- MEDICARE PAYMENTS FOR CURRENTLY COVERED PRESCRIPTION DRUGS

[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]

MEDICARE PAYMENTS FOR CURRENTLY COVERED PRESCRIPTION DRUGS
=======================================================================

HEARING

before the

SUBCOMMITTEE ON HEALTH

of the

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

__________

OCTOBER 3, 2002

__________

Serial No. 107-84

__________

Printed for the use of the Committee on Ways and Means

U.S. GOVERNMENT PRINTING OFFICE
83-923 WASHINGTON : 2002
___________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001

COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
J.D. HAYWORTH, Arizona LLOYD DOGGETT, Texas
JERRY WELLER, Illinois EARL POMEROY, North Dakota
KENNY C. HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

Allison Giles, Chief of Staff
Janice Mays, Minority Chief Counsel

______

Subcommittee on Health

NANCY L. JOHNSON, Connecticut, Chairman

JIM McCRERY, Louisiana FORTNEY PETE STARK, California
PHILIP M. CRANE, Illinois GERALD D. KLECZKA, Wisconsin
SAM JOHNSON, Texas JOHN LEWIS, Georgia
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota KAREN L. THURMAN, Florida
PHIL ENGLISH, Pennsylvania
JENNIFER DUNN, Washington

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.

C O N T E N T S

__________
Page
Advisory of September 26, 2002, announcing the hearing........... 2

WITNESSES

Centers for Medicare & Medicaid Services, Hon. Thomas A. Scully,
Administrator.................................................. 9
U.S. Department of Health and Human Services, Office of Inspector
General, Centers for Medicare and Medicaid Audits, George Reeb,
Assistant Inspector General; accompanied by Robert Vito,
Regional Inspector General, Evaluation and Inspections,
Philadelphia, PA............................................... 40

______

American Society of Clinical Oncology, and University of
Colorado, Cancer Center, Paul Bunn, M.D........................ 46
Medical Rights Center, Kim Glaun................................. 61
PacifiCare Health Systems, Inc., and Prescription Solutions, John
D. Jones....................................................... 56
Project HOPE, Michael J. O'Grady................................. 50

SUBMISSIONS FOR THE RECORD

American Association for Homecare, statement..................... 75
American College of Rheumatology, statement...................... 89
American Society of Nuclear Cardiology, Kansas City, MO, Timothy
M. Bateman, M.D., statement.................................... 80
American Society for Therapeutic Radiology and Oncology, Inc.,
Laura Thevenot, statement...................................... 74
Association of Freestanding Radiation Oncology Centers, Peter
Blitzer, M.D., statement....................................... 81
National Alliance for Infusion Therapy, and National Home
Infusion Association, Alexandria, VA, statement................ 82
Oncology Nursing Society, Pittsburgh, PA, Judy E. Lundgren, and
Pearl Moore, letter and attachments............................ 84

MEDICARE PAYMENTS FOR CURRENTLY COVERED PRESCRIPTION DRUGS

----------

THURSDAY, OCTOBER 3, 2002

House of Representatives,
Committee on Ways and Means,
Subcommittee on Health,
Washington, DC.

The Subcommittee met, pursuant to notice, at 10:38 a.m., in
room 1100 Longworth House Office Building, Hon. Nancy L.
Johnson (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]

ADVISORY

FROM THE
COMMITTEE
ON WAYS
AND
MEANS

SUBCOMMITTEE ON HEALTH

CONTACT: (202) 225-3943
FOR IMMEDIATE RELEASE
September 26, 2002
No. HL-18

Johnson Announces Hearing on

Medicare Payments for Currently Covered

Prescription Drugs

Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Health of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on pricing mechanisms for drugs
covered under the Medicare program. In addition, the hearing will
examine physician reimbursement for administration of these
prescription drugs. The hearing will take place on Thursday, October 3,
2002, in the main Committee hearing room, 1100 Longworth House Office
Building, beginning at 10:00 a.m.

In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include the Administrator of the Centers for Medicare
and Medicaid Services (CMS), academics, and providers. However, any
individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing.

BACKGROUND:

Medicare does not cover most outpatient prescription drugs.
However, it does cover certain categories of outpatient prescription
drugs, including drugs used in dialysis, organ transplantation, cancer
treatment, and certain drugs used with durable medical equipment, such
as infusion pumps and nebulizers. According to the U.S. General
Accounting Office, about 450 outpatient drugs are covered under these
categories. Medicare payments for covered drugs have skyrocketed,
increasing beneficiary and taxpayer costs, and driving potentially
inappropriate clinical decisions.

In 1992, Medicare paid about $700 million for prescription drugs;
eight years later, it paid $5 billion. (Between 1999 and 2000, payments
increased by $1 billion.) In addition, just 35 drugs account for 82
percent of Medicare spending and 95 percent of the claims volume.

The Balanced Budget Act of 1997 (P.L. 105-33) specified that
Medicare payment for covered outpatient prescription drugs would equal
95 percent of the average wholesale price (AWP) for the drug. AWPs,
however, are not defined by law or regulation. The AWPs are reported by
drug manufacturers to organizations that publish the data in compendia.
Medicare carriers use the published data in calculating payment for
Medicare covered drugs, but AWPs are not grounded in any real market
transaction, and do not reflect the actual price paid by purchasers.
The AWP for a product is often far greater than the acquisition cost
paid by suppliers and physicians. In addition, AWPs do not reflect the
discounts, rebates or ``charge backs'' that manufacturers and
wholesalers customarily offer to providers. Therefore, AWPs represent
neither average prices nor prices charged by wholesalers.

Medicare pays an excessive amount for covered drugs. The U.S.
Department of Health and Human Services Inspector General found that
Medicare beneficiaries and taxpayers could save more than $200 million
on one drug alone--albuterol, an inhalation therapy drug--if the drug
were reimbursed at prices available to commercial purchasers. Moreover,
a higher AWP creates a higher beneficiary copayment and premium,
because beneficiaries are responsible for a copayment equal to 20
percent of Medicare's payment for the drug. In some cases, the
beneficiary's copayment is greater than the physician's or supplier's
actual total cost for the drug.

Some manufacturers reportedly use inflated AWPs as a strategy to
increase market share. Physicians and suppliers are reimbursed based on
the inflated AWP, but actually pay much less to acquire the drug. The
larger the ``spread'' between the actual price and 95 percent of the
AWP, the greater the incentive to use the product. This inappropriately
influences clinical decisions and may harm patient care, while driving
over-utilization of services.

Some physicians have expressed concerns about lowering Medicare
reimbursements for prescription drugs. They assert that they are under-
reimbursed by Medicare for their costs in administering the drugs, and
claim that the overpayments for drugs to cover their practice expenses.
Oncologists, for example, argue that Medicare does not adequately
reimburse them for the practice expenses associated with providing
treatment to cancer patients in outpatient settings.

There is little rationale for using Medicare overpayment for drugs
as a mechanism to reimburse physicians for practice expenses. Medicare
has a well-defined procedure for examining the adequacy of physician
payments under the physician fee schedule. As provided for under the
Benefits Improvement and Protection Act, oncologists recently submitted
results from a new survey on practice expenses to CMS as part of this
review. Because any increase in practice expense reimbursements to one
specialty, such as oncology, must be budget neutral under current law,
other specialties would experience decreases in their practice
expenses, unless Congress were to provide new money to recognize these
practice costs.

In announcing the hearing, Chairman Johnson stated, ``The AWP
process is seriously flawed. It's costing Medicare beneficiaries and
taxpayers too much because Medicare is paying inflated prices. We must
inject competition into the program to bring market forces to bear on
reimbursement for drugs. The Administration says that they will fix the
problem if Congress does not act, but it will take congressional action
to ensure that our seniors continue to have access to high-quality
cancer care.''

FOCUS OF THE HEARING:

Thursday's hearing will highlight problems with the AWP system for
determining Medicare reimbursements for currently covered prescription
drugs, and examine alternative mechanisms for determining Medicare
payments.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Please Note: Due to the change in House mail policy, any person or
organization wishing to submit a written statement for the printed
record of the hearing should send it electronically to
[email protected], along with a fax copy to
(202) 225-2610, by the close of business, Thursday, October 17, 2002.
Those filing written statements who wish to have their statements
distributed to the press and interested public at the hearing should
deliver their 200 copies to the Subcommittee on Health in room 1136
Longworth House Office Building, in an open and searchable package 48
hours before the hearing. The U.S. Capitol Police will refuse sealed-
packaged deliveries to all House Office Buildings.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.

1. Due to the change in House mail policy, all statements and any
accompanying exhibits for printing must be submitted electronically to
[email protected], along with a fax copy to
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a
total of 10 pages including attachments. Witnesses are advised that the
Committee will rely on electronic submissions for printing the official
hearing record.

2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.

3. Any statements must include a list of all clients, persons, or
organizations on whose behalf the witness appears. A supplemental sheet
must accompany each statement listing the name, company, address,
telephone and fax numbers of each witness.

Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.

The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call (202) 225-1721 or (202) 226-3411 TTD/TTY in advance of the event
(four business days notice is requested). Questions with regard to
special accommodation needs in general (including availability of
Committee materials in alternative formats) may be directed to the
Committee as noted above.

Chairman JOHNSON. Good morning. This morning's hearing is
very important in our effort to strengthen our Medicare
Program. The evidence is overwhelming that Medicare is paying
way too much for some items of durable medical equipment (DME)
and prescription drugs. It is imperative that we adopt a system
that more accurately aligns costs and payments.
While this would not normally be a difficult task, it is a
very difficult problem at this time because most cancer care is
paid for through drug reimbursements. This means that as we
change the way we pay for drugs, we must also realistically and
accurately reimburse for the practice expenses associated with
the delivery of, for example, chemotherapy. These practice
expenses are significant--personnel, special equipment, costly
drug inventories and insurance to cover them, and so forth.
So assuring reimbursement for practice expense is no easy
task, yet it has been only a minor part of the average
wholesale price (AWP) discussion. The U.S. General Accounting
Office (GAO) tried identifying practice expenses, but neglected
to focus its work appropriately on oncologists who deliver such
care in an office setting. The oncology community was slow, as
well, to rise to this quite daunting task.
However, now we are developing the needed information.
Today we are unified in our quest to change the way we pay for
Medicare-covered drugs and the way we pay for the costs of
administering those drugs.
While I am keenly disappointed in the GAO study, I am
pleased that the oncologists have taken advantage of a
provision I wrote in the Benefit Improvement and Protection
Act. The provision permits groups to submit practice expense
data and requires the Centers for Medicare & Medicaid Services
(CMS) to evaluate that data and use it if it meets certain
standards. The most recent data is very important and
particularly significant because of our earlier failure to
collect appropriate information.
Overpaying for drugs burdens seniors with copayments that
in some instances exceed the cost paid for the drug by the
physician, pharmacist, or provider of durable medical
equipment. On the other hand, underpayment will, without
question, deny seniors access to life-saving care.
Medicare spending on part B drugs is very concentrated.
Just 35 drugs account for 82 percent of Medicare spending, and
95 percent of the claims volume. Furthermore, Medicare payments
for covered drugs have skyrocketed, increasing beneficiary and
taxpayer costs. In 1992, Medicaid paid about $700 million for
prescription drugs. In 2000, it paid $5 billion, a 700-percent
increase over 8 years.
Medicare's payment for these drugs is prescribed in law.
The Balanced Budget Act 1997 specifies that Medicare pay 95
percent of the AWP, for the drug. The AWPs, however, are not
defined by law or regulation. They are reported by drug
manufacturers to organizations that publish the data in
compendia, like the Red Book. Medicare carriers use the
published data to calculate payment.
The problem is that AWPs do not reflect the actual price
paid by purchasers. Nor do they accurately account for the
costs associated with administering the drugs, for which no
other Medicare payment is made. The AWPs are often far greater
because they do not reflect the discounts, rebates, or so-
called charge backs that manufacturers and wholesalers
customarily offer to providers. On the other hand, for cancer
drugs, they have the costs of inventory, insurance, special
equipment, nursing, and other personnel that are not captured
in any other payment.
Examples of overpayment abound, forcing seniors to bear
higher copayments and premiums. Beneficiaries pay a copayment
equal to 20 percent of Medicare's payment for the drug. For
some drugs, beneficiaries are, indeed, paying more in
copayments than physicians or suppliers are paying to purchase
the drug.
Consider Vancomycin, with an AWP of $382. The beneficiary
would pay 20 percent, or $73. The provider would pay $5, on
average. That is a $73 payment by the beneficiary for a drug
that cost the provider $5.
Here are just a few examples comparing one company's 2001
AWP, as reported in the Red Book, and the actual wholesale
prices determined by the U.S. Department of Justice.
Vancomycin, the Red Book reported AWP was $382 compared to the
U.S. Department of Justice actual price of $5, an injectable
drug. The other two are also injectable. In the interests of
time, I am going to skip over the details.
A second and equally serious problem are reports that some
manufacturers use inflated AWPs as a strategy to increase
market share. If Medicare reimburses physicians and suppliers
based on the inflated AWP, providers have a greater incentive
to use the products with the larger spread. Providers may base
prescribing decisions on economic incentives rather than
clinical appropriateness. This practice may harm patient care
and drive over-utilization of services.
Of all countries, America has the greatest access to cancer
care. In recent years, there has been a revolution in cancer
care, enabling physicians to deliver the latest in quality care
in many small centers across America. Medicare does not
reimburse oncologists for the practice expenses associated with
providing treatment to cancer patients in outpatient settings.
Consequently, they have come to rely on the overpayment for
drugs to cover these costs.
Before we eliminate overpayments, we must assure
appropriate reimbursement for practice expenses. While all
agree on this, I am determined it be done accurately and
fairly. I am disappointed with the relatively small amount of
attention that has been focused on this issue and will pursue
it in questioning.
We are very pleased to welcome the Honorable Thomas A.
Scully from the Centers for Medicare & Medicaid Services again
before us, and on our second panel, George Reeb, Michael J.
O'Grady, Ph.D., Paul A. Bunn, Jr., M.D., John D. Jones, and Kim
Glaun, whom I will introduce a little bit more at a later time.
Mr. Stark?
[The opening statement of Chairman Johnson follows:]
Opening Statement of the Hon. Nancy L. Johnson, a Representative in
Congress from the State of Connecticut, and Chairwoman, Subcommittee on
Health
Good morning. This morning's hearing is a very important one in our
effort to strengthen our Medicare program. The evidence is overwhelming
that Medicare is paying way too much for some items of durable medical
equipment and prescription drugs. It is imperative that we adopt a
system that more accurately aligns costs and payments.
While this would not normally be a difficult task, it is a very
difficult problem at this time because most cancer care is paid for
through drug reimbursements. That means that as we change the way we
pay for drugs, we must also realistically and accurately reimburse for
the practice expenses associated with the delivery of, for example,
chemotherapy, and these practice expenses are significant, personnel,
special equipment, costly drug inventories, and the insurance to cover
them and so forth.
So assuring reimbursement for practice expense is no easy task, yet
it has been only a minor part of the AWP discussion.
The GAO tried identifying practice expenses but neglected to focus
its work appropriately on oncologists who deliver such care in an
office setting. The oncology community was slow as well to rise to this
quite daunting task. Now, however, we are developing the needed
information and today, are unified in our quest to change the way we
pay for Medicare-covered drugs . . . and the way we pay for the costs
of administering those drugs.
While I am keenly disappointed in the GAO study, I am pleased that
oncologists have taken advantage of a provision that I wrote in the
Benefit Improvement and Protection Act that permits groups to submit
practice expense data and requires the Centers for Medicare and
Medicaid Services to evaluate that data and use it, if it meets certain
standards. Their most recent data is very important and particularly
significant because GAO failed to collect appropriate data in the study
we sought for that purpose, though unintentionally.
Overpaying for drugs burdens seniors with co-payments that in some
instances exceed the cost paid for the drug by the physician,
pharmacist, or provider of durable medical equipment. On the other
hand, underpayment will without question deny seniors access to life-
saving care.
Medicare spending on Part B drugs is very concentrated: just 35
drugs account for 82 percent of Medicare spending and 95 percent of the
claims volume.
Furthermore, Medicare payments for covered drugs have skyrocketed,
increasing beneficiary and taxpayer costs. In 1992, Medicare paid about
$700 million for prescription drugs; in 2000, it paid $5 billion, a 700
percent increase over 8 years, though the number of drugs used has
soared as well.
Medicare's payment for these drugs is prescribed in law. The
Balanced Budget Act of 1997 specifies that Medicare pay 95 percent of
the average wholesale price, or AWP, for the drug. AWPs, however, are
not defined by law or regulation. They are reported by drug
manufacturers to organizations that publish the data in compendia, like
the Red Book. Medicare carriers use the published data to calculate
payment.
The problem is that AWPs do not reflect the actual price paid by
purchasers, nor do they accurately account for the costs associated
with administering the drugs, for which no other Medicare payment is
made. The AWPs are often far greater because they do not reflect the
discounts, rebates or so-called ``charge backs'' that manufacturers and
wholesalers customarily offer to providers. On the other hand, for
cancer drugs, the heavy costs of inventory, insurance, special
equipment, nursing and other personnel are not captured by any other
payment.
Examples of overpayment abound, forcing seniors to bear higher
copayments and premiums. Beneficiaries pay a copayment equal to 20
percent of Medicare's payment for the drug. For some drugs,
beneficiaries are paying more in copayments than physicians or
suppliers are paying to purchase the drug.
Consider vancomycin, with an AWP of $382. The beneficiary would pay
20 percent of the Medicare reimbursement of $363, or $73. The provider
would pay about $5, on average. That's a $73 payment by the beneficiary
for a drug that costs the provider $5.
A second and equally serious problem are reports that some
manufacturers use inflated AWPs as a strategy to increase market share.
If Medicare reimburses physicians and suppliers based on the inflated
AWP, providers have a greater incentive to use products with a larger
``spread'' between the actual price they pay and Medicare's
reimbursement. Providers may base prescribing decisions on economic
incentives rather than clinical appropriateness. This practice may harm
patient care, and drive over-utilization of services.
Of all countries, America has the greatest access to cancer care.
In recent years there has been a revolution in cancer care, enabling
physicians to deliver the latest in quality care in many small centers
across America. Medicare does not reimburse oncologists for the
practice expenses associated with providing treatment to cancer
patients in outpatient settings. Consequently, they rely on the
overpayments for the drugs to cover these costs. Before we eliminate
these overpayments, we must assure appropriate reimbursement of
practice expense. While all agree on this, I am determined it be done
accurately and fairly and am disappointed with how little real
attention seems to be focused on it in today's testimony and will
pursue this matter in questioning.
We are pleased to welcome Tom Scully from the Centers for Medicare
and Medicaid Services who will give us his views on AWP reform.
Our second panel will include:

George Reeb, from the Office of the Inspector General in
the Department of Health and Human Services will update us on his
findings comparing AWP to actual acquisition costs;
Michael O'Grady from Project Hope will discuss a
competitive bidding approach to establishing Medicare reimbursements
for outpatient drugs;
Dr. Paul Bunn from the American Society of Clinical
Oncology will tell us about the new information on practice expenses
that the Society has collected and submitted for consideration; and
Kim Glaun from the Medicare Rights Center will present
concerns from beneficiaries perspective.

I look forward to your testimony.

Mr. STARK. Thank you, Chairman Johnson, for holding this
hearing today. I could not agree with you more. It is clear
that the pharmaceutical industry, and its partners are bilking
Medicare beneficiaries and the program, perhaps out of billions
of dollars.
I will not repeat many of your observations because they
hold. This illegal behavior, I think, harms each and every one
of us. Medicare pays more for the services it covers, and the
taxpayers pay more, in many cases, or beneficiaries pay more.
The drug companies will argue in their defense that they
are operating within the letter of the law. They will not
change their behavior unless and until the law changes. Well, I
disagree with their interpretation of the law. I certainly will
agree with them that they are right. We should change the law,
and that will take care of that.
I have introduced a bill which would end the outrage. It is
a market-based solution which would require Medicare to pay the
true average market price for the drugs currently covered. That
means we pay for what the doctors or the hospitals actually
pay. It is consistent with the GAO recommendations. It is
achievable in a short timeframe. It is enforceable, very stiff
penalties, and it also recognizes that we must address the
inadequacies of the current reimbursement to the doctors.
One of the reasons this is so prevalent is that the doctors
feel they are underpaid for the administration. They make it up
through marking up the drugs. I do not think that is the way to
do it. I think if they are underpaid, we should address that,
as well. Then we will have a solution.
I would like to put some human terms on this. There is an
enterprising person in Florida. I know this sounds like a
little advertising, but that is okay. He looked up on the web--
he was mad about this problem and found my bill. He wrote to
one of our staff Members on the Committee on Ways and Means. He
says, ``Terry, I would like to thank you for your time and
effort in helping track down the price of cancer drug
Leucovorin, $14.88. The fascinating 20 percent that I have to
pay is $51.08. It does not take a rocket scientist to figure
out that the numbers are questionable, not only the price of
Leucovorin, but every item on the page would raise eyebrows.''
``My problem is, of course, that our HMO, health
maintenance organization, dropped out of our county and now we
only have Medicare. The facts will show that what I have to pay
for my wife's chemo are out of line. Paying a 20-percent copay
is okay as long as the doctor's numbers were fair. The page I
will fax to you will show that there is a problem. Please thank
Congressman Stark for his effort in trying to right the wrong.
Please give my regards to Congresswoman Karen Thurman, as she
helped me with the U.S. Department of Veterans Affairs (VA)
health program, parentheses, this is only a personal opinion,
but she is the jewel of Citrus County.''
[Laughter.]
Mr. STARK. ``Thank Terry and you. If you would send me your
fax number, I will send you the document I have from the
doctor.''
I would like to ask that the Harper's personal address be
redacted but that the letter be made part of the record, Madam
Chair, and I submit it.
Chairman JOHNSON. So ordered.
[The letter from Mr. and Mrs. Harper follows:]

Terri Shaw
Washington, DC

Terry,

I would like to thank you for your time & effort that you gave in
helping track down the price of the cancer drug (leucovorin). ($14.88),
& the fascinating 20% that I have to pay, is $51.08. It does not take a
rocket scientist to figure out that the numbers are questionable????.
Not only the price of leucovorin, but every item on the page would
raise eyebrows. I will fax the document from the doctor as I am having
trouble with my scanner. My problem is of course is that our HMO
dropped out of our county & now we only have Medicare.
The fax will show that what I have to pay for my wife's chemo are
out of line. Paying a 20% co-pay is o-k as long as the doctor's numbers
were fair!!!!!!!. The page that I will fax to you will certainly show
that there is a problem.
Please thank Congressman Stark for his effort in trying to right a
large wrong in our Medicare Program.
Please give my regards to Congresswoman Karen Thurman, as she
helped me with the VA health program. (This is only a personal opinion
but, she is the jewel of Citrus County).
Thank you Terry & if you would send me your fax number I will send
the document I have from the doctor. Once again, we thank you.

