments to oncologists
relative to their estimated practice expenses were comparable to those
for all specialties. But we also found that HCFA made inappropriate
modifications to its basic method of setting these payments, which
resulted in a lowering of the average fees paid for the administration
of chemotherapy.
While physicians receive an explicit payment for administering drugs,
Medicare's payment policies for delivering pharmacy supplier-billed
drugs and related equipment are uneven. Pharmacy suppliers billing
Medicare receive a dispensing fee for one drug type”inhalation therapy
drugs”but there are no similar payments for the other covered drugs,
such as infusion therapy or covered oral drugs. Suppliers do receive
an additional Medicare payment for the rental or purchase of durable
medical equipment (DME) and related supplies that are used to
administer drugs, such as inhalation and infusion therapy, that
require DME. However, in 1998 we reported two problems with the
program's payments for DME”-a wide variety of products may be covered
under a single fee and fee schedule allowances were out of line with
current market prices.[Footnote 7] These problems may result in
overpayments that implicitly compensate for some service delivery
costs not covered by Medicare.
Other payers and purchasers, such as private health plans and the
Department of Veterans Affairs (VA), employ different approaches in
paying for or purchasing drugs that may be instructive for Medicare.
In particular, VA uses the leverage from the volume of federal drug
purchases to secure verifiable data on actual market transactions and
it uses the prices paid by manufacturers' best customers to set
Federal Supply Schedule (FSS) prices. VA also uses competitive bidding
to obtain lower prices for certain products for its own facilities.
These approaches may be instructive for Medicare provided that they
are adopted in ways that reflect Medicare's unique responsibilities
and characteristics.
In our view, Medicare should pay for each service appropriately and
not rely on overpayments for some services to offset inadequate
payments for complementary services. Our recommendation that Medicare
begin to establish payment rates using information about actual market
transactions for covered drugs at levels that reflect providers'
acquisition costs is consistent with this principle. We have also
recommended that the CMS administrator use consistent methods in
setting physician practice expense fees for all services, including
those for administering chemotherapy.
Background:
While the traditional Medicare program does not have a comprehensive
outpatient prescription drug benefit, the program does cover roughly
450 outpatient drugs. The outpatient drugs with the highest Medicare
payments and billing volume fall into three categories: those that
physicians bill for and that are typically provided in a physician
office (such as chemotherapy drugs); those that pharmacy suppliers
bill for and that are administered through DME, such as a respiratory
drug given in conjunction with a nebulizer;[Footnote 8] and those that
are also billed by pharmacy suppliers but are patient-administered and
covered explicitly in statute.[Footnote 9] In 1999, spending for
Medicare-covered outpatient prescription drugs totaled almost $4
billion.[Footnote 10]
Small Number of Products Accounts for Majority of Program Spending and
Volume:
Although Medicare reimburses providers for roughly 450 outpatient
drugs, spending is concentrated on a small number of products billed
by pharmacy suppliers and a few physician specialties. For example,
just 35 drugs accounted for 82 percent of Medicare spending and 95
percent of the claims volume in 1999. These 35 products included
certain injectible drugs to treat cancer, inhalation therapy drugs,
and oral immunosuppressive drugs, such as those used by organ
transplant patients. Physician-billed drugs accounted for the largest
share of Medicare program spending, while pharmacy supplier-billed
drugs constituted the largest share of the billing volume. Drugs
provided in physician offices accounted for more than 75 percent of
total Medicare spending for drugs in 1999 and just three specialties”
hematology oncology, medical oncology, and urology”submitted claims
for 80 percent of the total physician billings for outpatient drugs.
By contrast, pharmacy suppliers accounted for more than 80 percent of
Medicare drug billing volume and less than 20 percent of corresponding
payments. Two inhalation therapy drugs accounted for 88 percent of the
Medicare billing volume for pharmacy-supplied drugs administered in a
patient's home.[Footnote 11]
Medicare Payments for Drugs Are Based on "Prices" Set by Manufacturer:
Medicare bases its reimbursements to physicians and other providers
for a covered outpatient drug on the product's AWP, with Medicare
beneficiaries contributing 20 percent of the payment. The AWP,
however, is neither "average" nor "wholesale;" it is simply a number
assigned by the product's manufacturer. The AWP is often described as
a "list price," "sticker price," or "suggested retail price,"
reflecting that it is not necessarily the price paid by a purchaser or
a consistently low, or "wholesale," price.