Bob & Florence Harper

Mr. STARK. I look forward to hearing what our witnesses
have to say.
[The opening statement of Mr. Ramstad follows:]
Opening Statement of the Hon. Jim Ramstad, a Representative in Congress
from the State of Minnesota
Thank you, Madam Chairwoman, for holding this important hearing
today.
The Medicare program is broken. Physicians are declining to see
Medicare patients because of low reimbursement rates, reimbursement for
new technologies used in outpatient settings is scheduled to be
severely cut, and seniors in Minnesota pay higher premiums and receive
fewer benefits than seniors in many other states under the
Medicare+Choice program.
The biggest factor driving all of these issues is the arbitrary
formulas used in the Medicare program to determine reimbursement rates.
Medicare reimbursement must be reformed to reflect real world market
transactions.
At the same time, we must make sure that new approaches to
reimburse based on actual costs are accurate and truly encompass all
costs associated with the medical procedure. Reimbursement for medical
devices used in outpatient care is a perfect example of the inability
of our system to accurately capture and report actual costs associated
with medical services.
For example, the proposed 2003 rule for the outpatient prospective
payment system is based on nearly 60 million hospital claims. One would
assume these claims provide an accurate view of the costs associated
with performing a medical procedure. Unfortunately, further review of
the hospital claims shows significant flaws in the hospital coding
process. For example, these claims, which served as the basis for 2003
payment rates, included submissions showing cardioverter-defibrillators
used in colonoscopies and carpal tunnel surgeries and pacemakers used
in cataract surgeries. In fact, of the 3,322 single-procedure claims
for pacemaker insertions reviewed, 50 percent of those claims were
coded incorrectly.
Madam Chairwoman, Medicare's reimbursement policies must be
reformed to reflect costs, and these costs must be accurate. Medicare's
ability to accurately reimburse for Medicare services may be the
biggest determinant of what medical services are available to our
seniors. These aren't just reimbursement formulas or proposed rules--
these may be life or death decisions for millions of elderly Americans.
Thank you, Madam Chairwoman, for holding this hearing, and I look
forward to working with you to ensuring that seniors have access to the
health care they need and deserve.

Chairman JOHNSON. Mr. Scully?

STATEMENT OF THE HON. THOMAS A. SCULLY, ADMINISTRATOR, CENTERS
FOR MEDICARE & MEDICAID SERVICES

Mr. SCULLY. Madam Chairwoman, Congressman Stark, and
Members of the Subcommittee, thank you for having me here
today. I am always happy to be here on an issue I think we have
so much agreement on.
Obviously, as I think we all know, we all wanted to be
talking about larger Medicare prescription drug issues this
year. We still hope to get a Medicare drug benefit out of
Congress this year. That seems increasingly unlikely. From the
Administration's point of view, we would like to congratulate
you for getting a Medicare prescription drug bill out of the
Committee and out of the House. We certainly are committed to
getting that legislation passed as soon as we can.
Back to AWP, this is a longstanding problem. Medicare pays
about $5 billion a year for about 450 outpatient drugs. We pay
far more than any of the purchasers of these drugs, and the
agency has been determined for many years to try to find a way
to fix it.
This is the third time I have testified on AWP this year.
Having testified on a lot of issues, I can tell you that rarely
have I seen the kind of bipartisan support for fixing a problem
that this issue has. Senator Baucus and Senator Grassley in the
Senate Committee on Finance were both very supportive of fixing
this problem. Chairman Tauzin and Congressman Dingell were
literally jumping up and down in their hearing to fix this
problem. The Administration is very anxious to work with all of
Congress, including this Committee, to fix this problem.
I think this is clearly one place where Congress has a very
huge problem that needs to be fixed. There are a number of ways
to fix AWP. We support a lot of what the Committee has been
talking about in your proposal on competitive bidding. We think
that is one approach that could easily work. Mr. Stark's
approach is another. The House Committee on Commerce, as you
probably know, proposed using the average sales price (ASP),
which is similar to Mr. Stark's bill. I think we have been
saying all year long, we may have opinions. We would work with
any one of them. The one thing that is clear is we are
overpaying for all these drugs.
Just to give you one example on the competitive bidding
front, which we think in the long range--in the short range, an
ASP approach or picking a new and better AWP may be the short-
term fix. We believe, however, that even those numbers
potentially could be gamed in the long run, as AWP has been. In
the longer term, we think a more market-oriented approach may
work.
Just to point out one example, in San Antonio last year in
our DME competitive bidding proposal, we put out a bid for
Albuterol, a widely used drug for asthmatics, and we received
30 bids. Eleven companies out of the 30 were accepted. We saw a
25-percent reduction in the price that we paid. It worked out
to about average wholesale price minus 30, not average
wholesale price minus 5. Not every drug is that easy to compete
with. San Antonio is a big town. We understand competitive
bidding may have other issues in smaller markets. It is very
clear that we are overpaying and not paying market prices for
drugs.
We are also very concerned, as you are. We have said to the
oncologists and others, that there are a number of areas--
particularly, oncology, hematology, and dialysis facilities--
where providers rely on the cross-subsidy from high average
wholesale prices for drugs to make up for what they perceive,
in some cases probably correctly, to be an underpayment for
their basic services. We think on any proposal to fix AWP needs
to address that.
The GAO report, that came out earlier said that they
believe that the oncology practice expense payments were
underpaid by about $49 million. An earlier CMS report suggested
that number was $52 million. We have been spending a lot of
time with the oncologists, and it is part of our ongoing
rulemaking. I cannot get into the details they submitted, but
it is significantly higher, which probably is not surprising
given the number. We do think that we need to find the right
amount for practice expenses. As we reduce the overpayments for
AWP, that we need to make adjustments probably, at the very
least, for oncologists, hematologists, and for dialysis
facilities.
There are problems here. This fits into a broader payment
concern. We believe the easiest way to fix this is for Congress
to fix it, because if you fix it and we get the savings through
average wholesale price, you can redistribute the appropriate
money back into the base to pay oncology fees. It is very
unclear at this point whether the agency has the ability to do
that administratively.
Our concern is we could save, we could discuss any number,
say $100 million a year to $1 billion a year on overpayment for
AWP. We have looked at legally whether we could actually save
the money administratively and put it back in the payment
rates. It is not clear. It is not clear that we cannot, but it
is also not clear that we can. It would clearly be much cleaner
to take the savings and for Congress to put the money back in
the program.
If we cannot put it back in administratively, you can see
the potential problem we have. If we were to add, let us say
hypothetically, $100 million a year back for the oncologists,
we are in a context, at least right now, which we also hope to
fix, where we are looking at a physician update of negative 4.4
percent on the base conversion factor next year--an outcome I
think all of us are hoping to avoid in the next few weeks for
which the Administration strongly supports technical fixes.
In the context of fixing payments to oncologists, if in the
current setting we had to put $100 million back into the base
for oncology fees as we fix the AWP, that update would not be
negative 4.4 percent, it would be negative 4.6 percent. So, the
idea in a budget neutral sense of fixing the oncology practice
expenses as you save money in AWP is probably not particularly
appetizing for anyone, including the oncologists. So it may be
an option, but it is not clear that we can do that legally.
That is one of the major reasons all year long we supported the
idea of Congress making this fix and telling us, at least
directing us, even if it is in somewhat vague terms, to make
the market-base fix and to put some of the money back into the
appropriate practice areas.
There are a number of impacts of AWP that I do not think a
lot of people understand. We clearly way overpay for drugs, but
I want to go through one example because I think while we
overpay for drugs. It is obviously a huge problem for taxpayers
if we are overpaying $1 billion a year on drugs, which some
folks claimed, but it also has an impact all through the rest
of the health care system. So, I brought some charts today to
illustrate that.
About 80 percent of these drugs are paid for in physicians'
offices, but about 20 percent are paid for in hospital
outpatient settings. As you know, right now we are going
through a rewrite of our hospital outpatient rule, which is
incredibly complicated. I am spending a great amount of time
on. Last year, we paid most of what are called pass-through
drugs at 95 percent of AWP, and when we pay that, we
significantly overpaid for a lot of drugs.
This year, in our draft rule, we used about 60 million
claims to figure out the real rate that hospitals paid for
drugs. Those rates came down significantly, and they will come
down. In the final rule, they came down a lot, and I used the
draft rule data. In the final rule, we are actually using even
better data and better claims. I think some of the drug prices
will go down and others will go up, so there will be some
significant changes.
Last year, the reason I put this chart up is this does not
just cost the taxpayers $1 billion. If you look at what we paid
on that chart--and you probably cannot read it too well from
that distance and I apologize--what you will see is that for
some drugs, we will overpay a lot. I will just give you an
example: Retuxin last year. When we paid at 95 percent of AWP,
we paid $372. This year, when we are using actual hospital
claims to pay it, the price is dropping by 20 percent.
Each of the first four drugs on the chart are cancer drugs.
As you go down the line, you will find that when you switch
from 95 percent of AWP, which we paid in the outpatient
setting, to real prices that hospitals pay, you frequently end
up with 75 or 80 percent of the AWP. So obviously for
taxpayers, paying that lower rate is the right thing to do.
What a lot of people do not realize is the hospital
outpatient pot is a finite, roughly $17-billion pot. If you
switch to the next chart, I think what you will find is that in
addition to paying too much, when we have to put more money
into overpaying for drugs, and it is somewhat similar but
different for devices, you also have to take money out of basic
services. So last year, for instance, the payment in an
outpatient setting for colorectal colonoscopies dropped 16.3
percent. For mammographies, it went down 13.2 percent. For
emergency room (ER) level visits, the mid-level ER visits, it
went down 3.7 percent. When you take out overpayments for drugs
you free up money to go back into the base services because it
is a finite pot. If we are paying too much for drugs, we are
not necessarily just paying too much from taxpayers. We are
also taking resources out of other areas for critical services,
like colonoscopies, mammographies, and ER visits.
So this year, we found that we took a lot of money out of
the payments, and we had overpaid for AWP. We now have 60
million claims, in the final outpatient rule. We are going to
take down a lot of payments for a lot of drugs to what we think
are far more market oriented, far more appropriate levels. What
you find is, and these will change in the final rule, but you
will find double-digit increases over last year for payments of
colonoscopy, double-digit increases for mammographies, and
probably close to double-digit increases for the basic
emergency room visit. There is also a direct tradeoff between
overpaying for drugs and underpaying for basic hospital
services that a lot of people do not understand.
So it is not just bad policy for taxpayers to overpay for
outpatient drugs, and it does not just have the impact of
spending too much taxpayer money. It also has the impact of
negatively affecting hospitals on their basic services for
critical preventive services and critical things like emergency
room visits. I do not think the connection is often made in
that regard.
So we are determined for a variety of reasons, mainly so
that we do not overpay for drugs, but also to make sure that we
have the accurate payment for base physician and hospital
services, to fix this policy. I think it is clear on a
bipartisan basis that this is bad payment policy. We have an
enormous level of bipartisan support to fix it. It is very
clear.
We would very, very much like to have Congress fix AWP this
year if you can do it before you go. If you cannot, the
Administration is committed to fixing it on our own. I will
tell you that, just in brief, if Congress does not fix it this
year, our plan is to pick one of our 23 contractors--right now,
we have 23 contractors that pay--they, each one of them
measures AWP on their own, and they decide what AWP is locally.
When you do a poll of those contractors, which we have done,
you will find that the payments vary massively and their
interpretation of the AWP varies massively.
So administratively, our plan immediately would be later
this year to pick one contractor--we have a couple that we
believe are better than others. We will pick our best of the 23
carriers and tell them that they are going to be essentially
the common price determiner for what is real AWP. We think that
would immediately save $100 million a year.
Then our plan would be to go out and do a much more
detailed market survey. Most of our carriers are Blue Cross
plans. They know what they are paying for people for the same
drugs who are under 65. We believe that if we did nothing but
identify appropriate market prices, we could probably save as
much as $500 million a year.
We think Congress can probably do more if you direct us to
do any one of the hybrid approaches that you have, but our view
is the number one thing that we should not do is let this go on
any longer. It needs to be fixed as soon as it possibly can.
We would be very anxious to work with the Committee and
Congress to try to fix this in the next 2 weeks by any one of
the approaches that have been suggested. If not, I think the
Administration is committed to fixing it on our own
administratively during the course of the next 6 months. Thank
you, Madam Chair.
[The prepared statement of Mr. Scully follows:]
Statement of the Hon. Thomas A. Scully, Administrator, Centers for
Medicare & Medicaid Services
Chairman Johnson, Congressman Stark, distinguished Subcommittee
Members, thank you for inviting me to discuss Medicare Part B
reimbursement for prescription drugs. As you know, prescription drugs
have become an increasingly important component of modern health care,
particularly for Medicare beneficiaries. The President has taken a
number of steps to provide immediate relief to America's seniors and
people with disabilities who have high drug spending, and we are
continuing to work closely with Congress to strengthen Medicare by
including a comprehensive prescription drug benefit. I would like to
thank you for your hard work on creating prescription drug legislation.
Although we are disappointed that Medicare beneficiaries still do not
have comprehensive drug coverage, we remain hopeful that we can
continue to work together to enact this crucial benefit as soon as
possible.
It is also critically important that we improve the payment system
for the small number of outpatient drugs currently covered by Medicare.
It is clear that Medicare's payment system for those covered drugs,
based on average wholesale price, or ``AWP,'' is seriously flawed. The
Medicare program relies on the prices reported by drug manufacturers to
set payment rates. We all agree that Medicare should pay appropriately
for all the services and treatments covered by Medicare, including the
limited drugs that we currently cover. At the same time, we need to be
certain that Medicare pays physicians and other providers appropriately
for their services when they furnish drugs to beneficiaries. We support
fair, competitive payments for Medicare prescription drugs. We
understand that the Committee is working on such a proposal and we look
forward to working with you.
By law, Medicare does not pay for most outpatient prescription
drugs. However, there are some specific exceptions where Medicare
covers pharmaceuticals, such as those drugs that are not self-
administered and are furnished incident to a physician's covered
services. In these cases, the law requires that Medicare pay physicians
and other providers based on the lower of the billed charge or 95
percent of the drugs' AWP. Numerous studies have indicated that the
industry's reported wholesale prices, the data on which Medicare bases
its drug payments, are vastly higher than the prices drug manufacturers
and wholesalers actually charge physicians and providers. That means
Medicare beneficiaries, through their premiums and cost sharing, and
U.S. taxpayers are spending far more than the ``average'' price that we
believe the law intended them to pay for these drugs. Some affected
physicians and providers have suggested that these Medicare ``drug
profits'' are necessary to cross subsidize what they believe are
inadequate Medicare payments for services related to furnishing the
drugs, such as the administration of chemotherapy for cancer. We
believe that finding a way to pay appropriately for both the drugs and
the services related to furnishing those drugs is a better approach.
Clearly, Medicare drug pricing is complex. Over the years, numerous
legislative efforts have made progress toward developing an effective
alternative to AWP. These efforts have aimed at ensuring that Medicare
and its beneficiaries do not pay more than they should for the
prescription drugs that Medicare covers, and that physicians and
providers are compensated appropriately for their services. We continue
to believe that a legislative remedy to this problem would be
preferable, and we will work with Congress to implement effective
legislation. However, if necessary, we are prepared to build on the
strong evidence and best ideas for reform developed in Congress by
taking action under the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act of 2000 (BIPA), which provided some
authority for the Secretary to act after reviewing the General
Accounting Office (GAO) report to Congress. Under BIPA, we could move
to a market-based system for drugs and adjust payments for services
related to furnishing drugs such as practice expenses for oncology
administration. As we look to the future, particularly as we add
broader prescription drug coverage to Medicare, it is vital that we
develop market-based, competitive pricing systems for drugs so that we
do not repeat the past mistakes of overpayment. We are committed to
working with Congress to amend the current system to make sure that
Medicare pays a fair, competitive price for all benefits, including the
limited drugs the program now covers.
MEDICARE'S LIMITED DRUG BENEFIT
The Centers for Medicare & Medicaid Services (CMS) pays most of the
health care expenses of almost 40 million Medicare beneficiaries. If
Congress were creating the Medicare program today, we believe it would
certainly include a prescription drug benefit. When the Medicare
program was enacted in 1965, however, prescription drugs played a less
prominent role in health care than they do today. Although by law
Medicare does not generally cover over-the-counter or outpatient
prescription drugs, Medicare does cover some drugs, including:

Drugs that are not self-administered and furnished
``incident to'' a physician's service, such as prostate cancer
drugs;
Certain self-administered oral cancer and anti-nausea
drugs;
Certain drugs used in conjunction with certain
durable medical equipment or infusion devices, (e.g., the
albuterol that is put into nebulizers, which are devices used
by asthma patients);
Immunosuppressive drugs, which are used subsequent to
organ transplants;
Clotting factors for beneficiaries with hemophilia;
Erythropoietin, the drug that constitutes Medicare's
largest drug expenditure, is used primarily to treat anemia in
end stage renal disease patients and in cancer patients; and
Osteoporosis drugs furnished to certain beneficiaries
by home health agencies.

These drugs are typically provided in hospital outpatient settings,
dialysis centers, or doctors' offices, and are purchased directly by
the physician or physicians and providers. Generally, Medicare does not
cover preventive drugs such as vaccines. However, Medicare law provides
coverage specifically for certain vaccines, namely influenza,
pneumonia, and hepatitis.
By law, Medicare carriers generally pay for these drugs based on
either the actual charge or 95 percent of the AWP, whichever is lower.
This adds up to more than $5 billion a year for currently covered
drugs, approximately 80 percent of which is paid by the Medicare Trust
Funds. In general, Medicare beneficiaries must also share in the cost
of purchasing these drugs, except for the flu and pneumonia vaccines,
through their Part B premiums, the $100 Part B annual deductible, and a
20 percent coinsurance.
MEDICARE PAYMENT FOR CURRENTLY COVERED DRUGS
The AWP is intended to represent the average price at which
wholesalers sell drugs to their customers, which include physicians and
pharmacies. Traditionally, AWP has been based on prices that are
reported by drug manufacturers and printed in compendia such as the Red
Book, published by Medical Economics Company, Inc. However,
manufacturers and wholesalers are routinely offering physicians and
providers competitive discounts that reduce the actual amount the
physician or physicians and providers pays for the drugs. These
discounts are not reflected in the published price and reduce the
amount many physicians and providers actually pay to levels far below
those prices published in the Red Book. However, Medicare's regulated
payment system is tied to the published price of the drugs, precluding
the program from obtaining competitive discounts for the drugs it
covers. In addition, use of the AWP, as reported by manufacturers to
companies that compile such prices, creates a situation where a
manufacturer can, for certain drugs, arbitrarily increase the reported
AWP and, in turn, offer physicians a deeper ``discount.'' Furthermore,
the deep competitive discounts, compared to the reported AWP, offered
by drug manufacturers could give physicians and physicians and
providers incentive to use a particular manufacturer's products for
Medicare beneficiaries.
To give an example, a recent General Accounting Office report found
that Medicare payments in 2001 for Part B-covered outpatient drugs were
often much higher than the prices paid by physicians and pharmacy
providers. The GAO reported that discounts of 13 to 34 percent off AWP
were widely available for many physician-administered drugs. GAO also
noted that two other physician-administered drugs had discounts of 65-
86 percent.
This Committee, CMS, the Department's Office of the Inspector
General (IG), and others have long recognized the shortcomings of using
AWP as the basis for Medicare drug reimbursement. The IG has published
numerous reports showing that true competitive market prices for the
top drugs billed to the Medicare program by physicians, independent
dialysis facilities, and durable medical equipment suppliers were
actually significantly less than the AWP reported in the Red Book and
other similar publications. As competitive discounts have become
widespread, the AWP mechanism has resulted in increasing payment
distortions. However, Medicare has continued to pay for these drugs
based on the reported AWP (less 5 percent). It is simply unacceptable
for Medicare to continue paying for drugs in an outdated,
noncompetitive way that costs beneficiaries and the program far more
than it should.
In the past, the Agency has attempted to remedy disparities between
Medicare payments based on AWP and the amount actually paid by
physicians and providers. However, these efforts have been
unsuccessful. For example, the Agency's proposed June 1991 physician
fee schedule included payments based on 85 percent of AWP. The Agency
also proposed that certain high volume drugs be reimbursed at levels
equal to either the lesser of 85 percent of AWP or the physicians' and
providers' estimated acquisition cost. The Agency received many
comments, primarily from oncologists, indicating that an 85 percent
standard was inappropriate. Most comments indicated that while many
drugs could be purchased for less than 85 percent of AWP, other drugs
were not discounted. Other comments suggested that while pharmacies and
perhaps large practices could receive substantial discounts on their
drug prices, individual physicians could not. As an alternative,
beginning with 1992, the Agency established a policy for Medicare to
pay either the AWP or the estimated acquisition cost, whichever was
less.
Since the estimated acquisition cost approach proved to be
unworkable, subsequent legislation was proposed that would have
required Medicare to pay physicians their actual acquisition cost for
drugs. Under this proposal, physicians would tell Medicare what they
paid for the drugs and be reimbursed that amount, rather than the
Agency developing an estimate of acquisition costs and paying
physicians based on that estimate. After considering this proposal,
Congress adopted an alternative approach in the Balanced Budget Act of
1997 (BBA), setting Medicare's payment for drugs at the lesser of the
billed charge or 95 percent of AWP. While this brought Medicare
payments closer to the prices that physicians and providers pay for
drugs, Medicare payments for many drugs were still significantly
greater than the competitive discounts obtained by physicians. The
system still tied Medicare payments to the artificially inflated
industry-reported list prices. In fact, in a December 1997 report, the
IG found payments based on AWP to be substantially greater than the
prices available to the physician community. As an alternative to
actual acquisition costs, Congress considered proposals to pay all
Medicare drugs at 83 percent of AWP, a compromise between 95 percent of
the AWP and the average discount found by the IG.
In May 2000, the Department of Justice (DOJ) and the National
Association of Medicaid Fraud Control Units made advertised market
wholesale prices for 49 drugs covered by Medicaid available to State
Medicaid programs and to First Data Bank, a drug price compendium owned
by the Hearst Corporation. These wholesale prices, culled from
wholesale catalogs circulated among the physician and provider
community, while not reflecting certain other discounts such as
rebates, were closer to the actual average wholesale prices for these
drugs than the drug manufacturers' reported AWP. In 2000, the Agency
sent this new information to Medicare carriers and instructed them to
consider these alternative wholesale prices as another source of AWP
data in determining their January 1, 2001, quarterly update for many of
these drugs. Due to concerns about Medicare reimbursement for the
administration of the chemotherapy and clotting factor drugs, the
Administration instructed our carriers not to use the data for those
drugs at that time. Anticipating Congressional action that was soon
enacted in BIPA, establishing a moratorium on decreases in Medicare
drug reimbursement rates, the Agency in December 2000 postponed
Medicare carriers' use of the DOJ data while the GAO conducted a study
of Medicare drug pricing and related payment issues. BIPA also provided
some authority for the Secretary to address AWP after reviewing the
GAO's findings.
FLAWS IN AWP THAT AFFECT THE OUTPATIENT RULE
The shortcomings that I've discussed today regarding AWP also
affect payment in the outpatient prospective payment system (OPPS).
More specifically, it has affected perceptions about the updated
payments for OPPS for 2003. In 2000, CMS adopted a prospective payment
system for outpatient services delivered by hospitals, which includes
the drugs and devices used in a procedure. By law, payments must be
based on the relative cost of treatment. The law further requires that
CMS must make additional payments, called ``pass-through payments,''
for new drugs and devices. These payments are allowed for two to three
years and, for drugs, are calculated to be the difference between the
amount in the rate for existing products and the average wholesale
price for the new product. The total dollars set aside for these new
drugs and devices currently is limited to 2.5 percent of total spending
for services under the outpatient prospective payment system. By law,
CMS must use AWPs as reported by the manufacturer for these drugs to
set payment rates for these drugs and to calculate the amount funded
out of the pass-through pool. Using AWPs that overstate the costs of
some drugs results in higher ``pass-through payments'' and makes less
money available for other items eligible for pass-through payments.
In 2003, as a result of collection and analysis of nearly 60
million actual hospital claims, we have been able to set payment rates
more accurately. As the payments for some procedures go up, payments
for other ones go down and vice versa. However, a recent New York Times
article misrepresented the impact on payments to hospital outpatient
departments. Although payments for many items will be lower in 2003,
overall Medicare payments to outpatient departments are projected to
increase by almost 8 percent, reflecting hospitals' estimated
acquisition costs rather than manufacturers' reported wholesale prices
for prescription drugs. While proposed rates for many drugs are lower
than 2002 rates, 2002 rates were likely greatly overstated in many
cases because they were based on overinflated manufacturers' AWPs.
The story is similar with respect to our payments for procedures
using pass-through devices. For 2002 rates we used prices reported by
manufacturers to set payment rates for these types of procedures. The
other hospital costs for the procedure, such as the operating room,
supplies, and nursing time, were calculated using the latest available
charges from approximately 50 million hospital claims and the latest
available cost reports. I'd like to discuss a couple of examples of how
payment rates have changed over the past several years for procedures
that use pass-through devices. In my first example, payment for the
insertion of a cardioverter-defibrillator, a hospital in 2001 received
$7,411 for the procedure plus an additional amount for pass-through
devices used during the procedure. The additional payment amount for
pass-through devices was equal to the hospital's charges for the
device(s) reduced to costs using the latest available hospital's cost-
to-charge ratio (CCR). For 2002, the estimated cost of the procedure
was about $1,500. Using claims and cost report information from
hospitals, we would have added another $6,800 for device costs and the
total payment would have been about $8,300. However, because we folded
in an additional amount based on prices submitted to us by
manufacturers, we added another $11,100 to the payment--bringing the
total device-related costs to $17,900. Thus, in 2002, a hospital
receives about $19,400 plus an additional amount in pass-through
payments. For 2003, we have determined that the total payment for the
procedure should be about $9,400. This payment reflects the cost of the
procedure ($1,550) plus the estimated cost of devices used with the
procedure ($7,850). Because pass-through eligibility for the devices
that are being used with this procedure will expire January 1, 2003, we
have fully incorporated their estimated costs, using hospital claims
and the latest available cost reports, into the costs of the procedure.
Similarly in my second example, the implantation of a drug infusion
device, a hospital in 2001 received $561 plus an additional amount for
pass-through devices used during the procedure. The additional payment
amount for pass-through devices was equal to the hospital's charges for
the device(s) reduced to costs using the latest available hospital's
cost-to-charge ratios (CCR).
For 2002, the estimated cost of the procedure was about $940. Using
claims information from hospitals we would have added another $3,800
for device costs and the total payment would have been about $4,750.
However, because of the fold-in based manufacturers' reported prices,
we added another $2,400 to the payment--bringing the total device-
related costs to $6,200. Thus in 2002 a hospital receives about $7,150
plus an additional amount in pass-through payments.
As noted in the proposed rule, we estimate that the total payment
for the procedure for 2003 should be about $6,660. This payment
reflects the estimated cost of the procedure ($1,640) plus the
estimated cost of devices used with the procedure ($5,020). Because
pass-through eligibility for the devices that are being used with this
procedure will expire January 1, 2003, we have fully incorporated their
estimated costs into the procedure.
To the extent that CMS has to overpay for devices, payments for and
access to other services for all beneficiaries are reduced. For
example, between 2001 and 2002, payment for diagnostic mammography fell
13 percent. Under the proposed 2003 rates, the rationalization of
payment for many devices has helped to allow for an 18% increase in
diagnostic mammography payments. In the end, from 2000 to 2003, payment
rates for most procedures using pass-through devices will have
increased steadily and significantly. We shouldn't be allowing
artificial prices nor artificial AWPs to undercut access to basic,
preventive, and other services for beneficiaries.
CONCLUSION
Medicare beneficiaries rely on prescription drugs to treat a wide
variety of chronic and acute conditions. For many seniors, in the
traditional fee-for-service plan, the coinsurance that they pay is tied
to Medicare's payment rate. We must find a fair way to make sure that
Medicare beneficiaries and taxpayers do not pay excessive prices for
prescription drugs that are far above the competitive discounts that
are widely available today to other Americans. We need to pay
appropriately for all Medicare benefits, including the prescription
drugs we do cover and the services required to furnish those drugs. We
look forward to working with you Mrs. Chairman, this Committee, and the
Congress to implement improvements in Medicare's payment policy for
currently covered drugs. Thank you for the opportunity to discuss this
important topic with you today, and I am happy to answer your
questions.

__________

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Drug APCs for Select Cancer and Other Drugs with Pass-Through Status Set to Expire January 1, 2003
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Percent Difference Percent Change in
2002 Payment Between 2002 2003 Proposed to
2001 2001 Median Rate (Net of Payment (net of 2002 Payment Rate
Brand Total Hospital Cost Pro-rata 2003 Proposed pro-rata and 2001 (Net of Pro-rata
APC Descriptor Name Units Per Unit Reduction) Payment Per Unit median cost) Reduction)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0849 Rituximab cancer Rituxan 207,331 $310.85 372.38 $296.97 +20% -20.3%
treatment
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
7046 Doxorubicin hcl Doxil 36,834 $247.41 294.08 $236.12 +19% -19.7%
liposome inj
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0844 Pentostatin Nipent 25 $1,161.78 1355.13 $1,108.83 +17% -17.0%
injection 8
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0858 Inj cladribine per Leustatin 10,482 $46.18 34.79 $43.69 -25% 25.6%
1 MG
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
7042 CapecitXeloda or 204,556 $1.93 2.00 $1.56 +3% -22.0%
150 mg
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0733 Non esrd Epoetin Procrit 12,272,503 $10.32 $9.46 $9.88 -8% +4.5%
alpha Inj
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
0734 Darbepoetin alfa, 1 Aranesp $4.74
mcg
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Chairman JOHNSON. Thank you for your testimony, Mr. Scully.
Unfortunately, last night, I only had your Senate Committee
on Finance statement of March. While I reviewed that, that was
the most we had and my morning did not allow me to look at the
statement that we just received. I am delighted to hear of the
more detailed information that you have. It is absolutely true
that you need to be able to respond to drops in drug prices as
volume rises, as well as other changes in the market. So, I
hope that we will be able to work together to get this job
done.
The new Gallup survey results developed by the American
Society of Clinical Oncology (ASCO), as they will testify
later, do give us some very concrete information. Will you be
willing to work with them on that data and its implications for
reimbursement of practice expenses? The Gallup survey does use
the same methodology that the American Medical Association and
CMS uses for other payment costs.
Mr. SCULLY. Absolutely. I believe we have been working with
them a lot on their data, and we will probably end up
incorporating it in whatever policy we use, to the extent we
can.
Chairman JOHNSON. The biggest and most dramatic difference
is the issue of payment for non-physician work, that so many
other types of personnel are necessary to deliver this care,
that it does not come out in the way we generally calculate
payments. So, we do have to look differently at practice
expenses in the delivery of cancer care than we do in some
other areas. Would you agree on that?
Mr. SCULLY. Absolutely, and I think we have acknowledged
that we need to make some changes in the practice expense
payment for oncologists. As you probably remember, we went
through one of your oncology clinics in your district earlier
this year. I think it is clear that in a number of these
settings, the base practice payments are underpaid, but they
also are relying on a transfer subsidy, basically, of excessive
margins on AWP. We believe we should pay people correctly in
both situations.
Chairman JOHNSON. Thank you. In preparing for this hearing,
I looked at the list of the 32 drugs that are 82 percent of the
cost for the government. While Albuterol was on that list, none
of the other couple of pages of examples of gross spreads were
on that list. I want to know whether or not your agency is
going to be able to, of the 450 drugs, give us a better
understanding of which of those drugs are oral, which are
injectable, and which we have a practice expense component,
because you cannot treat them sort of all the same.
If some are just an injection in an office that is in
addition to a whole other office procedure or visit for which a
physician is reimbursed, that is different than if it is part
of a day-long process of treatment. So, it is interesting to me
that some of the largest abuses, some of the biggest spreads
are in oral and injectable drugs, with which there is not, to
my knowledge, a significant practice expense issue.
So, it would be very helpful if you could provide for the
Committee a list of those that you think there is a practice
expense issue associated with. Then, the other critical piece
of information to doing this right, is which of those drugs are
sole-source, which are dual-source, and which are multi-
sourced. You can compete where there is multi-source. You
cannot compete where there is sole source, and in some of the
cancer areas, that is a very big issue. So, do you think you
will be able to provide us with that kind of information in the
near term as we move forward trying to resolve this?
Mr. SCULLY. Absolutely. We would be happy to.
[The information follows:]

Centers for Medicare & Medicaid Services
Washington, DC 20201
1/6/03

Hon. Nancy L. Johnson
Subcommittee on Health
Committee on Ways and Means
U.S. House of Representatives
2113 Rayburn House Office Building
Washington, DC 20515

Dear Chairman Johnson:

The attached table shows information for the top 35 drugs that
account for 86.5 percent of Medicare spending for currently covered
drugs paid for by part B carriers. Drugs paid by intermediaries (e.g.,
to ESRD facilities for epoetin, vitamin D and iron preparations, and to
hospital outpatient departments for separate drug APCs or for pass-
through drugs) are not shown on this table. The table shows both the
technical and common names for the drug as well as the clinical
indications for which the drug is used.
Medicare Spending: In 2001, allowed charges were $6.4 billion for
all carrier paid drugs. The 35 drugs shown on the table account for
$5.6 billion. Seven drugs account for 50.5 percent of spending for
carrier-paid drugs ($3.2 billion). The top drug, Procrit, accounts for
12.1 percent of spending. Two interchangeable prostate cancer drugs,
Lupron and Zoladex, combined account for 17.2 percent of carrier paid
drugs. Two drugs furnished via a covered item of durable medical
equipment, Albuterol and Ipratropium Bromide, account for 12.8 percent
of carrier drug spending.
Competition: The table also shows the type of competition for the
drug, i.e., whether the drug is sole source, multi-source or generic.
This information is primarily from the hospital outpatient department
prospective payment system classification for the 30 of these drugs
covered under that system and from the FDA Orange Book for four drugs.
Other than unclassified injections:

Twenty of the 35 drugs, representing 44.0 percent of
Medicare carrier drug spending are sole-source.
Nine of the 35 drugs, representing 25.2 percent of
Medicare carrier drug spending are multi-source.
Five of the 35 drugs, representing 16.4 percent of
Medicare carrier drug spending are generic.

Form of Administration: The table also shows the form of
administration for the drug. Other than unclassified injections, which
account for 1.0 percent of drug spending and have multiple forms of
administration:

Twenty-two of the 35 drugs, accounting for 38.0
percent of carrier spending, are administered by intravenous
infusion.
Two of the 35 drugs, accounting for 12.8 percent of
carrier spending, are administered through an inhaled solution,
i.e., through an item of Medicare-covered durable medical
equipment. Specifically, albuterol and ipratropium bromide are
inhaled as an aerosolized solution through a nebulizer.
Two of the 35 drugs are oral immunosuppressive drugs
taken to prevent rejection of an organ transplant. They account
for 1.5 percent of carrier spending.
Eight of the 35 drugs, accounting for 33.3 percent of
carrier spending, are administered through injections. Of
these, two are subcutaneous injections, two are injected into a
joint, three are administered through intramuscular injections
and one can be administered by subcutaneous or intramuscular
injection. Medicare pays a separate fee for administration of
these injections.

Payment for Drug Administration/Dispensing: Medicare pays a
separate fee for injections. Each of the subcutaneous and intramuscular
injections and injections into a joint would receive such separate
payment.
Medicare pays a separate fee for administration of chemotherapy
drugs (and other drugs administered through intravenous infusion such
as Remicade for rheumatoid arthritis).
Oncologists and rheumatologists have raised issues regarding the
adequacy of payment for the administration of drugs. These concerns
generally involve the administration of intravenous infusion drugs and
other drugs that are not taken orally. Oncologists argue that Medicare
payment for chemotherapy administration is too low and drug
overpayments are necessary to subsidize a practice expense
underpayment. Rheumatologists make a similar argument with respect to
infusing Remicade.
Medicare does not make a separate payment for administration of
clotting factor to treat hemophilia. A draft GAO report recommends that
Medicare lower payment for clotting factor and establish a separate
payment for clotting factor administration.
It has been suggested that ESRD facilities use their Medicare drug
mark-ups to compensate for what they believe to be inadequate composite
rates. It has also been suggested that there may be issues about
administration or dispensing of infusion drugs (other than chemotherapy
drugs) furnished via an item of Medicare-covered durable medical
equipment. Suppliers of durable medical equipment have argued that
there is an administration or dispensing issue regarding inhalation
drugs furnished through durable medical equipment, such as nebulizers.
CMS clinical staff have reviewed the remaining carrier paid drugs
that Medicare currently covers. For drugs not on the list of top 35
drugs, the same types of issues would arise for chemotherapy, clotting
factor, ESRD facility separately billable drugs and infusion and
inhalation drugs furnished via durable medical equipment. Our clinical
staff review does not suggest different types of administration issues
for the remaining drugs.
There are two types of issues regarding using some of the savings
from a revised method of paying for drugs currently covered in Medicare
to pay for administration or dispensing of these drugs. First, for
drugs where the administration is paid under the physician fee
schedule, increases in administration payments would need to be done in
a manner that is not budget-neutral under the physician fee schedule.
Second, for drugs where the administration is not paid under the
physician fee schedule, there an administration or dispensing fee would
need to be established. We would be glad to work with the Committee
staff to provide technical assistance to address both of these issues.

Sincerely,
Hon. Thomas A. Scully
Administrator
__________

ALLOWED CHANGES FOR TOP 25 DRUGS PAID BY CARRIERS
CY 2001 Through November 2002
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Type of Allowed Percent of total percent of total Form of
HCPCS Code Description Clinical Indication(s) Competition** Charges*** (in Medicare drug Medicare drug Administration
millions) spending spending
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Q0136 Non-ESRD epoetin alfa Treatment of Anemia: in cancer Multi-source $779.9 12.1% 12.1% Subcutaneous,
inj (Procrit) patients on chemotherapy, related Intravenous
to AZT treatment of HIV-AIDS, from bolus
chronic kidney failure; reduction
of allogenic blood transfusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9217 LeuAdvanced prostatic cancer; central Sole-source $665.5 10.4% 22.5% Intramuscular
(Lupprecocious puberty; endometriosis;
Uterine leiomyomata (fibroids)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7644, Ipratropium Bronchospasm (Asthma and chronic Generic $469.5 7.3% 29.8% Inhaled
solution]
J7645 Bromide (Atrovent) obstructive lung disease)
Rhinorrhea: perennial rhinitis,
common cold
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9202 Goserelin acetate Advanced prostatic cancer; central Sole-source $437.2 6.8% 36.6% Subcutaneous
implant (Zoladex) precocious puberty; endometriosis;
Uterine leiomyomata (fibroids)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7619, Albuterol Asthma, chronic obstructive lung Generic $354.4 5.5% 42.1% Inhaled solution
J7618, disease
J7620,
J7625
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9265 Paclitaxel injection Cancer: ovarian, breast, lung; AIDS- Multi-source $269.2 4.2% 46.3% Intravenous
(Taxol) related Kaposi's sarcoma infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9310 Rituximab cancer Non-Hodgkin's lymphoma Sole-source $269.2 4.2% 50.5% Intravenous
treatment (RituXan) infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J2430 Pamidronate disodium Reduce high calcium levels caused Sole-source $193.4 3.0% 53.5% Intravenous
(Aredia) by cancer; bone metastases from infusion
cancers and multiple myeloma;
Paget's disease
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1745 Infliximab injection Rheumatoid arthritis; Crohn's Sole-source $196.1 3.1% 56.5% Intravenous
(Remicade) disease infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9170 Docetaxel (Taxotere) Cancer: breast, lung Sole-source $167.9 2.6% 59.1% Intravenous
infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9045 Carboplatin injection Ovarian carcinoma Sole-source $165.2 2.6% 61.7% Intravenous
(Paraplatin) infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1441 Filgrastim Myelosuppresive chemotherapy; Bone Multi-source $163.1 2.5% 64.2% Intravenous
infusion,
(480 injection marrow transplant; Peripheral Blood Subcutaneous
mcg) (Neupogen) Progenitor Cell collection, severe
J1440 chronic neutropenia
(300
mcg)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9206 Irinotecan injection Metastatic carcinoma of the colon Sole-source $161.4 2.5% 66.7% Intravenous
(Camptosar) or rectum bolus and
infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9201 Gemcitabine HCl (Gemzar) Cancer: pancreatic, lung Sole-source $136.9 2.1% 68.8% Intravenous
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1561,3 IV immune globulin Immunodeficiency; low platelets Generic $118.0 1.8% 70.6% Intravenous
(IveeGam, Biogam BayGam, (ITP); bone marrow transplants; HIV
Panglobulin) infection; severe blistering skin Infusion
diseases
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1260 Dolasetron mesylate Antiemitic (for vomiting after Multi-source $112.6 1.8% 72.4% Intravenous
(Anzemet) chemotherapy); Prevent of treat infusion
post-operative nausea
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7320 Hylan G-F 20 injection Pain from knee osteoarthritis Multi-source $84.7 1.3% 73.7% Injected into
(Synvisc) joint
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J3490 Drugs unclassified Multiple Not applicable $66.0 1.0% 74.7% Multiple
injection
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J0640 LeucovorinCancer (after methotrexate) Generic $63.0 1.0% 75.7% Intravenous
injection (Wellcovorin)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
90658 Flu Vaccine Influenza prevention Multi-source $74.1 1.2% 76.9% Intramuscular
(3 yrs)
90659
(whole)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J2405 Ondansetron HCl Antiemitic (for vomiting after Multi-source $60.3 1.0% 77.9% Intravenous
injection (Zofran) chemotherapy) infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9355 Trastuzumab (Herceptin) Breast cancer Sole-source $54.8 0.9% 78.8% Intravenous
infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7517 Mycophenolate mofetil Allogenic transplants prevent organ Sole-source $55.0 0.9% 79.7% Oral
oral CellCept rejection
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7190 Factor viii (Monarc-M) Hemophilia Generic $50.7 0.8% 80.5% Intravenous
infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J2820 Sargramostim injection Bone marrow transplant; recovery of Sole-source $41.7 0.7% 81.2% Intravenous
(Leukineneutrophils after chemotherapy infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J0151 Adenosine injection For use in cardiac stress testing Sole-source $40.3 0.6% 81.8% Intravenous
(Adenoscan) when patient cannot exercise infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7192 Factor viii recombinant Hemophilia Multi-source $40.7 0.6% 82.4% Intravenous
infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J1526 Granisetron HCl Antiemetic (nausea and vomiting Sole-source $34.7 0.5% 82.9% Intravenous
injection (Kytril) after chemotherapy)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7507 Tacrolimus oral Prevention of transplant rejection Sole-source $39.5 0.6% 83.5% Oral
(Prograf)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9390 Vinorelbine tartrate Cancer: Lung, Sole-sourcerian $34.2 0.5% 84.0% Intravenous
(Navelbine) injection
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J7315, Sodium Knee pain from osteoarthritis Sole-source $34.4 0.5% 84.5% Injection into
joint
J7316, hyaluronate
Q3030, (Hyalgan;
J7317 supartz)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9350 Topotecan (Hycamtin) Cancer: ovarian, small cell lung Sole-source $33.0 0.5% 85.0% Intravenous
infusion
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J9000 Doxorubicin injection Cancer: leukemia, kidney, sarcoma, Multi-source $31.9 0.5% 85.5% Intravenous
(Adriamycin) breast, ovarian, bladder, thyroid, injection
lung, lymphomas, stomach
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J2352 Octreotide acetate Acromegaly, carcinoid tumors, Sole-source $30.6 0.5% 86.0% Intramuscular or
injection (Sandostatin) VIPomas, severe diarrhea subcutaneous
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
J0585 Botulinum toxin Dystonia, strabismus and Sole-source $28.6 0.5% 86.5% Intramuscular
injection (Botox) blepharospasm, spasticity
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
TOTAL $5,558.4 86.5% 86.5% N/A
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
*Does not include Epoetin for ESRD or any other drugs paid for by intermediaries.
**Type of competition based on the 202 OPPS pass-through drug classification.
***Allowed Charges are what Medicare allows before application of deductible and coinsurance.
Source:

Facts and Comparisons, 2001

USPDI, 2002

FDA Orange Book

Chairman JOHNSON. There are two other issues I wanted to
bring up. One is that I do not believe you have the authority,
and you indicated that it is not at all clear to you whether
you have the authority. I think you have the authority to
compete prices. I think at least that may be less difficult. I
would worry about your competing prices and changing prices
without the authority to take the money saved and use whatever
portion the data indicates to reimburse for practice expenses
without putting that money into the big pool of practice
expense dollars where it would be averaged across every other
physician and increase practice expenses for every physician in
every discipline and not adequately increase oncologists.
So as you approach this problem, are you looking at
defining in the law clearly that the practice expense money
used to reimburse for the drugs whose price we are going to cut
will stay with the physicians who have those practice expenses,
and not allow that money to sink into the general pool from
which practice expenses for every other practicing physician
affected by Medicare are reimbursed? Do you think that you have
the authority, and are you committed to achieving that goal?
Mr. SCULLY. Well, we are certainly committed to achieving
the goal. We would certainly like to make the fix in a context
where we do not have a negative 4.4-percent pot, first of all.
I think it is clearly appropriate to put the practice expense
funds back where they are needed, and there may be other
categories, but as I said, oncology is probably number one.
Other areas we have identified that rely on AWP for margins are
hematologists and dialysis facilities. We clearly think that
you should put the money back in where there is a problem. I
think we are committed to doing that.
It is unclear, and I have spent a lot of time on it,
legally whether we--how we can do that. It would be a lot
cleaner and a lot better if Congress directed us to do it that
way.
Chairman JOHNSON. We will need to direct you to do it that
way, but we will also need help on the clarity of the law. We
have spent hours and hours on this. It is hard to define those
dollars, keep them in the pool that will reimburse the people
appropriately, then have our clean savings, and then maintain
that after year one.
So this is an issue that if we do not address correctly, it
will, without question, close cancer treatment centers across
the country. Our hospital-based cancer treatment facilities are
not capable of absorbing the number of patients that need
attention, nor would they provide access to elderly people who
often are not able to drive themselves. So, the access issue is
critical. We are blessed to have developed this system that
provides greater access to cancer care than any other Nation
provides its elderly, or its citizens. So, we want to be sure
to do this right. It does need to be done, but it must be done
correctly.
Last, in your experience with bidding drug prices, what
standards are you finding you will need to include to prevent
things like the following? This is an example that comes to me
from California, where they have had some experience in this.
The health plan changes the drug that it is going to offer
for a patient, a cancer patient, monthly depending on where
they get the lowest price. Now, that can be very difficult for
the continuity of care. That is one problem. The second problem
is that sometimes they take the powder form, because it is the
cheapest, but that takes 20 minutes in a shaker machine in
order to dissolve the powder form into an injectable component.
It does come in a liquid form. So, if you just look at price,
you are going to shift some very significant personnel costs on
providers. That is not fair. We have to be able to deal with
that.
Secondly, mail order alone does not work. Mail order can be
delivered to your doorstep and sit in the sun and have no
effect afterward or be badly affected. Some of these are very
toxic agents, and how they are delivered, when they are
delivered, and the physician having ample lead time so that if
a drug needs to be complemented by another drug to address
white cell problems, that drug is also there, is important.
So, these problems are real. They have been experienced by
physicians who are dealing with plans that competitively bid
cancer drugs. We cannot go nationwide with a program that does
not set some standards in regard to what kinds of costs could
be forced on a physician, what kinds of disruption in
continuity of care can be tolerated, and what the standards
must be for certain kinds of drugs in terms of mail order
delivery and handling, because if some of these drugs are not
managed by the wholesaler in an appropriate fashion, they will
not do the job. They will be compromised in their
effectiveness. Some oncologists actually go and check the
wholesaler. They make unannounced visits to see that the drugs
are well managed.
So far, we do not have an example of a competitive bidding
system in which there are such quality controls. Has your
agency gotten into this? Will you be able to work with us on
this issue of quality controls?
Mr. SCULLY. Sure. I think whether it is the DME competitive
bidding where you are doing it or whether it is drug
competitive bidding, it is going to take a number of years to
phase it in rationally. I do think there are some benefits to
it.
Clearly, we are not trying to just get low prices. The drug
that I mentioned, Albuterol, we had 30 bidders, and we took 11.
I think in the past, we had very little oversight of who was
selling it, and in the competitive bidding process, we have a
site inspection and probably more oversight of the people who
won the bids. So, in some ways, we are more involved in the
process of overseeing the people that are actually selling the
drugs. Clearly, by having a third of the bidders win, quality
is every bit as big a factor as price, which I think we need to
be clearly focused on.
In the case, I believe, of the San Antonio demo, we
actually hired an ombudsman, a third-party ombudsman, to accept
complaints and do independent review of what is going on. So
there are clearly ways--I think there are ways that,
potentially, you could have better oversight and better
quality, and at the same time create at least some pressure to
get better prices.
Chairman JOHNSON. Thank you. I look forward to working with
you. It certainly is disturbing that things like Leucovorin,
and the calcium have a spread of 6,581 percent. So, I do not
differ with you that this is a problem that we need to address,
both out of fairness to the taxpayers----
Mr. SCULLY. If I can just give you one more example, and I
do not want to pick on them, because I actually had good
results, but I had, I think, a fairly important cancer drug
that came in with an AWP a couple months ago of $28,000,
because I am sure that is what they thought was a neat price. I
found out that the VA was paying about, depending on how you
calculate it, $12,000 to $14,000. This happened to be the in
outpatient setting. We came to a very good resolution which
will not be final until the rule comes out, but I think we
actually ended up determining pretty close to a reasonable
price.
The bottom line is, in most cases, had this drug not been
$28,000, and the vast bulk of them are not, they are usually
$300, and I had not happened to notice it because it was so
huge, which is almost by accident, people make up AWPs.
Whatever they just happen to think is a great price goes in the
Red Book as an AWP, and we pay it. That is a crazy process.
In this case, because it was such a high-priced drug and it
happens to be, I think, a pretty good cancer drug, I think we
talked to the company and came up with a very rational result
that will pay an appropriate price and give great access to
patients. What scares me is how many of the other ones that are
not that big that we do not notice that just come through and
get paid for automatically. It is a crazy process.
Chairman JOHNSON. I absolutely agree with you. We are very
careful in what we pay for every other purchase in Medicare,
and we should be careful about what we pay for drugs.
The VA example that you give is very important, though, for
people to remember. We appropriate dollars to the VA to deliver
the drug to the patient, and that is the practice expense issue
that we also have to give equal time to.
Mr. SCULLY. I had the VA's budget for 4 years in the last
Administration. I do not mean to compare the VA price. It is
one of many indicators. It was a flag for me that----
Chairman JOHNSON. Absolutely.
Mr. SCULLY. The VA has a totally different delivery
mechanism.
Chairman JOHNSON. Mr. Stark?
Mr. STARK. Thank you, Madam Chair.
I gather that you have outlined what you could do if we do
not act, but you do not think it would be as effective because
of reserving the savings to adjust the payments to the
providers. I also gathered in your testimony, I think you said
or indicated that you thought it would be best to go currently
with actual cost and build the payment constraints on that,
looking forward to moving to a competitive bidding system, is
that a summary of----
Mr. SCULLY. I think I tried to say, Congressman Stark, all
year to the three Committees involved is that we just want to
get something done, and we are interested----
Mr. STARK. I think I heard you say that you could get into
using the actual price more quickly and then move on, perhaps,
it would take some time to work on a bidding----
Mr. SCULLY. I think in the short term, you could clearly
make an argument that going to an average manufacturer's price
(AMP) or ASP-type price clearly delivers the quickest change
and probably the quickest savings. My only concern there is if,
and obviously there are a lot of interested parties in this, if
they get locked into a new price, like an ASP or AMP, for
years, they will come back and say, we do not need to do it
anymore. You have got whatever your number is. I believe in the
long run, a more competitive market-based approach is probably
going to work better.
Mr. STARK. They are both market based, I mean. It is a
question--I am curious. The GAO is going to tell us that the
Albuterol, you said you could save 25 percent in your
experiment, and GAO tells us that 85 percent discounts are
generally available. What is wrong with using the generally
available discounts? Is there something wrong with the people
who are buying it that way and saving 85 percent instead of 25
percent?
Mr. SCULLY. My view is we should find the best price we can
pay and try to save as much money as we can.
Mr. STARK. Consistent with getting quality drugs.
Mr. SCULLY. Yes.
Mr. STARK. Let me confess, and this is a very difficult
confession to make, but I am unaware, probably because I do not
pay enough attention, but I am unaware of the proposal that our
Committee is now considering for competitive bidding, mostly
because they have not shared it with the minority. I am aware
of the bills that would take various average pricing. Could you
summarize for us what you see as the current difference in
these programs, and what are the problems we would have to
solve if we go to bidding? As I say, this is something we have
never discussed, and I would be interested in getting your read
on it.
Mr. SCULLY. I am not sure the competitive bidding approach
has been sketched out in detail with the Administration,
either. We have talked about it because we have been asked by
various committees, because I have a lot of staff who have
spent years on this, to think about different approaches. I do
not think it has gotten much more than conceptual, certainly
nothing written I have seen.
I think the basic concept is similar to the DME-type thing:
in major metropolitan areas in particular, over the next few
years, that we would--essentially, we did an Albuterol for
large-volume drugs, go out and have competitive pricing
opportunities. I think the problems you have there are similar
to what we have in other competitive bidding. In rural areas
and smaller towns, it is going to be more difficult, and you
probably have to have some kind of--what I believe our
alternative would be is kind of have a market-based pricing
mechanism.
Mr. STARK. That is what I was going to ask you. Where
Kaiser, say, in my district has got half the people, they can
get probably a lower bid than the pharmacist in Susanville,
where they have got a 10-bed hospital. Whereas we could average
the price that Kaiser gets, with the Susanville price, we would
get somewhat lower. Whether it would be lower for more or fewer
people, I do not know. That is a problem, I gather, unless you
have a winner-take-all, which I gather the industry would
object to.
Mr. SCULLY. I am not sure that is--our approach, I think,
is generally to--in a place like San Antonio, you can have 30
bidders and pick 11, I think you are probably going to get a
result. In a rural area, I am not sure it is--we are going to
be concerned about having one bidder.
I do think, however, that most of our carriers are Blue
Cross plans. If you talk to Palmeto or River Bend, which is
South Carolina or Tennessee, they have millions of people who
buy the same drugs under 65 years old. It is not that difficult
to figure out what the market for under-65-year-olds are. In
many cases, our contractors are not allowed to do that.
I think it is certainly possible to measure what the prices
are for people in commercial plans, and frequently these are
the same contractors we use, and pay what the commercial rates
are instead of a made-up rate.
Mr. STARK. Do you envision picking one contractor in an
area?
Mr. SCULLY. No. The only thing we envision, as an
administrative situation in the short run, if Congress did not
act, is we would probably pick--we have 23 Part B carriers that
do this now. They do it independently. We have been trying to
get all 23 of them, for a variety of reasons, to communicate
better. What we would probably do is pick whoever we thought
was the best one, had the best staff and the best information,
and say for the other 23--AWP is different in all 23 right now.
We could at least pick one and say, ``This is the reference
price. If you want to pay differently, explain to us why.''
Mr. STARK. Thank you. Thank you, Madam Chair.
Chairman JOHNSON. Mr. McCrery?
Mr. MCCRERY. Thank you, Mr. Scully, for joining us this
morning. Frankly, between your testimony, which was excellent,
and your responses to the questions from Mrs. Johnson and Mr.
Stark, I do not have a whole lot of questions left to ask.
However, let me explore a couple of things.
First of all, Mrs. Johnson was adamant that CMS research
the extent to which the practice expenses should be bolstered
to make up for the drop in the AWP or in the price for the
drugs, and I am wondering how much research CMS has done or how
much research you have access to that would allow you to
accurately make up that difference?
Mr. SCULLY. I think the whole system--arguably, the
physician fee schedule, relative value units (RVU), which I
have been involved in, as have many on the Committee, for 15
years, is never perfect. As I said, the GAO report, I think,
said $49 million. We said $52 million earlier in the year. We
spent a lot of time with the oncologists since. We have a lot
more data. The number is probably a little higher than that. I
am sure it will never be perfect, but I am pretty confident we
have a lot of different reference points to figure out the
right amount, and----
Mr. MCCRERY. For every specialty?
Mr. SCULLY. Probably--certainly for oncology, we spent a
lot of time on it. I think we have a fairly good idea for
hematology, which is smaller, and probably not as good for
dialysis facilities, but I think we have a pretty good idea.
There may be others that I have not mentioned, but those are
the three that I have had flagged by the staff as the biggest
problem areas.
Mr. MCCRERY. Does CMS plan to do a continual review of the
practice expenses, the changes in technology, the changes in
office set-up and all the things that one has to look at?
Mr. SCULLY. It is pretty controversial every year with the
physician community as it is, so I think we are constantly
reviewing, especially in the practice expense guidelines, which
the Secretary withdrew earlier this year. We work with all the
specialty groups through the Relative Value Update Committee
(RUC), which is done on the guidance that we convene all--the
Resource Utilization Committee, which makes all the
recommendations for all the RVUs and practice expenses every
year. I think we continually discuss this all year long in
Committees with all the specialty groups. So, we are very
focused on it.
I think because of the cross-subsidy in oncology for AWP,
even the RUC has acknowledged that over the years--I think
everybody acknowledges it--there has been an underpayment for
practice expenses and for AWP.
Mr. MCCRERY. Speaking of subsidies, you mentioned that you
could easily look at the under-65 population and get an
accurate reflection of the price of a drug. Is it not true that
that drug, that under-65 population could be subsidized by the
reimbursement from Medicare, which is vastly overblown?
Mr. SCULLY. Yes, but I think, and we had this discussion on
the prescription drug issue--it may sound unrelated, but I am
not sure it is--on our drug card. Seniors pay the highest cost
for drugs right now, and I think if they were organized, they
would pay--we think they would pay 15 percent less. Do we
expect prices to go up as a result for people under 65? Yes.
Right now, seniors are cross-subsidizing non-seniors, and I
think, arguably, if we squeeze the price of AWP down, do we
expect there might be some increases in the commercial market?
There probably would be. Clearly, we are vastly overpaying
right now.
Mr. MCCRERY. Yes, we clearly are, but my point is that the
under-65 price does not necessarily reflect the true market
price because it is being subsidized by the artificially high
price that they get from Medicare.
Mr. SCULLY. Yes.
Mr. MCCRERY. What I am really getting at here is that this
whole thing is a mess.
[Laughter.]
Mr. MCCRERY. I was down in Shreveport visiting the
pathologists, and they are concerned about the technical
component of their reimbursement being considered to be in the
Diagnosis Related Group (DRG). There are scores of examples of
that type of judgment that CMS has to make, that we have to
make, and in my view, the market should be making. Would it not
help a lot if we were to adopt the recommendations of the
National Bipartisan Commission on Medicare and go to a premium
support system that the market then would make these decisions
rather than a bunch of people sitting up here that have not a
whole lot of knowledge of all the intricacies of those market
decisions?
Mr. SCULLY. Well, Congressman, as I think you probably
know, philosophically, I completely agree with you, and I think
that, as I mentioned, Blue Cross of South Carolina, Blue Cross
of Tennessee, all these companies make these judgments every
day in the under-65 market. In the over-65 market, CMS fixes
prices. I think that will probably continue for a while. With
the system we have, I will be the best price fixer I can be.
We clearly think that, obviously, in the long run, that the
under-65 market, the Blue Cross plans and other insurers make
these judgments, and we think they probably make them more
accurately than we do. We are stuck with a not particularly
good system, and we are trying to make the best of it. I
totally agree with you.
Mr. MCCRERY. [Presiding.] You have my sympathy. Mrs.
Thurman?
Mrs. THURMAN. Thank you. Thank you for being here. Until
the last question, it sounded like everything was going along
just pretty good here.
[Laughter.]
Mrs. THURMAN. I would say it is heartening to hear that we
are all kind of on the same page here. I happen to have had an
opportunity just a couple of weeks ago to visit a cancer
center, and many of the issues that we are talking about here
certainly were a part of our discussion and their concerns.
Certainly, the nursing staff at the center was, I mean, by far
the best, along with the doctors, but they are just saying they
cannot continue to do what they are doing because of the cost
of the practice and doing the service.
So, I do think we need to get to the bottom of this and
figure out, and I think we should be honest about it. I think
we should say, you do this work and this is what you get paid
for. This is what the drugs cost, and we cannot hide this stuff
anymore. So I would say that.
I am curious within some of the staff that you have talked
about, if they have looked at all, if we were to fix this,
because of the 25 percent of Medicare beneficiaries that have
Medigap? Would there be a reduction in cost for them, as well,
or could our premiums go down in that area? Has anybody looked
at that?
Mr. SCULLY. I am not sure we have calculated the details of
that, but clearly in the physician office, it is usually at
least 20-percent co-insurance.
Mrs. THURMAN. Right.
Mr. SCULLY. So if we had a significant reduction in prices,
let us say it is just 15 percent, then seniors save 20 percent
of that. In the outpatient setting, as you know, the copayments
are all over the board, but we have a long-term policy to fix
it, which Congress passed. I think we are still looking at
probably 45-percent average copayments. So, in the outpatient
setting, seniors are paying frequently 45 percent of the drug
prices. Clearly, there would be some savings to seniors.
Mrs. THURMAN. So, we could suggest in the Medigap that they
need to be looking at some cost reduction if this were fixed in
that way.
Mr. SCULLY. Yes.
Mrs. THURMAN. Second, I want to thank you for meeting with
some of our constituents, I guess, with the University of
Florida and others on the protein bead issue. Can we fix this
at all? This also is an issue of payments on cancer therapy.
Mr. SCULLY. This has to do with our extremely popular
pending outpatient rule. My tongue is in my cheek.
Mrs. THURMAN. I believe it does have something to do with
your extremely popular----
[Laughter.]
Mr. SCULLY. The outpatient rule, as I think a lot of the
Committee know, I was involved in, when I was not in the
government, is incredibly complicated. It has got a lot of
problems. We are getting better at the pricing every year.
When we did our draft rule that came out on August 8,
essentially, we took 60 million claims and we pushed the
button, and the computer spit out the right rates. There were
many price changes, and I think many of them legitimate, for
drugs and devices that went down. As I mentioned, the benefit
is colonoscopies, emergency room visits went up.
For the final rule, we have culled through the data, met
with, I think, lots and lots of people from the industry,
including a number of people from Florida and a number of other
medical centers about proton beam devices. I have tried to be
very open to everybody in the world that wanted to come and
meet with us. We are using a lot narrower chunk of the data
that we think is more accurate, about 45 to 50 million claims.
I think you will see a lot of device-related and drug-related
ambulatory payment classifications (APC) go up in the final
rule, and I think the calculations will be far more accurate. I
probably spent 2 or 3 hours a day on this every day.
I do not think everybody in the world will be happy. I
think the final results of that rule will be probably more
accurate. On a relative basis, people will be happier with the
final rule than they were with the draft rule. My guess would
be that particular payment is probably one of them.
Mrs. THURMAN. Then just last, as you can imagine, we are
starting to hear from our nursing homes. I know this not the
subject of this hearing, but we need to give some idea back to
folks at home on the nursing home issue, because I believe they
took their 10-percent cut in payments. I just wondered if we
are supportive of efforts in Congress to eliminate or postpone
these 10 percent cuts.
Mr. SCULLY. Well, in fairness, I do not think it is fair to
portray it as a cut. I have a lot of friends in the nursing
home industry, and I have had this friendly debate with them.
In fact, I would note that I have hired--this is a little bit
off-track, but I hired a number of Wall Street analysts who
work for CMS who look at the relative health of the industries
from public information. We put out a very detailed 45-page
report on the health of the nursing home industry and these
add-ons--and what would happen if they went--and they are on
our website. I think it is very accurate, and I will be happy
to send it up.
We have done the reports on hospitals. We are putting out
one tomorrow or Monday on devices. We have done them on nursing
homes, on home health, and my view is that we have
responsibilities regularly just to figure out how people are
actually doing--if they are making a reasonable margin or if
they are losing money. We are trying to figure out accurately
from publicly available information how they are doing, if it
is the right thing.
In the nursing home field, largely based on that report
that we did earlier this year, Congress spent $12 billion a
year on Medicare nursing homes, and we added $3 billion in
temporarily. The Administration had the discretion to continue
$1 billion, and we did that earlier this year. Congress is
talking about adding back what are add-ons and the House bill
added on about another $1 billion. The Senate did about the
same. I think that we are up in the air about that, whether
that should be done or not.
Chairman JOHNSON. [Presiding.] Mr. English of Pennsylvania.
Mr. ENGLISH. Thank you, Mr. Scully. At the risk of missing
a procedural vote, I do have a question that I wanted to pose
to you.
A lot of the discussion about AWP reform is focused on
cancer treatments and oncologists, which is one of my areas of
interest. Is it not true that there are also some other types
of non-cancer therapies that should be included in discussions
to ensure that all patients continue to have access to
medically necessary therapies? Can you tell me the other types
of health care providers, disease states, and drug therapies we
should be keeping in mind as we design policies to ensure
patient access, and what other types should we be taking into
account?
Mr. SCULLY. I think there are a lot of different provider
areas that may have small impacts from AWP, and we are
certainly willing to work with the Committee to identify those.
I think the big dollars are largely in oncology, probably the
second biggest is in dialysis facilities who also rely on
margins from AWP, and hematologists, the third. I think almost
every physician, to some degree, that administers drugs
probably has some beneficial cost-shifting benefit from AWP. I
think those are the three big areas.
Mr. ENGLISH. My impression is that there are some others
that would also be impacted by AWP, including osteoarthritis,
rheumatoid arthritis, multiple sclerosis (MS), acquired immune
deficiency syndrome (AIDS), and anemia. Have you solicited
input from any non-cancer physician provider groups about these
issues?
Mr. SCULLY. We have, and I think some of the ones you
mentioned, clotting factors is one very large one. I mean, we
are more than happy to meet with any of them and discuss any
appropriate data they have.
Mr. ENGLISH. Very good. Thank you, and I appreciate your
participation today. I also want to thank you again for coming
to Northwestern Pennsylvania to help us with some of the
reimbursement reform issues and hope to be able to host you
there again.
Mr. SCULLY. I am happy to do it. Thanks.
Chairman JOHNSON. Thank you, Mr. Scully. I would hope that
as you look at some of these other areas, that you also give
some attention to the issue of respiratory therapists. The role
that respiratory therapists play in home care is something we
need to better understand in making these reimbursement
decisions.
Also, I would like to comment for the record that I am
concerned about your references to the GAO study and their $49
million. Having spoken with them at great length about their
study, they also would acknowledge that their sample of
oncologists was very small and that it under-represented the
office practice delivery of chemotherapy. Eighty percent of all
patients receive their care there. They included in their study
not only surgeons, who just do cancer surgery, but also
hospital-based cancer treatment facilities whose reimbursement
structure is different.
So I think, in spite of the fact that I put the provisions
in that asked for the study, not only are these results we
can't use, but they acknowledge themselves that they did not do
what you did in my district. You went into an office practice
and see what the expense of the temperature-controlled
containers are, what you have to keep on hand, the Occupational
Safety and Health Administration, OSHA, prescribed hoods under
which you have to manage the dosages, the waste, because once
you open something, you have to throw the rest away.
So, there are a lot of costs associated with delivery that
they explicitly did not look at. Whereas, the Gallup survey
results that the oncologists have finally completed and have
gone to Lewin, who I think is your contractor, do go to those
issues.
So, I hope that since it is the same methodology as is
normally used and so on and so forth, that we take that data
extremely seriously so that we do not make a mistake, because
this is an area in which we really cannot afford to do it
wrong. As important as it is for the government to start paying
for drugs properly, it is every bit as important for us to try
to pay accurately in an area where we have never paid. So, this
is new territory, and because it is new territory, it must be
an add-on to the practice expense pool and not a part of that
practice expense pool.
So, I hope you will have your legal staff begin helping us
define the legal structure that we need to keep that money
available for the purposes for which we need it. If we free it
from the drug payment structure, we will be able then to both
pay fairly for drugs and pay fairly for delivery.
Congresswoman Dunn, I am glad you got back.
Ms. DUNN. Thanks.
Chairman JOHNSON. We expect to have an hour after this
vote, so we wanted to keep going.
Ms. DUNN. Thank you very much, Madam Chairman. Thank you,
Mr. Scully, for coming today.
I want to take an opportunity today to ask you a couple of
questions that have to do with reimbursements. In the State of
Washington, we continue to be concerned about the inequitable
payments for managed care plans and physicians, and find that
we increased funding for both of these groups in the Medicare
prescription drug bill that the House did pass earlier this
year, but we are particularly concerned in my State about the
inequities that are due to geography.
I am hopeful that as we look at this issue--this is a
continuing long-term issue--that we will be able to work
together and find legislative and administrative answers to
solving our problem dealing with the parity in payments. I
would like today to get your commitment to work with me and
other Members of the Congress who are eager to get this
situation squared away in order to address these inequities.
Mr. SCULLY. Absolutely. As I said when I was in Seattle
earlier in the year, when we spent a day hearing from a lot of
people about this, I think the Medicare+Choice rates, which
were significantly improved in the House bill. The
Administration has a strong interest in getting those rates
more effectively targeted this year, I think there is a fairly
significant increase in the House bill. I think we had
continued erosion in Medicare+Choice nationally, but I know in
Seattle, you have got a major problem for the plans in the
State, and I have tried to keep them in. They have been raising
premiums, and it is all due to the rate repayment. We are very
concerned about that.
We are also concerned about how the area rates are set and
why they are significantly higher in some regions and lower in
the others. We are committed to working with you. Equally on
the hospital wage index and the physician geographic practice
cost indexes or GPCIs, it is called, that are regionally
varied, there are a lot of different components that go into
that and most of them are legislative. We are very happy to
work with you to make them more accurate.
Ms. DUNN. That is good. That is really important. As we see
plans raising their premiums, which is my great worry in our
State, where we have lost too many plans already, the
willingness of the Administration to work with us on remedies
is very much appreciated. I will look forward to that.
Also, when you were in Seattle, we worked on another issue,
which is the reimbursement for certain drugs. Of course, that
is what we are talking about today. Right now, the Medicare
Program is paying 95 percent for certain drugs that are
biologics. Some of these drugs that are biologics are very
expensive. Self-injected versions already exist in the market
that may be cheaper and allow more choice to patients. For
example, we have self-injected biologics that can treat
multiple sclerosis or rheumatoid arthritis, but these are not
currently covered by Medicare.
I have introduced legislation to allow Medicare coverage of
self-injected biologics as a substitute for covered drugs or
biologics. One way to reduce costs of drugs, of course, is to
encourage competition by allowing replacements of a self-
injected biologic in the place of a covered drug. Even with a
comprehensive prescription drug bill, we still need to address
AWP as we try to find a solution for that much larger problem.
I hope that we can do something to reduce costs by
encouraging competition. I would like to just probe your
thoughts today on allowing coverage for self-injected
biologics, which do cut costs in the long run because they take
the burden off the clinics, off the hospitals, off the
physicians, yet are not currently covered.
Mr. SCULLY. Well, this is another complicated problem. As
you know, we went through a very detailed program guidance
earlier this year on self-injectables. The current law says
that we pay for outpatient drugs that are not usually self-
injected, which after great mounds of legal advice, we
determined meant they had to be done in an office more than 50
percent of the time. That brings up some very strange results.
For example, with MS, we determined--the good news is, for
a drug like Avonex, which is only covered in about half the
country, it is now covered everywhere, which is a very
prevalent MS drug. That was because we determined in a national
survey that more than half the time, it was done in a
physician's office.
A number of other very successful MS drugs, some of which
are taken by friends of mine, were not covered because they are
generally not self-injected, so they were not covered.
Similarly with rheumatoid arthritis. Remicade and Enbrel are
two great drugs. After our survey, we covered Remicade, I
believe, and did not cover Enbrel for the same reasons.
You can certainly make a good argument that that, policy-
wise, does not make a lot of sense, and we are more than happy
to talk about it. We made the determination that we think we
followed the law as clearly as we possibly could and clarified
coverage as much as we could to, I think, the benefit of a lot
of patients. Clearly, we do not believe under current law we
can pay for drugs that are not usually--that are usually self-
injected.
Ms. DUNN. Thank you very much, Mr. Scully. I do want to
just give you one example of where we could be saving some
money by covering both those drugs for rheumatoid arthritis.
The covered drug is $17,000. The self-injected version is
$15,000. It would be a savings of about $2,700. So, we will
continue to make our case, and I appreciate your willingness to
listen to us and possibly at the proper time act to include
these drugs as choices for others that are currently included.
Mr. SCULLY. I try to be sensitive to all these things, but
as you know, I have rheumatoid arthritis, so that one I know a
lot about. There is a very good policy argument for that.
Ms. DUNN. Thank you. Thank you, Madam Chairman.
Chairman JOHNSON. Mr. Ramstad?
Mr. RAMSTAD. Thank you, Madam Chair, and thank you, Tom,
for being here today and for spending as much time discussing
with me the outpatient rule, particularly as it relates to
procedures using technology. You know my concerns. I am very
concerned that the proposed outpatient rule will cut
reimbursements for medical devices, which means that these
reductions will negatively impact Medicare beneficiaries'
access to new medical procedures. I believe seniors should have
the same access to medical devices, to procedures using medical
technologies that other health care patients enjoy.
I guess my concerns can be boiled down to two principal
concerns. First of all--and they both relate to the methodology
used to determine 2003 rates. As we have discussed, the
inaccuracy of hospital data, I think, is obvious, the problems
there. Second, the underlying methodology using the cost-to-
charge ratio.
Now, I know we have talked about the third-party data that
CMS has been presented. Are you willing to use third-party data
where appropriate? That is my first major question.
Mr. SCULLY. I think this is--as I said, I am spending
probably 2 or 3 hours a day on this and have for the last
month. I am confident that the final rule will have accurate
payment. We really cannot use third-party data except to figure
out where we are just wrong and need to go back and scrub our
own data more. We have 60 million claims, as I mentioned. We
are only using a little under 50 million claims. We used 60 in
the draft rule.
The reason we use third-party data, and we have used a lot
from the drug companies and device companies, is to figure out
where our calculations from our data are just way off, and in
many cases, they have been. In addition, I also called up the
three very large buyer groups, and we cannot use their data,
either, but I called them up and I identified personally about
35 drugs and devices that seemed to be way off. I called up
independent buying groups and confidentially they gave me the
prices they pay in the market. We have used that to further
target places where our data might have been off.
The bottom line is that we are using lots of independent
data, more than anything else, to figure out outliers where we
may have made a mistake. It is clear to me we have way overpaid
for a lot of things last year. I am confident when the final
rule comes out that we will have appropriate prices for
virtually every procedure that includes a device.
Mr. RAMSTAD. When I look at the 2001 data, which shows the
pass-through pool is about half the size that CMS projected for
2002, even assuming the billings would increase by 50 percent
from 2001 to 2002, the pro rata reduction was at least a third
larger than it needed to be. As far as the underpayments are
concerned, would you use the authority that we gave you to
compensate underpayments in a previous year to increase this
year's conversion factor? Is that----
Mr. SCULLY. This system is so complicated. I have been
working on Medicare for over 20 years, and there has never been
any law passed more complicated than this one. I am not sure--
we still do not know for 2001, because I went through this--
this morning with the staff. We are not certain exactly how
much we spent in 2001, much less 2002. So, I am not sure we
could make an accurate calculation.
The good news is, I do not believe at this point, and the
regulation comment period does not close until October 8, and
we do not want the rule out until November 1, but my guess is
right now that for this year, we will not have to have any pro
rata reduction and that we will be able to live with it in the
pass-through pool. I think as every year goes on and we get a
little better at calculating both the rates and what we are
likely to spend, we will be more accurate. At this point, I am
not sure we could, even if we wanted to, say we actually did
not spend as much as we should have in previous years. We do
not actually know exactly right now.
Mr. RAMSTAD. In the regulations, CMS acknowledges that the
deep cuts from 2002 to 2003 that I initially broached would
likely impact access to new technology in the outpatient
setting, as I said before, and that is my concern. How many of
these APCs do you think you will be able to fix by the final
rule, Tom? Are you willing to use your authority to keep some
APCs within about 10 to 15 percent of their current year rates
until more accurate data can be secured?
Mr. SCULLY. I think we will have some mechanisms in the
final rule to make sure that if there were any things that were
real outliers, that they do not take too big a decrease. I
literally have gone through personally every one of these
devices of any significance in great detail, looked at the
rates from past years, looked at commercial rates, and I am
pretty confident.
What we did last year, just to clarify, is--because we did
not have any other data--we frequently called up companies and
got their manufacturers' list price and put them in the rule. I
think in some cases, I understand people in some places looked
like they got a big cut. I also think that we clearly way
overpaid for some devices in past years.
The initial rule that came out this summer, which caused a
lot of panic, probably, in many cases, came out with rates that
were a lot lower than the final rule will be. As I said, that
came purely out of essentially pushing the button and coming up
with the computer data on 60 million claims that may not have
been as accurate as we would like. We spent enormous amounts of
time going through this device by device, drug by drug, and I
am confident that when I sit down with you on November 2 when
the rule comes out, that I can go through device by device and
discuss every one, where we went with which price and that they
will be fair.
Mr. RAMSTAD. Let me just conclude, Madam Chairman, by
saying I am very, very hopeful that you are willing to use your
authority to keep some APCs within about 10 to 15 percent of
their current year rates until the data are accurate. I think
that, for the integrity of the system and the spirit of
fairness, is very, very important, and I hope you will so
agree.
Mr. SCULLY. I would be happy to--I think when you--I am
very confident--I spent a lot of time on this rule. I do not
expect everybody in the country to be happy with it, but I do
think trying to keep the balance, as I mentioned, because we
clearly overpaid for a lot of things in previous years that
hurt base hospital services like colonoscopies and emergency
room visits. I try to keep that balance in mind, that we need
to find the right amount to pay for it. We do not actually pay
for devices. We pay hospitals a capitated rate for the services
that include devices.
I expect many of the ones that, you know, some of the
bigger outliers, like defibrilators and others, I spent an
enormous amount of time looking at various other sources,
including our own data. I am confident we will come out with a
fair payment.
Mr. RAMSTAD. Thank you.
Chairman JOHNSON. Thank you very much, Mr. Scully. I would
appreciate it if you would get back to the Committee as soon as
you can in terms of the lists of drugs that you think are going
to be most impacted and the ones that are going to be least
impacted, and also with language that you would suggest as to
how to keep the practice expense money that we save from better
competing the prices of drugs separate from other practice
expense money so that we can allocate it to the purposes for
which we need it.
Thank you very much. I appreciate your being here today on
this important subject.
Mr. SCULLY. Thank you very much.
Chairman JOHNSON. On our second panel, George Reeb from the
Office of Inspector General (OIG), in the U.S. Department of
Health and Human Services, will update us on his findings
comparing AWP to actual acquisition costs.
Dr. Michael J. O'Grady from Project HOPE, Health
Opportunities for People Everywhere, will discuss a competitive
bidding approach to establish Medicare reimbursements for
outpatient drugs.
John D. Jones from Prescription Solutions will discuss how
drug reimbursements are handled in the private market.
Dr. Paul A. Bunn, Jr., from the American Society of
Clinical Oncology will tell us about the new information on
practice expenses that the Society has collected and submitted
for consideration.
Kim Glaun from the Medicare Rights Center will present
concerns from the beneficiaries' perspective.
Thank you all for being here. I regret that we got a little
late start, but we will try to keep going through any votes
that might be called in respect for your individual schedules.
Mr. Reeb?