Because the term AWP is not defined in law or regulation, the
manufacturer is free to set an AWP at any level, regardless of the
actual price that purchasers pay. Manufacturers periodically report
AWPs to publishers of drug pricing data. While there is no required
frequency for manufacturers to report AWPs, most publishers said they
attempt to update AWPs at least annually. The Medicare-allowed amount,
or payment level, for each HCFA Common Procedure Coding System (HCPCS)-
coded drug is 95 percent of its AWP.[Footnote 12] Given the latitude
manufacturers have in setting AWPs, these payments need not be related
to market prices that physicians and suppliers actually pay for the
products.
Varying Payment Arrangements Affect Providers' Final Purchase Price:
Common drug purchasing arrangements can substantially reduce a
provider's actual acquisition price for a drug. Physicians and
suppliers may belong to group purchasing organizations (GPO) that
negotiate prices with wholesalers or manufacturers on behalf of GPO
members. GPOs may negotiate different prices for different purchasers,
such as physicians, suppliers, or hospitals. In addition, providers
can purchase covered outpatient drugs from general or specialty
pharmaceutical wholesalers or can have direct purchase agreements with
manufacturers. In these arrangements, providers may benefit from
transactions, including rebates and "chargebacks" that also reduce the
actual costs providers incur. Rebates offered by drug manufacturers or
wholesalers may be based on the number of different products purchased
over an extended period. Under a chargeback arrangement, the provider
negotiates a price with the manufacturer that is lower than the price
the wholesaler normally charges for the product, and the provider pays
the wholesaler the negotiated price. The manufacturer then pays the
wholesaler the difference between the wholesale price and the price
negotiated between the manufacturer and provider.
Medicare's Payment for Covered Outpatient Drugs Is Significantly
Higher than Prices Widely Available to Providers:
For the outpatient drugs accounting for the bulk of Medicare spending
and claims, Medicare payments in 2001 were almost always considerably
higher than wholesalers' prices widely available to physicians and
suppliers.[Footnote 13] This was true regardless of whether there were
competing drug products or whether a particular drug was available
from only one manufacturer. Physicians who had few Medicare claims for
covered drugs were able to obtain these wholesalers' prices or even
more favorable prices. Physicians and pharmacy suppliers told us that
the higher payments are necessary to cover costs of administering and
dispensing their drugs that Medicare does not pay. Our work indicates
that CMS's method of computing Medicare fees for physician-
administered drug claims, which are submitted primarily by
oncologists, inappropriately reduced those fees. Furthermore,
Medicare's coverage and payment policies for pharmacy supplier-billed
drugs are uneven: Medicare pays a dispensing fee for delivering some
pharmacy supplier-billed drugs; for others, however, Medicare makes no
explicit payment for delivery and administration services.
Wide Disparities Exist Between Drug Acquisition Costs and Medicare
Payments:
Physician-billed drugs account for the bulk of Medicare spending on
outpatient drugs. Of those billed by physicians, drugs used to treat
cancer accounted for most of Medicare's expenditures. The prices
available to physicians through wholesaler and GPO catalogs are far
lower than Medicare's payment. The catalog prices ranged from 13
percent to 34 percent less than AWP for most drugs that we examined
and up to 86 percent less for one. These prices indicate that
Medicare's payments for physician-administered outpatient drugs were
at least $532 million higher than providers' potential acquisition
costs in 2000. Further, the overpayment is likely even greater because
additional reductions provided to certain purchasers through
chargebacks, rebates, and other discounts drive down the actual
acquisition costs to providers even more.
Concerns have been expressed that providers who had few beneficiaries
requiring chemotherapy drugs either could not or do not obtain such
favorable prices. Therefore, we surveyed a sample of physicians who
billed Medicare for low volumes of chemotherapy drugs to see if they
were able to obtain discounts similar to those of providers with a
high volume of claims. More than one-third of these physicians who
billed for a low volume of drugs actually belonged to large, hospital-
based, or national chain oncology practices that likely had access to
widely available drug discounts. The low-volume providers who
responded to our survey reported similar or better discounts than the
widely available prices we documented, although these discounts may
not be as high as those obtained by high-volume purchasers.