STATEMENT OF GEORGE REEB, ASSISTANT INSPECTOR GENERAL, CENTERS
FOR MEDICARE AND MEDICAID AUDITS, OFFICE OF INSPECTOR GENERAL,
U.S. DEPARTMENT OF HEALTH AND HUMAN SERVICES; ACCOMPANIED BY
ROBERT VITO, REGIONAL INSPECTOR GENERAL, EVALUATION AND
INSPECTIONS, PHILADELPHIA, PENNSYLVANIA

Mr. REEB. Thank you and good morning, Madam Chairman. I am
George Reeb, Assistant Inspector General for the Centers for
Medicare and Medicaid Audits within the U.S. Department of
Health and Human Services. I am accompanied today by Robert
Vito, who is our Regional Inspector General for Evaluations and
Inspections. We appreciate the opportunity to be here before
you today regarding the important issue of Medicare payments
for prescription drugs.
My written testimony describes several Office of Inspector
General reports that found Medicare and Medicaid paid too much
for prescription drugs. I would like to briefly summarize that
information for you.
Medicare's current payment methodology adversely affects
both the Medicare trust fund and Medicare's beneficiaries, who
are responsible for a 20-percent coinsurance payment. This
occurs largely because Medicare and Medicaid base reimbursement
to physicians and suppliers on inflated average wholesale
prices.
Our work has consistently shown that published AWPs bear
little or no resemblance to actual wholesale prices available
to physicians, suppliers, and large government purchasers. In
general, Medicare reimburses physicians and suppliers at 95
percent of AWP. Similarly, most State Medicaid agencies
reimburse pharmacies at AWP minus an average of about 10.3
percent.
Medicare's total payments for prescription drugs have risen
steadily over the past decade. In 2001, Medicare paid $6.5
billion for drugs, an increase of $1.5 billion from the
previous year. Unlike Medicare, which currently covers a narrow
range of drugs, Medicaid, as you know, covers most outpatient
prescription drugs and total Medicaid payments were almost $24
billion in fiscal year 2001.
Over the past 5 years, the Office of Inspector General has
issued a number of reports on Medicare reimbursement for
prescription drugs. Medicare's coverage of outpatient drugs is
limited primarily to drugs used in dialysis or in
transplantation and cancer treatment. Physicians and suppliers
purchase these drugs, administer or provide them to Medicare
beneficiaries, and then submit the bill to Medicare for
reimbursement.
In our reports, we have compared Medicare reimbursement for
drugs to prices available to the VA, to Medicaid, and to
wholesale prices available to physicians and suppliers. For
just 24 drugs that we studied, we found Medicare could have
saved between $425 million to $1.9 billion a year by basing
reimbursement on prices available to other sources.
Although this hearing pertains to Medicare, I would also
like to mention our work on Medicaid primarily because it
confirms that AWP is not a realistic basis for drug
reimbursement. Both our Medicaid and Medicare work serve as a
red flag that if the Medicare prescription drug benefit is
expanded, the current payment methodology could lead to
billions of dollars in excess payments.
In Medicaid, we found that there was a significant
difference between the pharmacy acquisition costs for drugs and
their published AWPs. In our latest report, we found that
pharmacy acquisition costs ranged from 17 to 72 percent below
published AWPs. These percentages are not considered discounts
available to most pharmacies, such as volume discounts. We
believe that if States would reimburse pharmacies for Medicaid
patient prescriptions more in line with the actual acquisition
costs of the drugs, substantial savings could be realized by
the Medicaid program.
Publishing artificially high AWPs can be used as a
marketing device to increase the drug companies' market share.
For instance, because physicians and suppliers get to keep the
difference between their actual acquisition cost and the
inflated reimbursement amount, this spread can serve as an
inducement for suppliers or physicians to use one brand of drug
over another. While inflating the AWP does not increase the
amount the manufacturer receives for each unit of the drug, it
can increase their market share by creating an incentive for
physicians to prescribe the manufacturer's drug instead of a
competitors. This occurs, obviously, at the expense of the
Medicare Program and its beneficiaries.
We have had some recent legal cases which illustrate some
of the problems associated with Medicare's current
reimbursement. Because the price spread is so large and
Medicare reimbursement is so lucrative for the drug Albuterol,
some mail-order pharmacies have made illegal kick-back payments
to durable medical equipment suppliers for patient referrals
and a $10 million civil settlement was had from one pharmacy
group.
In another legal case, Bayer Corp. agreed to pay $14
million last year to resolve its liability in the Medicaid
program. Although Bayer did not admit liability, the United
States alleged that Bayer had knowingly set and reported the
AWPs for these drugs at levels far higher than the actual
acquisition costs for the majority of its customers and caused
these customers to receive excess Medicaid reimbursement. They
made misrepresentations to the Medicaid program for certain
information that is used in the rebate programs and knowingly
reported and underpaid the Medicaid rebates.
In October of last year, the United States announced an
$875 million settlement with TAP Pharmaceutical Products,
Incorporated. The TAP allegedly reported AWPs for Lupron at
levels that were far higher than the actual cost. They
encouraged customers to bill for free samples they provided,
and they paid kickbacks to physicians and were underpaying
rebates to the Medicaid program.
A drug reimbursement system should be based on real prices
available in the marketplaces. Physicians and suppliers,
including pharmacies, should be fairly reimbursed at levels
that ensure beneficiaries have access to the drugs they need.
We recognize that some physician groups say that overpayments
for prescription drugs simply make up for inadequate payments
for their practice costs. We agree that the physicians need to
be properly reimbursed for the patient care. However, we do not
believe that the payment for artificially inflated AWP prices
is the appropriate mechanism because it just exacerbates the
problem.
We would be happy to answer any questions you may have.
[The prepared statement of Mr. Reeb follows:]
Statement of George Reeb, Assistant Inspector General, Centers for
Medicare and Medicaid Audits, Office of Inspector General, U.S.
Department of Health and Human Services
Good morning, Madam Chairman. I am George Reeb, Assistant Inspector
General for the Centers for Medicare and Medicaid Audits within the
Department of Health and Human Services. I am accompanied by Robert
Vito, Regional Inspector General for Evaluation and Inspections,
Philadelphia. We appreciate the opportunity to appear before you today
regarding the important issue of Medicare payments for currently
covered prescription drugs. I am here to describe the findings of
several Office of Inspector General (OIG) reports showing that Medicare
and Medicaid pay too much for prescription drugs. This occurs largely
because of the use of the average wholesale price (AWP) as the basis
for calculating reimbursements to physicians and suppliers, including
pharmacies. We have consistently found that the AWPs which Medicare and
Medicaid use are not really wholesale prices. I will also describe
settlements of two cases which included the issue of manufacturers' use
of the AWP as a marketing tool, at unnecessarily high costs to
taxpayers and beneficiaries.
Background
For the most part, AWPs (which are not clearly defined by law or
regulation) are compiled in drug compendia such as Medical Economics'
Red Book. As our reports have indicated, the published AWPs that
Medicare and Medicaid use to establish drug reimbursement bear little
or no resemblance to actual wholesale prices available to physicians,
suppliers, and large government purchasers.
In general, Medicare reimburses physicians and suppliers at the
published AWP less a discount of 5 percent (i.e., 95 percent of the
AWP). Of this amount, Medicare beneficiaries are responsible for a 20
percent coinsurance payment. Similarly, most state Medicaid agencies
reimburse pharmacies based on the AWP of a drug less a discount which
averages about 10.3 percent nationally. Federal regulations require
that each State's reimbursement for a brand name or certain other drugs
not exceed, in the aggregate, the lower of estimated acquisition costs
or the providers' usual and customary charge to the public for the
drug. Some states require a small copayment for each prescription
filled by a pharmacy.
The current cost to Medicare and Medicaid for currently covered
drugs is in the billions. Medicare's total payments for prescription
drugs have risen steadily over the past decade. In 1992, Medicare paid
about $700 million for prescription drugs; by 2001, it paid $6.5
billion. Between 2000 and 2001 alone, payments increased by $1.5
billion. Unlike Medicare which currently covers a narrow range of
drugs, Medicaid covers most outpatient prescription drugs. Medicaid
payments for prescription drugs totaled almost $24 billion in FY 2001.
Our reports, which I am summarizing in this testimony, have shown time
after time that Medicare and Medicaid pay too much for drugs.
Medicare Pays Too Much--OIG Reports
Medicare's coverage of outpatient drugs is limited primarily to
drugs used in dialysis, organ transplantation, and cancer treatment.
Medicare also covers certain vaccines and drugs used with durable
medical equipment such as infusion pumps and nebulizers. Physicians and
suppliers purchase these drugs, administer or provide them to Medicare
beneficiaries, and then submit a bill to Medicare for reimbursement.
Medicare's current payment methodology for prescription drugs adversely
affects the Medicare trust fund and Medicare's beneficiaries, who are
responsible for 20 percent of the allowed amounts.
Over the past 5 years, the OIG has issued a number of reports, all
of which have reached the conclusion that Medicare and its
beneficiaries pay too much for prescription drugs. For example, we
studied the prices for 24 Medicare covered drugs ($3.1 billion of the
$3.9 billion in Medicare drug expenditures in 1999) comparing Medicare
reimbursement to prices available to the physician/supplier community,
the Department of Veterans Affairs, and Medicaid. We found that
Medicare and its beneficiaries would have saved $1.6 billion for these
24 drugs by paying the VA's Federal Supply Schedule price. For half of
the drugs, Medicare paid more than double the VA price. The savings
would have been $761 million a year by paying the actual wholesale
prices available to physicians and suppliers. For every drug in our
review, Medicare paid more than the wholesale price available to
physicians and suppliers and the VA Federal Supply Schedule price. We
also found that Medicare would have saved over $425 million or almost
15 percent a year for the 24 drugs by obtaining rebates similar to the
Medicaid program.
Subsequently, we updated the findings of this report with more
current drug pricing information and estimated that, of the $3.7
billion Medicare spent for 24 drugs in 2000, the program would have
saved $1.9 billion if the drugs had been reimbursed at prices available
to the VA. Over $380 million of this savings would have directly
impacted Medicare beneficiaries in the form of reduced coinsurance
payments. In some cases, the VA price for a drug was less than the
amount a Medicare beneficiary would pay in coinsurance. Further, we
estimated that, if Medicare paid the actual wholesale prices available
to physicians and suppliers for these 24 drugs, the program and its
beneficiaries would save $887 million a year. If Medicare paid for
these drugs based on catalog prices, beneficiaries would pay over $175
million less in coinsurance. The potential total savings available to
both Medicare and its beneficiaries is probably higher than our
estimates, assuming data for all Medicare drugs is similar to that for
the 24 we analyzed.
In other reviews, we reported that Medicare pays nearly double the
Medicaid price and almost seven times more than the VA for one
milligram of albuterol, a drug used with a nebulizer to treat asthma,
emphysema, and other respiratory problems. Nearly every chain pharmacy
we contacted sold generic albuterol at prices less than Medicare paid
for it. According to our survey results, any consumer could buy a
monthly supply of albuterol from Internet pharmacies for around $63.
For the same monthly supply, Medicare and its beneficiaries would pay
$120, $96 from Medicare and $24 from the beneficiary. The VA's entire
monthly payment of $17.50 for albuterol is less than just the
beneficiary's $24 coinsurance payment under Medicare. The VA price for
albuterol has fallen by more than 50 percent over the last 3 years,
from $0.11 per mg in 1998 to $0.05 per mg in 2001. During the same time
period, Medicare's reimbursement amount (based on reported average
wholesale prices) has remained constant at $0.47 per mg.
We also found that Medicare and its beneficiaries would save $279
million a year if ipratropium bromide were reimbursed at the median
price paid by the VA. The VA's purchase price has decreased
considerably over the last 3 years, from $1.29 per mg in 1998 to $0.66
per mg in 2001. In contrast, the Medicare reimbursement amount has
remained constant at $3.34 per mg. We also found that Medicare would
save between $223 million and $262 million a year if ipratropium
bromide were reimbursed at prices available to wholesalers and
suppliers. The median catalog price available to suppliers was $0.82
per mg, the median supplier invoice price was $1.18 per mg, and the
median wholesale acquisition cost reported by manufacturers was $1.20
per mg.
Aside from the obvious problem that AWPs can be arbitrarily
inflated, resulting in inappropriate Medicare payments, the use of AWP
as a basis for reimbursement in Medicare has other potential adverse
side-effects. For instance, because physicians and suppliers get to
keep the difference between the actual price they pay for the drug and
95 percent of its AWP, this ``spread'' can serve as an inducement for
suppliers or physicians to use one brand of the drug over another.
Thus, publishing an artificially high AWP can be used as a marketing
device to increase a drug company's market share. Such a tactic
increases the profit of the suppliers or physicians who purchase the
drug because, while not paying the artificially inflated AWP amount,
they are reimbursed based on that inflated amount. While inflating the
published AWP does not increase the amount the manufacturer receives
for each unit of the drug product, the higher profits available to
physicians and suppliers may lead them to purchase one brand of drug
over another, thereby increasing a manufacturer's market share. This in
turn increases the profits of the drug company. All of this occurs at
the expense of the Medicare program and its beneficiaries.
Medicaid Pays Too Much--OIG Reports
Although this hearing pertains to Medicare, I would like to mention
our work in the Medicaid program because it confirms that the average
wholesale price (AWP) is not a realistic basis for drug reimbursements.
Our Medicaid work also serves as a red flag that, if Medicare is
expanded to cover more prescription drugs, particularly those that
beneficiaries can obtain from pharmacies, it would be unwise for
Medicare to reimburse pharmacies at Medicare's current rate of AWP
minus 5 percent (i.e., 95 percent of AWP).
In Medicaid, we found there is a significant difference between
pharmacy acquisition costs for both brand and generic drugs and the
basis for most states reimbursement for drugs--the average wholesale
price (AWP). We believe if states would reimburse pharmacies for
Medicaid patient prescriptions more in line with the actual acquisition
costs of the drugs, substantial savings could be realized by the
Medicaid program.
As a follow-up to our previous work, we conducted nationwide
reviews of pharmacy acquisition costs for both brand name and generic
drugs reimbursed under the Medicaid prescription drug program during
Calendar Year (CY) 1999. Since most states use AWP minus a percentage
discount, which varies by state, as a basis for reimbursing pharmacies
for drug prescriptions, the objective of these reviews were to develop
an estimate of the discount below AWP at which pharmacies purchase
brand and generic drugs.
We obtained pricing information from 217 pharmacies in 8 states,
which resulted in an analysis of thousands of invoice prices that
included both brand and generic drug products. We compared each invoice
drug price to AWP for that drug and calculated the percentage, if any,
by which the invoice price was discounted below AWP. Our estimates were
that pharmacy acquisition costs for brand name drugs in 1999 was an
average of 21.84 percent below AWP and for generic drugs an average of
65.93 percent below AWP. These estimates were both higher than our
previous 1994 studies of 18.30 for brands and 42.45 for generics.
In each of these reports, we recommended that the Centers for
Medicare & Medicaid Services (CMS) require the states to bring pharmacy
reimbursement more in line with the actual acquisition cost of both
brand and generic drug products.
In response to comments made by both state Medicaid officials and
industry representatives, we further analyzed the results of our
studies of CY 1999 expenditures. This additional information was a
breakdown of discount percentages for various brand and generic drug
categories from single source innovator through drugs with and without
Federal upper limits. Based on the results of our additional analyses,
if states continue to reimburse for drugs based on AWP, we recommended
that CMS encourage the states to consider using a multi-tiered
reimbursement methodology. These tiers should be oriented to the
significant differences in pharmacy acquisition costs depending on the
drug's category of brand, generic, subject to Federal upper limits,
etc. The current method used by most states for reimbursing for brand
name drugs and non-Federal upper limit multiple source drugs using a
single percentage discount does not consider these large differentials
found during our additional analysis.
The discount percentages in this report ranged from 17.2 to 72.1
percent below AWP. These percentages do not consider discounts
available to most pharmacies such as volume discounts, prompt pay
discounts, and related rebates. The Medicaid program, unlike the
Medicare program, includes a rebate component that is based, in part,
on the average manufacturers' price (AMP). However, our report does not
address the disconnect caused by basing Medicaid reimbursements on AWP
while basing rebates on the AMP. That practice could result in higher
cost and lower rebates for the States under Medicaid. In an earlier
report we recommended tying the rebate to the AWP rather than the AMP.
Recent Settlements
Recent settlements further illustrate some of the problems
associated with Medicare's current reimbursement methodology. Because
of the price spread is so large and Medicare reimbursement so lucrative
for the drug albuterol, some mail-order pharmacies have been tempted to
capitalize on the difference by making illegal kickback payments to
durable medical equipment suppliers for patient referrals. A civil
settlement totaling $10 million was reached with one pharmacy that
engaged in this conduct. Issues of inflated AWPs were also associated
with recent settlements involving Bayer Corporation and TAP
Pharmaceutical Products Inc.
Bayer Corporation. In January 2001, the United States settled a qui
tam False Claims Act case with the Bayer Corporation, a major
pharmaceutical manufacturer. Under the terms of a settlement negotiated
by a team of Federal and state law enforcement officials, Bayer agreed
to pay $14 million in order to resolve its liability to the Medicaid
program. This case was investigated and handled by a team of Federal
and state representatives--including the OIG, representatives of the
Medicaid Fraud Control Units of four states and the Texas Attorney
General's Office, the United States Attorney's Office for the Southern
District of Florida, and the Department of Justice.
Through this settlement, Bayer resolved its liability under the
False Claims Act and the Medicaid Rebate Statute for its conduct in
connection with six of its drugs between January 1993 and August 1999.
Although Bayer did not admit liability, the United States alleged that
Bayer: 1) knowingly set and reported AWPs for these drugs at levels far
higher than the actual acquisition cost of the majority of its
customers and caused those customers to receive excess Medicaid
reimbursement, 2) made misrepresentations to the Medicaid programs of
certain states, and 3) knowingly misreported and underpaid its Medicaid
rebates for the drugs.
TAP Pharmaceutical Products, Inc. In October of last year, the
United States announced a major global health care fraud settlement
with TAP Pharmaceutical Products Inc. (``TAP''). TAP agreed to pay a
total of $875 million to resolve its liability, the largest health care
fraud settlement ever. TAP also agreed to plead guilty to violating
Federal law governing the use of drug samples. The investigation
centered on TAP's sales and marketing efforts to physicians who used
TAP's prostate cancer drug, Lupron. The company routinely provided free
samples of Lupron to physicians, expecting that those physicians would
bill the free samples to the patients and Medicare. TAP also allegedly
paid kickbacks to physicians, HMOs, and others in the form of grants,
debt forgiveness, travel, and entertainment, and other items to induce
them to purchase Lupron. In addition, TAP allegedly set and reported
AWPs for Lupron at levels far higher than the actual acquisition cost
of the majority of its customers and caused those customers to receive
excess reimbursement from Medicare and Medicaid. TAP also allegedly
underpaid rebate amounts due to the states under the Medicaid Rebate
Statute.
Conclusion
A drug reimbursement system should be based on real prices
available in the marketplace. Physicians and suppliers, including
pharmacies, should be fairly reimbursed and at levels that ensure that
the drugs are accessible. If reimbursement is set too low, some
beneficiaries may not be able to obtain needed prescription drugs. We
recognize that some physician groups have raised concerns about
Medicare's attempts to lower reimbursement for prescription drugs.
Specifically, these physician groups say that overpayments for
prescription drugs simply make up for inadequate payments for their
practice costs. We agree that physicians need to be properly reimbursed
for patient care. However, we do not believe that the payment of
artificially inflated drug prices is an appropriate mechanism to
compensate them.
This concludes my testimony. I appreciate the opportunity to
address this important issue with you today. I welcome your questions.
References:
Medicare Reimbursement of Prescription Drugs
OEI-03-00-00310 January 2001
http://oig.hhs.gov/oei/reports/oei-03-00-00310.pdf

Response to Request from The Honorable C.W. Tauzin
OEI-03-01-00490 June 2002 (Not on Internet)

Medicare Reimbursement of Albuterol
OEI-03-00-00311 June 2000
http://oig.hhs.gov/oei/reports/oei-03-00-00311.pdf

Excessive Medicare Reimbursement for Albuterol
OEI-03-01-00410 March 2002
http://oig.hhs.gov/oei/reports/oei-03-01-00410.pdf

Excessive Medicare Reimbursement for Ipratropium Bromide
OEI-03-01-00411 March 2002
http://oig.hhs.gov/oei/reports/oei-03-01-00411.pdf

Medicaid Pharmacy-Additional Analyses of the Actual Acquisition Cost of
Prescription Drug Products
A-06-02-00041 September 2002
http://oig.hhs.gov/oas/reports/region6/60200041.pdf

Medicaid Pharmacy-Actual Acquisition Cost of the Generic Prescription
Drug Products
A-06-01-00053 March 2002
http://oig.hhs.gov/oas/reports/region6/60100053.pdf

Medicaid Pharmacy-Actual Acquisition cost of Brand Name Prescription
Drug Products
A-06-00-00023 August 2001
http://oig.hhs.gov/oas/reports/region6/60000023.pdf

Chairman JOHNSON. Thank you very much. Dr. Bunn?

STATEMENT OF PAUL BUNN, M.D., DIRECTOR, CANCER CENTER,
UNIVERSITY OF COLORADO, DENVER, COLORADO, AND PRESIDENT,
AMERICAN SOCIETY OF CLINICAL ONCOLOGY, ALEXANDRIA, VIRGINIA

Dr. BUNN. Chairman Johnson and distinguished Members of the
Subcommittee, thank you for the chance to discuss with you the
views of the American Society of Clinical Oncology, or ASCO,
concerning payment for chemotherapy in physicians' offices. We
also appreciate Mr. Stark's efforts to move the debate forward
and that he has recognized the need to reform both the drug
payments and the practice expense at the same time.
With more than 19,000 Members, ASCO is the world's leading
organization representing cancer physicians and researchers. I
am the elected President of ASCO and serve as Director of the
University of Colorado Cancer Center in Denver. My specialty as
a medical oncologist is the care of patients with lung cancer.
I would like to begin by summarizing several facts
regarding cancer care in the United States. First, scientific
evidence indicates that cancer mortality rates are declining in
the United States. This decline can be attributed to advances
in screening, early detection, prevention, and therapy. These
advances have been realized largely through the Nation's
investment in cancer research and Congressional support for the
national cancer program.
Second, the U.S. cancer care system is the best in the
world. In this system, care is provided primarily in the
outpatient office setting because it is preferred by patients
who benefit from its convenience, its efficiency, and its
quality. Academic cancer centers play a major role in
scientific discovery and education, but are not equipped to
provide chemotherapy services to the majority of cancer
patients.
Third, most cancer chemotherapies and supportive care
agents are delivered most effectively in the office setting.
This is possible because of improvements in chemotherapeutic
drugs with fewer side effects, improved chemotherapy delivery
systems, better medications for system management, and highly
qualified support staff, including specially trained nurses,
pharmacists, and other health professionals.
Fourth, the reduction in cancer mortality and improved
quality of care come with associated increases in cost. Most of
these cost increases are due to increases in non-physician
services, such as chemotherapy administration and other
essential patient services.
Fifth, Medicare more than adequately reimburses for the
costs of drugs but under-reimburses for practice expenses. The
ASCO has long believed that the current system of reimbursement
is fundamentally flawed, but can only be fixed by reform in all
parts of the system. The net result of such simultaneous
changes would be to preserve the quality and integrity of
cancer care in the country today.
The ASCO is concerned that sudden changes in drug
reimbursement without correction in practice expense payments
could have a ripple effect that would adversely impact the
quality of care for our patients. Academic centers such as my
own could not absorb a significant influx of new patients from
physician offices that might be unable to continue to provide
chemotherapy services.
With that background, I want to make it clear that both I
personally and ASCO favor reform of the current system. Let me
briefly set forth what is necessary.
On the practice expense side, ASCO has advocated making
direct estimates of the cost involved in furnishing cancer
therapy. If Congress wants to use a system based on surveys of
practice expenses per hour, we believe the following are
required.
First, CMS should take into account the new data derived
from the recently completed Gallup survey to determine practice
expenses per hour of physician work. The data indicate
significant underpayment for these expenses.
Second, CMS must eliminate from its payment methodology
bias against services that do not involve physician work, these
services being critical to oncology care.
Third, Medicare must commit to pay in full for all actual
costs incurred.
On the issue of payment for drugs themselves, we have no
strong preference among the methodologies under consideration.
Competitive bidding sounds promising, but we have no idea of
how it might play out in a practical manner, given the
necessity to maintain inventories of drugs for both Medicare
and non-Medicare patients. The overarching point with respect
to payment for drugs, it is necessary to cover all the costs of
making the drugs available to Medicare beneficiaries with
cancer. This means we must account for the variability in the
capacity of individual physicians to acquire drugs at the
lowest possible price. Moreover, we have to accept, regardless
of the underlying payment mechanism, that maintenance of an
inventory of expensive, toxic, and sometimes unstable drugs
bears its own costs and these should be reimbursed by Medicare.
The ASCO is very eager to work with Congress and with CMS
to reach a solution that will assure Medicare beneficiaries
continue to receive the best possible cancer care.
Thank you again for inviting me here today, and I am happy
to answer your questions.
[The prepared statement of Dr. Bunn follows:]
Statement of Paul Bunn, M.D., Director, Cancer Center, University of
Colorado, Denver, Colorado, and President, American Society of Clinical
Oncology, Alexandria, Virginia
Chairman Johnson and Members of the Subcommittee, thank you for the
opportunity to appear before you to discuss a topic of great
importance, not just to the physicians whom I represent, but also, more
importantly, to the patients with cancer whom we treat. That issue is
the means by which the Medicare program pays for cancer treatment
services for our senior citizens. This has been a technically complex
and difficult issue, but ASCO is committed to working with you towards
an appropriate solution. What is at stake is the quality and
accessibility of essential services for cancer patients.
My name is Paul Bunn. I am a medical oncologist who specializes in
the treatment of patients with lung cancer. I am Director of the Cancer
Center at the University of Colorado and currently serve as President
of the American Society of Clinical Oncology (ASCO).
I want to thank you, Chairman Johnson, for your leadership not only
on this issue but in quality cancer care generally. We recall your
early and consistent support for Medicare coverage of patient care
costs in clinical trials, leading up to the eventual National Coverage
Decision in which Medicare agreed to extend such coverage in late 2000.
And we are very grateful that you championed legislation to require the
General Accounting Office (GAO) to conduct studies that would give
critical answers to questions about the cost of providing cancer care
in physician offices. As you indicated in your Advisory for this
hearing, ``it will take congressional action to ensure that our seniors
continue to have access to high-quality cancer care.'' We agree
completely with that goal.
Let me make clear at the outset that neither my income, nor the
revenues of the Cancer Center that I head are influenced by the
controversy involving reimbursement for office-based treatment that I
understand to be the focus of the Subcommittee today. I am based at a
Cancer Center that provides cancer treatment mostly in its outpatient
department, therefore I do not anticipate that changes in the payment
mechanism for drugs in physician offices will have any direct impact on
me or on my institution. Moreover, my entire oncology career has been
spent either at the National Cancer Institute or at an academic medical
center, neither of which is directly affected by this reimbursement
matter.

Necessity for Comprehensive Reform

Nevertheless, I am quite concerned that sudden or sharp changes in
reimbursement levels in any part of the comprehensive cancer care
system in our country might have a ripple effect that could influence
all other parts of the system and, in turn, all cancer patients. For
example, in my own position at the Cancer Center, I know that we could
not readily absorb a significant influx of new patients from physician
office practices, nor could we continue to provide quality cancer care
if our own drug reimbursement were reduced. Any reform must ensure that
quality care remains accessible to the approximately 80% of cancer
patients who receive chemotherapy in physician offices.
With that background, I first want to make clear that both I
personally and my organization ASCO favor reform of the current system.
We do not relish being targets for those who correctly point out that
some drugs are reimbursed by Medicare at a rate that exceeds the
acquisition cost. It is particularly troublesome when one focuses on
the fact that the drugs where such excess payments occur are not
usually the new sole-source drugs that are the cornerstones of modern
chemotherapy, but instead they are older multisource or generic drugs
that are less important to cancer care but still useful and necessary
in patient care. While physicians are targeted for harsh criticism when
such drugs are overpaid by Medicare (and by beneficiaries through their
copayments), we should recognize that it is the payment system itself,
not wrongdoing by physicians, that perpetuates any overpayments.
What can be done to fix that payment system? We believe, as we have
previously testified before congressional committees, that reform must
be comprehensive, encompassing both overpayments for drugs and
underpayments for the costs of administering the drugs. In that regard,
Chairman Johnson, we assume that you have signaled your agreement by
crafting legislation in both the Balanced Budget Refinement Act of 1999
and the Benefits Improvement and Protection Act of 2000 specifically
requiring GAO to study shortcomings in Medicare practice expense
payments.
Unfortunately, the GAO consideration of these issues failed to get
to the core issue of the cost of administering chemotherapy in the
office setting and the chronic Medicare underpayment of those costs
because GAO, contrary to the statutory instruction, conducted no
``nationwide study'' and collected no new data regarding ``resources
necessary to provide safe outpatient cancer therapy services and the
appropriate payment rates for such services.''

Practice Expense Reimbursement

Although the GAO failed to produce the most useful type of data,
ASCO recently contracted with the Gallup Organization to conduct a
survey of oncology practices in order to determine their practice
expenses per hour of physician work. This survey employed the
methodology of the American Medical Association SMS survey used by
Medicare to set payment rates. Practice expenses per hour does not
directly indicate the cost of furnishing any specific service, but it
is a component of Medicare's methodology for setting payment rates.
ASCO has long asserted that past survey results were inadequate to
capture true costs of oncology practices because they included only a
small, unrepresentative group of oncologists. Therefore, in order to
address the paucity of data, ASCO engaged Gallup to conduct a new
survey of oncology practices that would provide more reliable answers.
Gallup has now completed its survey, and the resulting data were
forwarded to the contractor of the Centers for Medicare & Medicaid
Services (CMS) for evaluation. The CMS contractor, the Lewin Group, has
completed its analysis of the data and forwarded its conclusions to
CMS.
As analyzed by Lewin, the survey data show that CMS dramatically
underestimated oncologists' practice expenses per hour; the survey,
adjusted for inflation, reflects that oncologists' actual practice
expense is roughly 90% higher than CMS' current assumptions. Additional
analysis, still underway, may increase the gap between actual expenses
and what Medicare assumes to be the case.
In view of the complexity of the CMS methodology for converting
practice expenses per hour into actual payment amounts, we are
uncertain how Medicare reimbursement will be affected by these new
data. We are, however, hopeful that we will be able to work with CMS to
determine whether the current methodology, after taking into account
this important new information, will result in adequate payment
amounts.
Aside from consideration of the new data, we believe it is also
necessary for CMS to revise its current methodology to eliminate its
bias against services that do not involve physician work--a very
substantial part of oncology services. Both GAO and the Lewin Group
have independently concluded that the current CMS methodology is biased
against zero physician work value services and thus leads inevitably to
lower payment amounts for those services. In addition, once the
methodology is revised to result in an accurate determination of the
costs involved, Medicare must actually pay these costs in full.
With the availability of new data to support the longstanding
assertion of oncologists that their practice expenses are under-
reimbursed, and hopefully with the willingness of CMS to eliminate its
bias against certain categories of services, the time may be ripe for
comprehensive revision of Medicare payment for cancer care in physician
offices. ASCO looks forward to working with CMS and the Congress to
find the right resolution of an enduring debate over appropriate
payment levels for these services.

Drug Reimbursement

Assuming meaningful practice expense reforms can be implemented, it
is essential also to change the way in which drugs are reimbursed by
Medicare. Our preferred approach would be to conduct market surveys in
an effort to identify true market costs. Through such a mechanism, the
system could eliminate the large disparities between Medicare payments
and acquisition costs that occur when generic or other competition
drives the price down over time while the Medicare payment remains
fixed.
I am aware that the Ways & Means Committee has developed a general
concept of competitive bidding for purchase of drugs. Personally, I am
in favor of a competition-based approach to just about any business
endeavor, but I must admit I have questions about the practical
applications of competitive bidding in this context.
Those questions largely revolve around the fact that physicians, or
clinics, or hospitals or anyone purchasing cancer drugs, will most
likely be purchasing for both Medicare and non-Medicare patients. It
would be extremely difficult, if not impossible, for providers to
segregate Medicare drugs from those purchased outside the system,
presumably through the normal market mechanisms.
The implications of an overarching drug purchasing authority that
might eventually exert influence on private as well as public purchases
have to be resolved by high-level policymakers. Because we have serious
reservations about the underlying concept, we would like to focus on
the elements that we think should be incorporated into a reimbursement
system for drug purchases that would be an alternative to the current
average wholesale price (AWP) approach.
Perhaps most importantly, we must recognize the tremendous
variation in ability of different purchasers to obtain volume- or
other-discounts. Any fixed payment, whether derived through competitive
bidding or otherwise, should allow for the fact that small market
purchasers may be unable to obtain the designated price.
It is also important to recognize that maintenance of an inventory
of expensive and toxic chemotherapy drugs has its own attendant costs.
These costs include spillage, wastage, the opportunity cost of
investment in an expensive drug inventory, and unpaid patient
coinsurance, or bad debt. In some states, sales or other locally
imposed taxes must be covered.
The general principle that should be applied with respect to drug
reimbursement is that Medicare payment should cover the full and actual
costs of acquiring and maintaining the drugs in preparation for
treatment of cancer patients. Drugs should not be a profit center for
physicians, but neither should they suffer loss as a result of
maintaining a drug inventory for the benefit of cancer patients. With
your help, I am certain that we will be able to develop a system that
satisfies these simple requirements.

Maintenance of Quality Cancer Care

The preeminent concern for all of us should be maintenance of
quality care for beneficiaries with cancer. Over the course of the past
several decades, there has been a revolution in the ability to deliver
life-saving cancer care to patients. Once life-threatening toxicities
of chemotherapy can now be managed, and newer therapies are more
targeted and feature fewer and less serious side-effects. These
advances, however, do not come without their costs.
Many of the practical advances in cancer care are now realized in
the physician office setting, often far from urban or academic medical
centers. Science has made this technology transfer possible, but it is
not impervious to being undermined if financial support is withdrawn.
Patient advocates in the cancer community feel strongly that any
solution to this problem should maintain the current quality care for
cancer patients.
Cancer patients now fare much better than just a few years ago.
Tremendous progress in cancer treatment has made it possible for cancer
patients to experience the same quality of care whether it is in a
community doctor's office or a hospital department. Quality care,
however, can be placed in jeopardy if payment for services is
precipitately reduced, regardless of the treatment setting.
I urge you and your Subcommittee Members to consider carefully the
potential impact of any changes in payment for cancer chemotherapy
drugs or services, and take those considerations into account before
pursuing any legislative action.

Chairman JOHNSON. Thank you very much, Dr. Bunn. Dr.
O'Grady?