Inhalation therapy drugs administered through DME and oral
immunosuppressive drugs represent most of the high-expenditure, high-
volume drugs billed to Medicare by pharmacy suppliers. As with
physician-billed drugs, Medicare's payments for pharmacy supplier-
billed drugs generally far exceeded the prices available to these
suppliers. Further, the discounts we found were largest for products
that could be obtained from more than one source. Based on the
discounts for six drugs billed primarily by pharmacy suppliers, we
found that Medicare's payments were at least $483 million more than
what the suppliers potentially paid in 2000. Specifically, two DME-
administered drugs, albuterol and ipratropium bromide, that accounted
for most of the pharmacy supplier-billed drugs paid for by Medicare
were available to pharmacy suppliers at prices that averaged,
respectively, 85 percent and 78 percent less than AWP. Two other high-
volume DME-administered drugs had prices averaging 69 percent and 72
percent less than AWP. Two of the high-volume oral immunosuppressives
were available from wholesalers with average discounts of 14 percent
and 77 percent. Although wholesale price information on the two other
oral drugs was not available, retail prices from online pharmacies
were as much as 13 percent and 8 percent below AWP.
Based on our findings, we recommended that Medicare revise its drug
payment policies to more closely parallel market prices that providers
actually pay to acquire drugs. To set such prices, Medicare needs to
use information on actual market prices, accounting for rebates and
other discounts. It is important in setting payment levels to be
mindful that providers' ability to secure discounts likely varies, and
that prices need to be sufficient to ensure that beneficiary access is
not compromised.
Current Drug Payments Called Necessary to Offset Inadequate Payments
for Related Services:
Physicians and pharmacy suppliers contend that the excess in
Medicare's payments for covered outpatient drugs compensates for
related service costs inadequately reimbursed or not explicitly
covered at all. Medicare payment policies for administering or
delivering a drug vary, depending on who provides the drug to the
patient. Physicians are compensated directly for drug administration
through the physician fee schedule. Pharmacy suppliers are compensated
for dispensing inhalation therapy drugs used with a nebulizer, which
make up the majority of their Medicare outpatient drug claims. No
explicit payments are made to pharmacy suppliers for dispensing other
drugs, but the suppliers receive payments for equipment and supplies
associated with DME-administered drugs.
Medicare pays physicians based on a fee schedule that includes rates
for administering chemotherapy. Payments for chemotherapy
administration are important because chemotherapy drugs represent the
bulk of Medicare payments for physician-administered drugs. Medicare's
payment for chemotherapy administration is usually determined by the
practice expense component of the fee schedule, as there is generally
no direct physician involvement with these services.[Footnote 14]
Payments for practice expenses were revised beginning in 1999. These
payments, which had been based on charges physicians had billed in
prior years, were recomputed to reflect the relative resources
required to provide each service. Implementation of these resource-
based practice expense payments has been controversial. This is in
part because the Congress required that payments be budget neutral so
that if one specialty's fees increased on average, some others would
have to be reduced. Such redistributions have occurred, and some are
significant. However, Medicare's physician payments were deemed
adequate in the aggregate, as almost all physicians participated in
Medicare and accepted the program's fees as payment in full, so that
budget neutrality appeared unlikely to cause access problems for
beneficiaries.
Oncologists argue that Medicare's payments for administering
chemotherapy are inappropriately low and that the excess Medicare drug
payments based on the AWP are needed to offset their losses. Yet,
oncology is one of the specialties to gain from the introduction of
new practice expense payments under the physician fee schedule. In our
October 2001 study on physicians' practice expenses under Medicare's
fee schedule, we showed that practice expense payments to oncologists
were 8 percent higher than they would have been if the prior payment
method had been maintained; we also showed that overall oncologists'
payments relative to their estimated practice expenses were close to
the average for all specialties.
While oncologists do not appear disadvantaged overall under the fee
schedule, adjustments that HCFA made to the basic method of computing
payments reduced fees for some oncologists' services, particularly
chemotherapy administration. In those adjustments, HCFA modified the
basic method in computing payments for services delivered without
direct physician involvement, like much of chemotherapy
administration.[Footnote 15] The modifications were intended to
correct perceived low payments for these services, but instead
resulted in reduced payments for some of these services, particularly
those provided by oncologists. Further, the agency reduced oncology's
reported supply expenses, one of the data elements used to compute
fees, to keep from paying twice for drugs that are reimbursed
separately by Medicare. Oncologists acknowledge that the supply
expense estimate needed to be reduced, but argue that the reduction
was too large. We recommended in our October 2001 report that
CMS revert to using the basic methodology to determine practice
expense payments for all services and develop the appropriate data to
more accurately estimate oncology supply expenses. If these
recommendations had been followed in 2001, we estimate that payments
to oncologists would have been about $51 million higher.
Similar to the physicians who bill for outpatient drugs, pharmacy
suppliers and their representatives contend that the overpayments for
DME-related drugs are needed to compensate them for costs not covered
by Medicare”that is, clinical, administrative, and other labor costs
associated with delivering the drug. These include costs for billing
and collection; facility and employee accreditation; licensing and
certifications; and printed patient education materials. Medicare pays
a $5 dispensing fee for inhalation therapy drugs used with a
nebulizer, the vast majority of the pharmacy-supplied drugs. The fee
is higher than dispensing fees paid by pharmacy benefit managers for
private insurance plans, which average around $2, and comparable to
fees paid by state Medicaid programs, which range from $2 to more than
$6.
Besides payments for the DME-related drugs, pharmacy suppliers may
receive additional compensation through the payment for DME and
related supplies. Our prior work shows that, for two reasons, Medicare
DME and supply payments may exceed market prices.[Footnote 16] First,
because of an imprecise coding system, Medicare carriers cannot
determine from the DME claims they process which specific products the
program is paying for. Medicare's coding system groups products that
may have significantly different characteristics and, therefore,
different prices. Medicare, however, pays one fee for all products
classified under a single billing code, regardless of whether their
market prices are below or above that fee.[Footnote 17] Second, DME
fees are often out of line with current market prices. Until recently,
DME fees had generally been adjusted only for inflation since the
process required to change the fees for any other reason was lengthy
and cumbersome. As a result, payment levels may not reflect changes in
technology and other factors that could significantly change market
prices.
Other Purchasers' Practices Are Instructive for Reforming Medicare
Payments for Covered Outpatient Drugs:
Private insurers and federal agencies, notably VA, employ varying
approaches in paying for drugs, generally using the leverage of their
volume and competition to secure better prices. While private payers
can negotiate with some suppliers to the exclusion of others and
arrive at terms without clear criteria or a transparent process to
secure lower prices, some of these practices would not be acceptable
for a public program like Medicare, given the program's size and need
to ensure access for providers and beneficiaries. VA uses the leverage
of federal purchasers to secure verifiable data on actual market
transactions by private purchasers to establish FSS prices for federal
agency and public hospital purchasers. VA also uses competition to
secure even lower prices in purchasing selected drugs for its own
facilities. In considering how these approaches might prove
instructive for Medicare, the program's unique responsibilities and
characteristics need to be carefully considered to avoid untoward
consequences for beneficiaries and providers.
VA sets FSS prices based on actual prices paid by private purchasers”
specifically, the prices that drug manufacturers charge their "most-
favored" private customers.[Footnote 18] In exchange for state
Medicaid programs covering their drugs, manufacturers agree to offer
VA and other government purchasers drugs at these prices. To enable VA
to determine the most-favored customer price, manufacturers provide
information on price discounts and rebates offered to domestic
customers and the terms and conditions involved, such as length of
contract periods and ordering and delivery practices.[Footnote 19]
Manufacturers must also be willing to supply similar information to
CMS to have their drugs covered by Medicaid. The information is the
basis for rebates required by the Medicaid program. With Congressional
sanction, CMS might utilize this information to determine appropriate
prices for Medicare that would be based on actual prices being paid in
the market. Medicare prices most likely could not be the prices paid
by most favored customers, but would need to be high enough to assure
access for all beneficiaries.
VA has been successful in using competitive bidding to obtain even
more favorable prices for certain drugs for its own facilities.
[Footnote 20] Through these competitive bids, VA has obtained national
contracts for selected drugs at prices that are even lower than FSS
prices. These contracts seek to concentrate the agency's purchase on
one drug within a class of therapeutically equivalent products for the
agency's national formulary. In 2000, VA contract prices averaged 33
percent lower than corresponding FSS prices.