STATEMENT OF MICHAEL J. O'GRADY, PH.D., SENIOR RESEARCH
DIRECTOR, PROJECT HOPE, BETHESDA, MARYLAND

Dr. O'GRADY. Madam Chairwoman, Members of the Subcommittee,
my name is Michael O'Grady, and I am a Senior Research Director
at Project HOPE. I appreciate the opportunity to comment today
on how Medicare's payments for currently covered drugs might be
improved.
I would like to start with three key points. One has been
pointed out before. The current system is overpaying for the
drugs Medicare covers.
Two, the evidence is in from the CMS competitive bidding
demonstrations and other public and private insurers that
competitive purchasing of drugs can yield significant savings
without hurting quality or beneficiary access.
Third, a reformed payment system based on competition
between drug manufacturers for access to the Medicare market
and competition between pharmaceutical benefits managers (PBM)
or other group purchasers to have the opportunity to be
Medicare's purchasing agent has the opportunity to provide the
highest quality drugs at the most competitive price.
Some background on the problem. Certainly, basing payments
on average wholesale price has long been a problem and it is
well demonstrated by both the OIG reports and the GAO reports
on this issue. As a general rule, any payment formula that
relies on data that cannot be effectively verified, either
through audits or other means, always will leave itself
vulnerable to that sort of manipulation.
The AWP-based formula is a prime example of how hard it is
to get an administered price done correctly. Every year, CMS
tries to accurately estimate thousands of different prices
across thousands of different counties across America using, at
best, 2-year-old data. This almost Herculean task is almost
impossible to do accurately.
Now, how to correct the problem. Unlike most problems in
Medicare payment policy, there is an example of how this might
be solved. The evidence from the CMS competitive bidding
demonstrations is quite encouraging. In the example brought up
before by Mr. Scully, in San Antonio competitive bidding saved
Medicare 25 percent over what it would have paid for the drug
Albuterol. There were no discernable effects on beneficiary
access found by the evaluation team that came in afterward.
Outside of Medicare, both public and private insurers have made
heavy use of pharmaceutical benefit managers, PBMs, to help
negotiate discounts and managed benefits.
Some considerations in thinking about how to design a new
system. An essential design consideration is getting the
incentives right. Use the competitive natures of the industries
involved to maximize Medicare's goals, design a payment system
so drug manufacturers, suppliers, and providers will be most
successful in the new system by providing the highest quality
products at the most competitive prices.
There are two areas where competition can be used to
encourage more prudent purchasing. First would be competition
among drug manufacturers for access to the Medicare market. The
second would be competition among group purchasers, for
example, PBMs, to supply drugs to Medicare's providers.
Now, this type of competition for access to the market. The
largest example that is currently out there is used by the
State of California for CalPERS, the California Public
Employees Health Plan. The CalPERS takes bids from a number of
different health plans every year with the understanding that
not all health plans will necessarily be allowed to offer
coverage to the approximately 1 million State and municipal
employees and retirees. The result has been an active
competition between California health plans to offer the most
coverage at the lowest price.
Medicare could apply the same method by designing a payment
system that has drug manufacturers compete for access to the
Medicare market. Medicare could use PBMs or other group
purchasing organizations the same way employers do, to
negotiate with the drug manufacturers for group discounts.
Now, the other type of competition that might work has to
do with competition to supply Medicare's providers. A familiar
example of this type of competition is found with the Federal
Employees' Health Benefits Plan, or FEHBP, where insurers
compete with one another to enroll workers and retirees in
their particular plan. The government sets its contribution
based on an average premium bid by the insurers. Then the
workers and retirees shop between plans for the best plan at
the most affordable price.
A similar design could be used where PBMs and other group
purchasers compete to offer Medicare-covered drugs to
Medicare's providers. This could be done by having PBMs bid to
participate in a program based on discounts they already have
or believe they can get from the manufacturers. The government
payment to providers could be set at an average price for a
particular drug. Providers would have the ability to shop
between different suppliers and choose one they were happiest
with in terms of price and service.
Now, to conclude, the best chance of maximizing quality and
access while minimizing Medicare's expenditures lies in
designing a purchasing system that builds on competition
between both manufacturers and PBMs. By structuring the
competition at two levels and having group purchasers act as
the intermediaries, the link between the drug manufacturers and
the providers that has caused so much trouble in the past has
been effectively broken.
How the competition is structured is key to the success of
a new program. The incentives of all actors, manufacturers,
PBMs, and providers, have to be structured in the same
direction. They only gain by providing quality products and
service at the best possible price. Thank you very much.
[The prepared statement of Dr. O'Grady follows:]
Statement of Michael J. O'Grady, Ph.D., Senior Research Director,
Project HOPE, Bethesda, Maryland
Madam Chairwoman and Members of the Subcommittee, my name is
Michael J. O'Grady and I am a Senior Research Director at Project HOPE.
Previously I have served on the professional staff of the Senate
Finance Committee, The Bipartisan Commission for the Future of
Medicare, The Medicare Payment Advisory Commission and The
Congressional Research Service. In those various roles I have had a
chance to extensively study the Medicare program and a number of
different health insurance programs, including the Federal Employees
Health Benefits Program (FEHBP), the California Public Employees
Retirement System (CalPERS) and private sector employer-provided health
insurance programs. I appreciate the opportunity to comment today on
the how Medicare's payments for currently covered drugs might be
improved.
Three Key points:
1) The current payment system is overpaying for the drugs
Medicare covers.
2) LThe evidence is in from the CMS competitive bidding
demonstrations and other insurers that a competitive purchasing
of drugs can yield significant savings, without hurting quality
or beneficiary access.
3) LA reformed payment system based on competition between drug
manufacturers for access to the Medicare market and competition
between PBMs to be Medicare's purchasing agent has the
opportunity to provide the highest quality drugs at the most
competitive price.
Background:
The Problem: A basing payment on the average wholesale price (AWP)
has long been a problem. The overpayments associated with the formula
are well documented by the Office of the Inspector General (OIG) and
the General Accounting Office (GAO).\1\ The vulnerability of the
current AWP-based payment formula to gaming by manufacturers has
resulted in significant overpayments by Medicare. Figure 1 provides an
example of the problem with the AWP-based formula. As a general rule,
any payment formula that relies on data that cannot be effectively
verified, through audits or other means, leaves itself vulnerable to
manipulation.
---------------------------------------------------------------------------
\1\ Medicare Payments for Covered Outpatient Drugs Exceed
Providers' Cost. Report to Congressional Committees United States
General Accounting Office, GAO-01-1118, September 2001.

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Source: ``Average Wholesale Price for Prescription Drugs: Is There
a More Appropriate Pricing Mechanism?'' Dawn M. Gencarelli, National
Health Policy Forum, NHPF Issue Brief No. 775/June 7, 2002, based on
information from U.S. General Accounting Office, Medicare: Payments for
Covered Outpatient Drugs Exceed Providers' Cost, September 2001 (GAO-
---------------------------------------------------------------------------
01-1118), Washington, D.C.

The AWP-based formula is a prime example of how hard it is to get
administered prices right. Every year CMS tries to accurately estimate
thousands of different prices in thousands of different counties. This
almost Herculean task is very hard to do accurately.
How to Correct the Problem: Unlike most problems with Medicare
payment policy, this problem has a relatively straightforward solution.
The evidence from the CMS competitive bidding demonstrations is in and
the results are encouraging. CMS conducted successful durable medical
equipment demonstrations projects in Florida and Texas. In the San
Antonio competitive bidding demonstration, pharmacy suppliers were
asked to bid for Albuterol, a drug used for respiratory illnesses with
a nebulizer. Medicare saved an estimated 25 percent over what it would
have paid without competitive bidding and there were no discernable
effects on beneficiary access (see Table 1).\2\
---------------------------------------------------------------------------
\2\ ``Second Annual Report to Congress: Evaluation of Medicare's
Competitive Bidding Demonstration For Durable Medical Equipment,
Prosthetics, Orthotics, and Supplies.'' U.S. Department of Health and
Human Services, Centers for Medicare & Medicaid Services, Baltimore,
Maryland, September 2002. http://www.cms.gov/healthplans/research/
dmebid.asp

Table 1: Average Price Reduction and Estimated Percent Savings, Polk County, Florida, and San Antonio, Texas:
Final Period in Each Site \3\
----------------------------------------------------------------------------------------------------------------
Polk County, Florida San Antonio, Texas
---------------------------------------------------------------------------
DMEPOS Category Estimated Percent Estimated Percent
Average Price Savings, Oct. Average Price Savings, Feb.
reduction (%) 01-- Sept. 02** reduction (%) 02-- Dec. 02* **
----------------------------------------------------------------------------------------------------------------
Oxygen Equipment and Supplies....... 19.4 19.4 21.8 17.7
Hospital Beds & Accessories......... 34.1 33.2 25.7 27.6
Urological Supplies................. 7.4 6.8 N/A N/A
Surgical Dressings.................. 3.8 3.6 N/A N/A
Wheelchairs & Accessories........... N/A N/A 20.1 23.8
General Orthotics................... N/A N/A 9.5 20.3
Nebulizer Drugs (Albuterol)......... N/A N/A 21.4 25.3
----------------------------------------------------------------------------------------------------------------
* Final period of the San Antonio demonstration is less than 1 year.
** Estimate of percent savings assumes 1999 volume for Polk and 1998 volume for San Antonio.
Notes: (1) The average price reduction indicates the average price decline when comparing the demonstration
prices to the prices on the statewide fee schedule for 2001. The percent differs between the average price
reduction and the savings because the two calculations use slightly different volume weights. (2) Detailed
data comparing round one and round two prices in Polk County can be found in the Appendix, Chapter 2, Section
2.2.2.

Outside of Medicare, public and private insurers have made heavy
use of pharmaceutical benefit managers (PBMs) to help negotiate
discounts and manage benefits. A recent study found that that PBMs
managed 71 percent of insured purchases at retail drug stores in
1999.\4\ The success of PBMs in the Medicare program will depend on the
structure and incentives the program provides. A study by the Kaiser
Family Foundation found the potential for PBM's to provide a cost-
effective Medicare drug benefit were significant, if structured
properly.\5\
---------------------------------------------------------------------------
\3\ Op. cit., footnote #3, page 4.
\4\ ``The Role Of PBMs In Managing Drug Costs: Implications For A
Medicare Drug Benefit,'' Prepared by: Anna Cook, Ph.D., Thomas
Kornfield, M.P.P., Marsha Gold, Sc.D., Mathematica Policy Research,
Inc.
Prepared for: The Henry J. Kaiser Family Foundation, January 2000,
page 7.
\5\ Ibid. page xi.
---------------------------------------------------------------------------
For Medicare to ignore the effective tools used by all other major
insurers, both private and public, is inefficient at best and
irresponsible at worst.
As the deliberations on a possible outpatient drug benefit
continue. A smarter, more efficient and more flexible CMS is a
necessary starting point. CMS has to move up the learning curve on the
smartest, most efficient ways to purchase pharmaceuticals.
What are the essential goals in redesiging Medicare's drug
reimbursement?
1) LEnsure beneficiary quality and access, while being as prudent a
purchaser as possible.

The Medicare program has a responsibility to the beneficiaries
to provide high quality health care. The Medicare program also
has a responsibility to the taxpayers' to be as careful as
possible with their tax money. Indirectly the Medicare program
has a responsibility to providers. Like any other insurer, if
Medicare treats providers unfairly and pays them less than the
cost of providing care, underpayments will eventually result in
reduced quality and access for beneficiaries. Paying providers
fairly does not mean overpaying providers. Given the dangers to
Medicare's financial viability associated with the approaching
retirement of the baby boom generation, Medicare must negotiate
for the most competitive prices possible and take full
advantage of the government's considerable buying power.

2) Ensure flexibility and adaptability to change:

If there is any certainty in this policy area, it that things
will be in almost constant change. Any payment policy that is
not flexible enough to adapt to those changes runs the risk of
overpaying for some drugs, underpaying for others and possibly
denying Medicare beneficiaries access to the latest
breakthroughs.
Technological change affects payment policy in two key ways: 1)
New products are constantly becoming available and 2) The price
of established products may change significantly over time.
Whether to cover a particular drug is a decision made
separately within CMS. However, setting the payment is part of
the payment methodology and critical in determining how
available the drug will be to beneficiaries. In the case of
new, breakthrough drugs still under patent, no insurer is in a
very strong negotiating position. But even patented drugs find
themselves in competition with other patented drugs developed
by other manufacturers. Given the serious competition between
drug manufacturers there are opportunities for negotiation. The
alternative method of setting a fixed government rate is in
effect a ``take or leave it'' situation, without the
flexibility to adapt quickly to an evolving situation.
Over time the price for a particular drug may change
significantly and a well-designed payment methodology will take
these changes into account. The clearest example is when a drug
comes off patent and generic alternatives become available.
But, even while still patented, the price can change
significantly and usually in a downward direction. There are
economies of scale and competition for other patented drugs
that reduce the price of a drug.
The opposite can be true as well. One of the more interesting
results of the CMS competitive bidding demonstrations was that
while most prices came down well below the traditional CMS rate
schedule, this was not universally true. There were some
products were prices had risen and the CMS administered price
was well below the negotiated price. Perhaps the suppliers were
not the effective negotiators they had been on the other
products, or perhaps the administered price was too low. To
repeat an earlier point, trying to set an appropriate price
without negotiation is extremely difficult. In the case of Part
B covered drugs the evidence points to significant overpayment,
but the opposite is also true. It is just very hard to
accurately set thousands of prices in thousands of different
counties. The potential for both overpayment and underpayment
is high.
How to achieve these goals?
How can Medicare develop a payment method that will achieve these
goals? An essential design consideration is getting the incentives
right. Use the competitive nature of the industries involved to
maximize Medicare's goals. Design the payment system, so drug
manufacturers, suppliers and providers will be the most successful by
providing the high quality products at the most competitive prices.
There are two areas where competition can be used to encourage more
prudent purchasing:

1) LCompetition among drug manufacturers for access to the
Medicare market.
2) LCompetition among group purchasers, e.g., PBMs, to supply
the drugs to providers.

Competition for access to the market_The California Public
Employees Retirement System (CalPERS) is an example of an insurer using
competition for access to help control spending. Due to effective union
contract negotiations by the California state employees unions, the
state contribution towards an employee's health insurance was generous,
sometimes more than 100 percent of premium costs. Without some
effective method to negotiate, the health plans would have no incentive
to ever bid below the state contribution. Offsetting this disincentive,
CalPERS has taken bids from a number of different health care plans,
with the understanding that not all plans would necessarily be allowed
to offer coverage to the approximately one million state and municipal
employees. The result has been active competition between California
health plans to offer the most coverage at the lowest price and
premiums below the level of the state contribution.
Medicare could apply the same method by designing a payment system
that has drug manufacturers compete for access to the Medicare market.
This could be done using PBMs or other group purchasing organizations.
PBMs currently negotiate savings with manufacturers based on their
ability to purchase in volume. The PBMs represent a collection of
groups, typically employers, who allow the PBMs to negotiate for them.
Failure to reach a successful negotiation with the PBM results in the
manufacturers drug not being covered or covered at a higher beneficiary
copay. Medicare can use PBMs or other group purchasing organizations
the same way employers do, to negotiate with the drug manufacturers for
group discounts.
Competition to supply providers_A familiar example of this style of
competition is the Federal Employees Health Benefits Program (FEHBP).
Insurers compete with one another to enroll workers and retirees in
their plans. The government contribution is fixed as a percentage of
the weighted average premiums bid by the insurers, which means insurers
with higher bids are more expensive to the workers and retirees.
Premium cost growth is slowed as workers and retirees shop between the
plans for the best plan at the most affordable price.
A similar design could be used where PBMs and other group
purchasers compete to offer Medicare covered drugs to Medicare
providers. This could be done by having the PBMs bid to participate in
the program based on the discounts they already have, or believe the
can get, from drug manufacturers. If there were a number of PBMs or
group purchasers negotiating to supply Medicare covered drugs;
providers would have the ability to shop between the different
suppliers for the best price and service.
The government payment to providers could be set to the average
price of the drug. The providers would have the ability to choose among
the multiple PBMs for the most competitive price and the best service.
By setting the payment to the average price of the drug, the provider
is assured that there are PBMs offering the drug at that price, but the
provider incentives are to shop for lower cost PBMs within the system.
Concluding remarks:
The best chance of maximizing quality and access, while minimizing
Medicare expenditures lies in designing a purchasing system that builds
on competition between both manufacturers and PBMs.
By structuring the competition at two levels and having PBMs and
other group purchasers act as intermediaries, the link between drug
manufacturer and the providers is effectively broken.
How the competition is structured is key to the success of the
program. The incentives of all actors, manufacturers, PBMs and
providers, have to structured in the same direction--they only gain by
providing quality products and service at the best possible price.

Chairman JOHNSON. Thank you, Dr. O'Grady. Mr. Jones?

STATEMENT OF JOHN D. JONES, VICE PRESIDENT, LEGAL AND
REGULATORY AFFAIRS, PRESCRIPTION SOLUTIONS, COSTA MESA,
CALIFORNIA, ON BEHALF OF PACIFICARE HEALTH SYSTEMS, INC.

Mr. JONES. Chairman Johnson, Representative Stark, and
Members of the Subcommittee, I want to thank you very much for
this opportunity to testify. I am John Jones, Vice President of
Legal and Regulatory Affairs for Prescription Solutions, which
is a subsidiary of PacifiCare Health Systems. I am a pharmacist
by training.
Prescription Solutions is a pharmacy benefit management
company which manages $2 billion of prescription drugs
annually. We handle about 200,000 claims every day. Nearly
15,000 of those claims are filled through our mail service
facility.
We support efforts that promote competition in the market
for Medicare-covered drugs. We applaud the Subcommittee's work
on the House-passed Medicare prescription drug bill which seeks
to accomplish this. My goal today is to describe how
PacifiCare, as a private payer, uses competition-based tools to
provide beneficiaries with prescription drugs in a cost-
effective manner. I then will illustrate how using these
purchasing and quality management techniques can result in
better clinical outcomes. Finally, I will highlight how price
setting mechanisms can disrupt this model and create barriers
to cost-effective drug pricing.
For years, the drug delivery system was fragmented and
lacked a cohesive infrastructure that could effectively monitor
utilization, ensure appropriate use, and maximize efficiencies.
Spurred by recent increases in utilization and cost of part B
covered drugs, Prescription Solutions developed a better model
that uses a series of management tools. These include the
following: a highly automated mail service pharmacy, specialty
pharmacies dealing with AIDS and transplant, home infusion
management, close coordination with infusion centers, and
obtaining drugs through wholesalers and manufacturers at
discounted prices.
The mix of tools we use can be influenced by the
reimbursement model for a particular provider group. Three
basic models are used. First, the provider group assumes the
risk for outpatient drugs. Second, the health plan assumes the
risk and pays the pharmacy claims to the provider. Third, the
PBM supplies the drugs and bills the health plan or insurer.
Using these techniques, we are able to achieve efficiencies
that have allowed us to pass many of those savings on to our
Members in the form of more comprehensive benefits. However,
this is becoming more challenging in the Medicare+Choice
program.
One important component of Prescription Solutions' model is
that we integrate the need to manage the purchasing and cost of
part B covered drugs with the need to produce the best overall
health outcomes. For example, a use of formularies actually
serves to improve the quality of care. Contrary to the
conventional belief that formularies exist simply to control
the cost of drug therapy, there are many aspects as to the
proper administration of a formulary that have more to do with
quality and clinical effectiveness.
In one instance, we received a request for a non-formulary
antibiotic medication, which is Vancomycin oral. The treating
physician had prescribed this drug for a serious knee
infection. Due to the way this medication works, by being taken
orally, it cannot get into the blood stream in a high enough
concentration to effectively treat the infection. We contacted
the physician to change the medication to an intravenous form,
notwithstanding the fact that the intravenous drug was
significantly more costly than the oral medication. The oral
form would have had no benefit and potentially would have led
to a more serious problem, including a need for surgery.
Prescription Solutions agrees that the current AWP system
for determining payment for covered drugs is flawed in that it
does not reflect the prices paid by suppliers and physicians.
To us, AWP is simply a benchmark price that is independently
established and maintained. It is useful as a tool.
Increasingly, contracts with pharmaceutical manufacturers and
pharmacy providers are based upon negotiated discounts from
AWP.
The AWP concerns are not the whole story. We would
encourage the Subcommittee to understand the impact of another
drug pricing rule which has brought impact in the
pharmaceutical market as a whole, and that is the Medicaid best
price rule. In simplest terms, the best price rule requires a
drug company to give the State Medicaid programs the deepest
discounts that it gives to the other purchasers. Manufacturers
use the requirement as a shield against aggressive negotiations
by private sector companies such as ours. The net effect is to
artificially increase the price to all purchasers. Thus, the
rule limits the effect that competition can have on price. It
results in the States paying a higher price for drugs. In
effect, while the best price rule was intended to reduce costs,
it has become a good example of price controls failing to
achieve the original purpose and raising drug prices for all
consumers.
In closing, we would commend the Committee for seeking
solutions to the payment issues created under the AWP
reimbursement system. We believe that Prescription Solutions'
model, a closely integrated component of a health plan delivery
system, is a template for how drug coverage and quality
management can provide value to beneficiaries and decrease the
overall cost of health care. Thank you very much.
[The prepared statement of Mr. Jones follows:]
Statement of John D. Jones, Vice President, Legal and Regulatory
Affairs, Prescription Solutions, Costa Mesa, California, on behalf of
PacifiCare Health Systems, Inc.
INTRODUCTION

Madam Chairman, Representative Stark, and Members of the
Subcommittee, thank you very much for the opportunity to testify at the
hearing on the payment of prescription drugs currently covered by
Medicare. I am John Jones, Vice President of Legal and Regulatory
Affairs for Prescription Solutions, which is based in Costa Mesa,
California.
BACKGROUND

Prescription Solutions, a pharmacy benefits management (PBM)
company, was founded in 1993 as a subsidiary of PacifiCare Health
Systems, Inc. (PHS). Prescription Solutions serves approximately six
million individuals, including members of managed care organizations,
and union trusts, retirees, third-party administrators, and employer
groups. Our goal is to provide the highest quality drug coverage in a
cost-effective manner. Access and affordability are the cornerstones of
everything we do. Our company manages approximately $2 billion of
prescription drugs annually. We handle approximately 200,000
prescription claims per day of which nearly 15,000 are filled through
our mail-service facility in Carlsbad, California.
Our parent company, PHS, is one of the nation's largest health care
services companies. Primary operations include managed care and
indemnity products for employer groups and Medicare beneficiaries in
eight states and Guam serving 4 million members. Approximately 800,000
of these members are in our Medicare+Choice health plan, Secure
Horizons. PHS and Prescription Solutions strive to provide a high
quality, cost-effective pharmacy benefit for both our commercial
members and Medicare beneficiaries.
Our testimony today focuses on three points: We support efforts
that promote competition in the market for Medicare-covered
pharmaceuticals and to describe for the Subcommittee how PacifiCare, as
a private payer, uses several processes to cover prescription drugs
that are currently covered by Medicare in a cost-effective manner.
Second, we believe that bringing appropriate purchasing and quality
management techniques into the program can result in better clinical
outcomes. And third, how price-setting mechanisms create barriers to
cost effective drug pricing and contracting for care.