Medicare's use of competition has been restricted to several
demonstration projects authorized by the Balanced Budget Act of
1997.[Footnote 21] In one of these demonstrations under way in San
Antonio, Texas, suppliers bid to provide nebulizer drugs, such as
albuterol, to Medicare beneficiaries. While Medicare normally allows
any qualified provider to participate in the program, only 11 bidders
for nebulizer drugs were selected to participate under the
demonstration. In exchange for restricting their choice of providers
to the 11 suppliers, beneficiaries are not liable for any differences
between what suppliers charge and what Medicare allows. Preliminary
CMS information on the San Antonio competitive bidding demonstration
suggests no reported problems with access and a savings of about 26
percent for the inhalation drugs. Expanding competitive bidding for
additional drugs could be beneficial. However, use of competitive
bidding would not be feasible for all drugs, for example, those that
have no or few therapeutic equivalent alternatives, which is the case
for many chemotherapy drugs.
Concluding Observations:
Our September 2001 study on Medicare payments for outpatient drugs
shows that Medicare payments and Medicare beneficiary copayments to
providers for these drugs are much higher than necessary, given what
the providers likely paid to purchase these drugs from manufacturers,
wholesalers, or other suppliers. Unlike the market-based fees paid by
VA and other federal agencies, Medicare's fees are based on AWP, which
is a manufacturer-reported amount that generally does not reflect
actual transactions between seller and purchaser. Physicians contend
that the profits they receive from Medicare's payments for outpatient
drugs are needed to compensate for inappropriately low Medicare fees
for most drug administration services. Similarly, the case argued by
some pharmacy suppliers for Medicare's high drug payments is that not
all of their costs of dispensing the drugs are covered.
If Medicare were to follow the principle of paying for each service
appropriately and incorporate lessons from other payers in setting
fees for outpatient drugs, the program would use information on actual
market prices, accounting for rebates and discounts, to establish its
payments for drugs. Manufacturers whose drugs are used by veterans or
Medicaid recipients are already required to provide this information
to VA and CMS. Medicare could also determine market-based fees for
certain drugs through competitive bidding. If drug payments are tied
closer to providers' likely acquisition costs, Medicare would need to
ensure that separate and appropriate payments are made to pay for the
administration and delivery of covered drugs. Changes to Medicare
payments for chemotherapy administration under the current physician
fee schedule are needed to make these payments comparable to payments
for other services. While Medicare also provides a separate payment
for the dispensing of inhalation therapy drugs, dispensing fees for
other drugs that physicians do not administer need to be considered.
Different methods of determining these payments may be necessary
because of differences in the way certain drugs are supplied and
administered. Paying for these services explicitly would enable
Medicare to eliminate implicit payments that may have been made
through excessive payments for DME and the drugs associated with the
DME payment.
Any change to Medicare's payments, particularly a reduction in fees,
for covered outpatient drugs or related administration or delivery
services needs to be accompanied by an ongoing assessment of whether
the new fees adequately support Medicare beneficiaries' access to the
drugs and services. Such monitoring should involve examining recent
use of these services so that prompt fee adjustments can be made if
access problems are found.
Mr. Chairman, this concludes my prepared statement. I would be happy
to answer any questions that you or other Subcommittee Members may
have.
Contact and Acknowledgments:
For further information regarding this testimony, please contact me at
(202) 512-7119. Kathryn Linehan, James Mathews, and Michael Rose made
contributions to this statement.
[End of section]
Footnotes:
[1] For the remainder of this statement, we will refer to "drugs and
biologicals" covered under Medicare part B, which generally covers
physician and outpatient hospital services, as "outpatient drugs."
[2] For example, see U.S. Department of Health and Human Services,
Office of the Inspector General, Medicare Reimbursement of Albuterol,
OEI-03-00-00311 (Washington, DC: June 2000) and Medicare Reimbursement
of Prescription Drugs, OEI-03-00-00310 (Jan. 2001).
[3] Our statement refers to HCFA when discussing actions taken under
that name.
[4] The Medicare, Medicaid, and SCRIP Benefits Improvement and
Protection Act of 2000 (Pub. L. No. 106-554, App. F, 106 Stat. 2763,
2763A-522).
[5] U.S. General Accounting Office, Medicare: Payments for Covered
Outpatient Drugs Exceed Providers' Costs, [hyperlink,
http://www.gao.gov/products/GAO-01-1118] (Washington, D.C.: Sept. 21,
2001).
[6] This study was mandated in section 213 of the Medicare, Medicaid,
and SCRIP Balanced Budget Refinement Act of 1999 (Pub. L. No. 106-113,
App. F, 113 Stat. 1501, 1501A-350). See U.S. General Accounting
Office, Medicare Physician Fee Schedule: Practice Expense Payments to
Oncologists Indicate Need for Overall Refinements, [hyperlink,
http://www.gao.gov/products/GAO-02-53] (Washington, DC: Oct. 31, 2001).
[7] See U.S. General Accounting Office, Medicare: Need to Overhaul
Costly Payment System for Medical Equipment and Supplies, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-98-102] (Washington, DC: May 12,
1998).
[8] A nebulizer is a device driven by a compressed air machine. It
allows the patient to take medicine in the form of a mist (wet
aerosol).
[9] Medicare-covered outpatient drugs that can be self-administered
include such drugs as blood clotting factors and some oral drugs used
in association with cancer treatment and immunosuppressive therapy.
[10] Spending is defined as Medicare's total payment, of which the
program's share is 80 percent and the beneficiaries' share is 20
percent.
[11] These two drugs are ipratropium bromide and albuterol (unit dose
form).
[12] The payment is based on the AWP for all the drugs having the same
HCPCS code. A National Drug Code (NDC) identifies an individual drug.
The Food and Drug Administration assigns the NDCs, which are the
universal product identifiers for drugs for human use. Each NDC
specifies a chemical entity, manufacturer, dosage form, strength, and
package size. For example, a single drug”marketed by one manufacturer
in one form and strength but in three package sizes”would have three
NDCs. HCFA defines HCPCS codes, which generally include multiple NDCs.
For single-source drugs, Medicare's payment is 95 percent of the
drug's AWP. For multisource drugs, generally those available from
multiple manufacturers, the payment allowance is 95 percent of the
lower of (1) the median AWP of all generic forms of the drug or (2)
the lowest brand name product's AWP.
[13] We attempted to analyze prices for 35 high-volume and high-
expenditure outpatient drugs, however, our analysis excluded some high-
volume and high-expenditure drugs because of inadequate pricing data.
Our results are based on wholesaler and GPO prices for 19 physician-
administered drugs and 6 drugs provided primarily by pharmacy
suppliers. Volume for a drug is measured in terms of the number of
units provided.
[14] Practice expenses include the salaries of nurses, technicians,
and administrative staff, and rent, utilities, equipment, and
supplies. Practice expenses constitute one of three components in
Medicare's physician fee schedule. The other two are the physician
work component and the malpractice component.
[15] In the case of chemotherapy drugs, the common practice is for a
nurse employed by a physician to administer the drug and for the
physician to bill Medicare.
[16] U.S. General Accounting Office, Medicare: Need to Overhaul Costly
Payment System for Medical Equipment and Supplies, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-98-102] (Washington, DC: May 12,
1998).
[17] The equipment and supply payment is determined from a DME fee
schedule, whose rates are based on a state-specific fee schedule and
subject to national minimum and maximum payment limits.
[18] Under federal procurement regulations, the government seeks to
obtain a price that is intended to equal or better the price that the
manufacturer offers its most-favored nonfederal customer under
comparable terms and conditions.
[19] Because the terms and conditions of commercial sales vary, there
may be legitimate reasons why the government does not always obtain
the most-favored customer price. Hence, under the regulations, VA may
accept a higher price if it determines that (1) the price offered to
the government is fair and reasonable and (2) awarding the contract is
otherwise in the best interest of the government.
[20] U.S. General Accounting Office, Prescription Drugs: Expanding
Access to Federal Prices Could Cause Other Price Changes, [hyperlink,
http://www.gao.gov/products/GAO/HEHS-00-118] (Washington, DC: August
7, 2000).
[21] Pub. L. No. 105-33, §4319, 111 Stat. 251, 392.
[End of section]