Competition and Prescription Solutions Processes

The key to Prescription Solutions' ability to operate efficiently
is that it is a PBM, which was founded to support the drug coverage
provided to the enrollees of health plan products provided by PHS. As
such the ability to integrate managed care concepts with effective
purchasing is worth review as Congress considers improving payment for
Medicare-covered services. Since we believe that competition is key to
our success, our testimony will describe some of the techniques we
employ.
As outlined in greater detail below, we utilize a variety of
dynamic methods to manage our business in order to achieve efficiencies
that permit us to provide a broader overall prescription benefit than
the company might otherwise offer in the absence of those efforts.
Nonetheless, over the past two or three years, these efficiencies have
been more challenging to achieve for drugs that Medicare does not
cover. In response to these market pressures, Prescription Solutions
continues to strive to improve quality, safety, and cost management
techniques. As referenced in various studies by the GAO and other
public policy experts, the effect of various price setting mechanisms
(i.e. Medicaid Best Price) on the market have not achieved the expected
goal of reducing overall program costs.
Recent cost increases and breakthrough biotechnology therapies have
spurred new efforts to develop and implement coordinated processes to
manage costs and improve health outcomes. Until recently, PHS risk or
financial responsibility for these products had been delegated to
medical groups and hospitals through capitated arrangements. Those
entities in turn shifted accountability to home health, durable medical
equipment, infusion centers and other providers. The result was a lack
of a cohesive infrastructure that can effectively monitor utilization,
ensure appropriate use and maximize efficiencies, thereby minimizing
costs and encouraging providers to accept risk for the provision of
those services.
Recently, the utilization of Part B covered drugs has soared due to
both technological advances in oncology and biotechnology. At the same
time, the costs of these agents also have soared; supplying providers
and patients in a convenient and cost effective manner has become
difficult. More seriously, the delivery system for medications has
become fragmented. Since many firms focus on providing a specific
category of agents or a limited range of products and services,
providers have had to work with many different entities creating
further inefficiencies and less focus on quality of care.
In response to this situation, Prescription Solutions strives for
comprehensive solutions that create preferred product choices and
clinical management. Prescription Solutions does not rely on any one
technique to purchase and provide Medicare-covered drugs, but rather on
a combination of tools. Dependent on the type of pharmaceutical or
treatment, our programs can integrate some or all of the following
processes:

Mail Service Pharmacy. Prescription Solutions
operates a highly automated pharmacy that ships prescriptions
and over-the-counter drugs by mail. Mail service is most
routinely used to supply maintenance medication to patients on
long-term therapies. For complex treatment protocols, our PBM
will coordinate with the clinician, product and DME vendor, and
medical management to mail overnight the drugs and equipment
necessary to provide the drug. This eliminates the need for the
physician to coordinate with several vendors.
Specialty Pharmacies. The PBM will coordinate with
pharmacies that provide niche therapy products by mail.
Examples of such therapies would be drugs for the treatment of
AIDS, transplants or infertility.
Home Infusion. The PBM will assure that companies
which provide injectable medication that will be administered
in the patient's home is delivered with the proper equipment by
mail or a local delivery service.
Infusion Centers. Prescription Solutions will work
with the organizations that provide injectable medications in a
clinical setting. Typically, patients go to such centers for
cancer treatments.
Wholesaler/GPO. In this instance, the PBM obtains the
drug through large purchasing groups at discounted rates. This
purchasing price helps determine the reimbursement rates.
Reimbursement Methods. There are three basic models.
In the first, provider groups assume the risk for all in-office
furnished pharmaceuticals. Dependent on the market, this model
applies to less than 50 percent of the providers. In a second
model, the health plan assumes the risk and the physicians send
claims for covered pharmacy services to the health plan; claims
are paid on a schedule of billed charges or on a discount off
AWP. Finally, the PBM may supply the drugs on order or
supplements inventory, and Prescription Solutions bills the
health plan or insurer. In this instance, the provider does not
have to negotiate pricing with multiple vendors. Between 30 to
40 percent of our PBM business falls into this model.

Because Prescription Solutions is able to compete by leveraging the
numbers of subscribers, contracted networks, and pharmacy arrangements,
we can achieve efficiencies that, when integrated with the rest of the
PHS health care and disease management services, have allowed us to
pass many of those savings on to our members in the form of more
comprehensive benefits. However, as is well known, this is becoming
more challenging in the Medicare+Choice program.

Improved Clinical Outcomes

One important outcome of Prescription Solutions ability to compete
efficiently for cost-effective drugs is that we integrate the need to
manage the purchasing and cost of Part B covered drugs with the need to
produce the best overall health outcomes while managing total health
costs. For this reason, many physicians from our contracted groups have
stated that they can deliver better quality of care in a managed
environment than in fee-for-service.
I would like to illustrate the point with a couple of examples. We
offer an integrated approach to management of specific diseases that
involve physicians, pharmacists, and patients. We improve quality of
care and quality of life. These programs often encourage the use of
medication and can sometimes increase the cost of pharmaceutical care,
but these costs often are offset by a decrease in the cost of overall
health care. For example, the use of beta-blockers after a first heart
attack is strongly supported by the research and national guidelines to
help avoid future adverse cardiovascular events. The national average
for the use of beta-blockers is only about 70 percent; our program has
demonstrated 85 to 95 percent compliance with the guidelines.
Prescription Solutions actively supports other disease management
programs, such as those for diabetes and congestive heart failure. We
work closely with patients and their physicians on the use of the most
efficacious drugs.
A second example illustrates our use of formularies as quality
enhancement tools. By our definition, a drug formulary or preferred
drug list is a compilation of drugs that have been reviewed for safety
and efficacy. Contrary to the conventional belief that formularies
exist to simply control the costs of drug therapy, there are many
aspects to the proper administration of a formulary that have more to
do with quality and clinical effectiveness. In one of our cases, a
request for a non-formulary antibiotic medication, Vancomycin oral, was
received in the prior authorization department. The treating physician
had prescribed this drug for a serious knee infection. Due to the way
this oral medication works, it could not get into the blood stream in a
high enough concentration to effectively treat the infection. We
contacted the physician to change the medication to an intravenous
form. Notwithstanding the fact that the intravenous drug was
significantly more costly than the oral medication, the latter would
have had no benefit and potentially could have led to a more serious
problem, including the need for surgery.

Concerns With Current Pricing Mechanisms

Finally, Prescription Solutions agrees with Members of Congress
that the current AWP system for determining payment for covered drugs
is flawed in that average prices and prices charged by wholesalers do
not reflect the prices paid by suppliers and physicians. In fact, the
tension that the AWP system has created led to changes in how health
plans, like PHS, contract with certain specialists for Medicare-covered
drugs, as we described earlier. To us, the AWP is simply a benchmark
price that is independently established and maintained. We use it as a
value used to negotiate purchasing, discounts and rebates of drugs.
Increasingly, contracts with pharmaceutical manufacturers, pharmacy
providers, and clients using our services are based upon negotiated
discounts from AWP for the prescriptions being dispensed.
But AWP concerns are not the whole story, and we would encourage
the Subcommittee to understand the impact of a rule on drug costs to
the Medicaid program, and which has broad impact in the pharmaceutical
market as a whole, i.e., the Medicaid ``best price'' rule. In the
simplest terms, the best price rule requires that whenever a drug
company gives a deeper discount to an insurance plan, PBM, or other
purchasing entity than the current discount offered to the states'
Medicaid programs, the deeper discount must be offered to the states as
well.
While on the surface this may seem to be a logical requirement, in
practice, the rule has created a floor price for many branded drugs,
thus inhibiting competition on price among the pharmaceutical
manufacturers with similar products. Because the Medicaid best price
and Federal Supply Schedule (FSS) pricing structures require the most
favorable pricing available to any entity, manufacturers use the
requirement as a shield against aggressive negotiations by private
sector companies such as ours. The net effect is to artificially buoy-
up the price to all purchasers since a pricing concession that would
discount a product below the Medicaid or FSS price would result in
substantial losses for the public book of the manufacturer's business.
The reason is simple. The rule limits the effect that competition
from multiple private purchasers--health plan PBMs, insurers,
hospitals, clinics and pharmacies--can have on price because the drug
companies would be required to give that same price to all 50 state
Medicaid programs as well. It is not a bargain for the manufacturers
and results in the states paying a higher price or floor for the drugs
provided under the program.
A further complication is that PBMs do not know the ``Best Prices''
for drugs and have no realistic way of learning this information. Thus,
if a pharmaceutical company states in negotiations that it can not give
a bigger discount because of ``Best Price'' considerations, the PBM has
no way to verify or rebut this claim. In effect, while the best price
rule was intended to reduce costs, it has become a good example of
price controls failing to achieve the original purpose and raising drug
prices for all consumers.

Conclusion

In closing, we would commend the Subcommittee for seeking solutions
to the payment issues created under the AWP reimbursement system. We
would like to emphasize two key points: first, we support a system that
allows for competition; and second, we believe it is critical that the
ability of Prescription Solutions and similar entities to continue to
achieve their quality management goals through integrated purchasing
and management systems is not compromised. We believe that Prescription
Solutions' PBM model--a closely integrated component of a health plan
delivery system--is a template for how drug coverage and quality
management can provide value to beneficiaries and decrease the overall
cost of healthcare. Thank you for the opportunity to testify.

Prescription Solutions PBM Structure

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Chairman JOHNSON. Thank you, Mr. Jones. Ms. Glaun?

STATEMENT OF KIM GLAUN, WASHINGTON COUNSEL, MEDICARE RIGHTS
CENTER, NEW YORK, NEW YORK

Ms. GLAUN. Good morning, Madam Chairman. My name is Kim
Glaun, and I am the Washington Counsel at the Medicare Rights
Center. The Medicare Rights Center is a national consumer
service organization with offices in New York, Washington, and
Baltimore, working to ensure that older and disabled Americans
get good, affordable health care.
Every year, the Medicare Rights Center hears from more than
60,000 Americans with Medicare who have questions about their
Medicare benefits, rights, and options. Thank you for inviting
me to share with the Subcommittee the consumer perspective on
Medicare's payment scheme for covered drugs.
Every day, the Medicare Rights Center hotline hears from
scores of older and disabled Americans who cannot afford their
prescriptions. Medicare's current policy of covering only a
limited number of drugs and paying for them based on the
average wholesale price often forces elderly and disabled
persons with cancer and other serious medical conditions to
spend more out of pocket than their small fixed incomes allow.
This policy should be changed.
Take, for example, Mrs. Thomas. While she is fictional, we
have spoken to countless men and women like her who face the
same difficulties she does in getting critical care. Mrs.
Thomas is 75 years old and lives in Texas, which, like most
States, does not have a State pharmaceutical assistance
program. Like the majority of people with Medicare, Mrs. Thomas
suffers from two chronic conditions, congestive heart failure
and cancer. Like the typical person with Medicare, her annual
income is about $16,000, too high for her to qualify for
Medicaid or other low-income assistance programs.
For someone like Mrs. Thomas, out-of-pocket costs for
medications and treatment for her heart condition alone could
easily cost $5,000 annually. A Medicare supplemental policy to
fill voids in Medicare could cost her $1,500 annually. If Mrs.
Thomas cannot afford supplemental insurance, she will need to
pay all Medicare gaps herself and is likely to forego critical
treatment.
Like most older and disabled Americans, Mrs. Thomas needs
Medicare to offer a good, affordable prescription drug benefit.
Instead, Medicare only offers her limited coverage for some of
her cancer drugs. The current policy of basing Medicare
reimbursements on the AWP directly harms Mrs. Thomas and
millions of other vulnerable and older disabled men and women.
First, as the U.S. General Accounting Office has documented
and my fellow witnesses and Administrator Scully have testified
today, the AWP bears little relation to the amount doctors and
suppliers actually pay for drugs and is grossly inflated.
Because Medicare patients pay 20 percent of the amount Medicare
reimburses for drugs and Medicare premises payment rates on the
inflated AWP, older adults and persons with disabilities are
overpaying for their medications.
Second, Medicare's inflated payments for medications drive
up the costs of Medicare supplemental policies. Insurers pass
on to policy holders the cost of inflated coinsurance payments
through premium increases. Premium hikes have made supplemental
policies unaffordable for a growing number of older and
disabled Americans with Medicare.
Third, the AWP creates perverse financial incentives that
could result in inappropriate prescribing at the expense of
people with Medicare's health and quality of care. The
difference or spread between the AWP-based price and the price
a physician actually pays for the drugs is essentially profit.
The greater the difference between the Medicare price and the
actual price, the more profit a physician keeps. The government
should not be perpetuating a system that induces doctors to
prescribe drugs based on their own financial gain rather than
clinical efficacy.
In sum, Medicare's current policy of pegging drug
reimbursement under part B to the arbitrary AWP subsidizes
physicians, suppliers, and manufacturers at the expense of
older and disabled Americans and America's taxpayers. It is due
time that Medicare use its market leverage to lower
prescription drug prices for people with Medicare rather than
accept the pharmaceutical industry's pricing structure as a
given. A Medicare policy of paying prices that the
pharmaceutical industry charges its most favorite customers
comports with Medicare's pricing practices for doctors,
hospitals, providers, and suppliers. A more rational payment
system will protect people with Medicare, the common good, and
the public purse.
Congress must respect the need to pay doctors and hospitals
rates that encourage them to continue to serve people with
Medicare, but moving toward a system based on acquisition costs
would institute much needed, reasonable reforms and success in
lowering both people with Medicare's cost sharing and taxpayer
expenditures for currently covered drugs.
In conclusion, we urge you to save the Medicare Program
from wasteful expenditures and to conserve those dollars to
help more people with Medicare get good, affordable
prescription drugs. Thank you.
[The prepared statement of Ms. Glaun follows:]
Statement of Kim Glaun, Washington Counsel, Medicare Rights Center, New
York, New York
Good morning, Madam Chairman. My name is Kim Glaun, and I am the
Washington Counsel at the Medicare Rights Center.
The Medicare Rights Center is a national consumer service
organization, with offices in New York and Washington, working to
ensure that older and disabled Americans get good, affordable health
care. Under a contract with the New York State Office for the Aging,
with funding from the Centers for Medicare and Medicaid Services, we
operate New York State's Health Insurance Assistance Program hotline.
We also operate a National Medicare HMO Hotline that assists elderly
and disabled Americans who are struggling to get needed care and
coverage from their HMOs.
Every year the Medicare Rights Center hears from more than 60,000
Americans with Medicare, who have questions about their Medicare
benefits, rights and options and problems accessing critical care.
Their greatest problem by far is securing affordable prescription
drugs. We thank you for inviting MRC to share with the Ways and Means
Committee Subcommittee on Health the consumer perspective on the issue
of prescription drug costs for people with Medicare.
Ensuring Older and Disabled Americans Get the Prescriptions They Need
Every day, MRC hears from scores of older and disabled Americans
who cannot afford their prescriptions. Even those fortunate enough to
have coverage for some of their medications under Part B or through a
Medicare HMO struggle to afford premiums and copays for this coverage.
Medicare's current policy of covering only a limited number of drugs--
and paying 95% of the Average Wholesale Price for these drugs--often
forces elderly and disabled individuals with cancer and other serious
medical conditions to spend more out of pocket than their small fixed
incomes allow and they should be expected to pay. This policy should be
changed.
Take for example, Mrs. Thomas, an amalgam of Medicare Rights
Center's clients. She is 75 years old and lives in Texas, which, like
most states, does not have a state pharmaceutical assistance program.
Like the majority of people with Medicare, Mrs. Thomas suffers from two
chronic conditions, congestive heart failure and cancer. Like the
typical person with Medicare, her annual income is about $16,000, too
high for her to qualify for Medicaid or other low-income assistance
programs. Like most people with cancer and congestive heart failure,
she is on multiple medications.
The Centers for Medicare and Medicaid Services estimates that out-
of-pocket costs for medications and other health care needs relating to
congestive heart failure alone can easily cost someone like Mrs. Thomas
close to $5,000 a year. On top of that she would pay about $1,500 a
year for Medicare supplemental coverage to fill other gaps in Medicare.
If she cannot afford to pay for this coverage and opts to pay the
coinsurance costs herself, she will have to spend even more and is
likely to go without critical treatment. Like many people the Medicare
Rights Center hears from, Mrs. Thomas is thinking about buying her
drugs from Canada on the Web, a practice that is illegal but that more
and more older and disabled Americans are following as a way to get
affordable medications.
Like most older and disabled Americans, Mrs. Thomas needs Medicare
to offer a good, affordable prescription drug benefit. Instead,
Medicare only offers her limited coverage for some of her cancer drugs.
The current policy of paying 95% of the Average Wholesale Price for
these drugs directly harms Mrs. Thomas and millions of other vulnerable
older and disabled men and women. It also needlessly saps money from
the Medicare program and taxpayers to the clear benefit of the
pharmaceutical industry and certain providers.
First, the AWP is a price that manufacturers derive using their own
criteria and is not defined by any Federal law or
regulation.^[i] The fact is, as recognized by the U.S.
General Accounting Office, the Average Wholesale Price is neither
``average'' nor ``wholesale.''^[ii] It is much higher than
what most other American purchasers are paying for these drugs. So long
as Medicare pays for drugs based on the average wholesale price--and
not on the much lower prices paid by other large purchasers--people
with Medicare will often end up paying much higher coinsurance for
their covered drugs than they would otherwise be paying.
---------------------------------------------------------------------------
\[i]{\Gencarelli. Dawn M., Average Wholesale Price for Prescription
Drugs; Is There a More Appropriate Pricing Mechanism? Issue Brief No.
775, National Health Policy Forum, June 7, 2002, 2, list visited on
October 1, 2002 from http://www.nhpf.org/pdfs/8-775+(web).pdf.
\[ii]{\Laura A. Dummit, Medicare Outpatient Drugs: Program Payments
Should Better Reflect Market Prices, testimony before the Senate
Finance Subcommittee on Health, March 14, 2002 (GAO-02-53IT). William
J. Scanlon, Medicare Part B Drugs: Program Payments Should Reflect
Market Price, testimony before the Subcommittee on Health and the
Subcommittee on Oversight and Investigations, US House Committee on
Energy and Commerce, September 21, 2001, (GAO-01-1142T), US General
Accounting Office, Washington, DC, 2, accessed October 1, 2002 at
http://www.gao.gov/new.items/d011142t.pdf.
---------------------------------------------------------------------------
Second, these inflated prices for Part B medications drive up the
cost of Medicare supplemental insurance, which millions of people with
Medicare purchase to fill Medicare's coverage gaps. Medigap insurers
must pay more in coinsurance for Part B covered prescription drugs than
they would be paying if the Federal Government paid a lower price for
these drugs. Of course, Medigap insurers simply pass these costs on to
their policyholders by raising their premiums. As a result, the data
shows that an increasing number of older and disabled Americans with
Medicare, people like Mrs. Thomas, can no longer afford these
policies.^[iii]
---------------------------------------------------------------------------
\[iii]{\Pourat, N., T. Rice, G. Kominski, and R.E. Snyder, 200.
``Socioeconomic Differences in Medicare Supplemental Coverage.'' Health
Affairs 19 (5): 186-96. The Detroit News, Business, B, August 14, 2002.
---------------------------------------------------------------------------
Third, the AWP creates perverse financial incentives that could
result in inappropriate prescribing at the expense of people with
Medicare's health and quality of care.^[iv] The difference,
or ``spread'', between the AWP-based price and the price a physician
actually pays for the drugs is essentially profit. The greater the
difference between the Medicare price and actual price, the more profit
a physician keeps.^[v] The government should not be
perpetuating a system that motivates doctors to prescribe drugs based
on their own financial gain rather than the best treatment for the
thousands of people with Medicare like Mrs. Thomas.^[vi]
---------------------------------------------------------------------------
\[iv]{\At root, the AWP is a marketing tool, utilized and
manipulated by the physicians, suppliers and manufacturers to gain
profit. See Rep. Sherrod Brown, Congressional Hearing: Medicare Drug
Reimbursement: A Broken System For Patients and Taxpayers, September
21, 2001 Washington, DC, Energy and Commerce Committee--Subcommittee on
Oversight and Investigations, last visited on October 1, 2002 at http:/
/www.kaisernetwork.org/health__cast/uploaded__files/ACF121.pdf
\[v]{\Janet Rehnquist, testimony before the Senate Committee on
Finance, March 14, 2002 Washington, DC, last visited on October 1,
2002, 3, at http://oig.hhs.gov/testimony/docs/2002/020314fin.pdf.
\[vi]{\Companies and individuals have taken advantage of these
perverse incentives. Recent litigation has highlighted how
pharmaceutical companies can manipulate the AWP to increase profits.
Most recently, in October, 2001, TAP Pharmaceuticals agreed to pay
almost $900 million to settle a civil and criminal lawsuit brought by
the United States and other private and governmental entities. TAP paid
substantial criminal and civil fines for allegedly developing and
implementing a fraudulent pricing scheme, as well as for marketing
misconduct, in connection with their drug Lupron. See U.S. v. Tap
Pharmaceuticals Prod., Crim. No. 01-CR-1-354-WGY (D. Mass. December 4,
2001), sentencing memorandum available at http://www.
prescriptionaccesslitigation.org/documents.htm (last visited October 1,
2002). Similarly, Bayer agreed to pay $14 million to settle a lawsuit
alleging that they had improperly inflated the AWPs for a number of
Bayer drugs, including AIDS and hemophilia drugs. Associated Press,
Report: Bayer to Pay $14 Million in Probe of Drug Prices, at http://
fyi.cnn.com/2000/health/09/18/bayer.drugs.ap (last visited Oct. 1,
2002).
---------------------------------------------------------------------------
Finally, when the Federal Government overpays for prescription
drugs, it drains the Medicare Trust Fund and harms all U.S.
taxpayers.^[vii] The Federal Government negotiates discounted
drug prices on behalf of veterans, Department of Defense employees and
retirees, and other Federal employees and retirees.^[viii]
The Federal Government should assure real discounted prices for
Medicare-covered drugs.
---------------------------------------------------------------------------
\[vii]{\Chairman Bilirakis, Congressional Hearing: Medicare Drug
Reimbursement: A Broken System For Patients and Taxpayers, September
21, 2001 Washington, DC, Energy and Commerce Committee--Subcommittee on
Oversight and Investigations, last visited on October 1, 2002 at http:/
/www.kaisernetwork.org/health__cast/uploaded__files/ACF121.pdf
\[viii]{\Supra note 2, at 2 (``We found that Medicare would have
saved $1.9 billion of the $3.7 billion it spent for 24 drugs in 2000 if
the drugs were reimbursed at prices available to the VA. Over $380
million of this savings would directly impact Medicare beneficiaries in
the form of reduced coinsurance payments.'')
---------------------------------------------------------------------------
In sum, Medicare's current policy of pegging drug reimbursement
under Part B to 95% of an arbitrary AWP subsidizes physicians,
suppliers and manufacturers, at the expense of older and disabled
Americans and America's taxpayers.
Helping People with Medicare While Preserving the Medicare Trust Fund
It is due time that Mrs. Thomas and the millions of people in
similar financial and health situations be able to afford the
medications they need. It is long past time for Medicare to use its
market leverage to lower prescription drug prices for people with
Medicare rather than accept the pharmaceutical industries' pricing
structure as a given. A Medicare policy of paying prices that the
pharmaceutical industry charges its most favored customers is both
consistent with Medicare's pricing practices with doctors, hospitals
and other providers and suppliers and in the interest of people with
Medicare, the common good and the public purse.
Congress must respect the need to pay doctors and hospitals rates
that encourage them to continue to serve people with Medicare. But
moving toward a system based on acquisition costs would institute much
needed, reasonable reforms and success in lowering both people with
Medicare's cost-sharing and taxpayer expenditures for currently covered
drugs.
Conclusion
In conclusion, we urge you to save the Medicare program from
wasteful expenditures and help more people with Medicare to get good
affordable prescription drugs. Every dollar the Federal Government
saves through lower prescription drug prices under Medicare Part B is
money that can go to covering additional prescription drugs that
millions of people with Medicare desperately need.
I thank the Ways and Means Committee Subcommittee on Health for
this opportunity to testify on behalf of older and disabled Americans.

Chairman JOHNSON. Thank you very much. I thank the panel
for their testimony. Ms. Glaun, I thank you for your eloquent
description of the burden that high-priced drugs place on our
elderly. I am hopeful that we will pass some prescription drug
legislation this year. I am very proud that this Committee did
get a bill through the House, that particularly for the low-
income seniors would take essentially all the costs off them,
so I certainly share with you that concern.
I also am very conscious of the copayment burden that high-
cost drugs place on our seniors and the danger of the spread
driving a physician's decision as to what to use. In light of
the testimony that indicates that 80 percent of our seniors get
chemotherapy in practice-based cancer treatment centers, do you
have any concern about access to those centers if we
concentrate only on price and not on practice?
Ms. GLAUN. I completely agree with the parties that have
testified and you, Madam Chairman, as well, when you have said
that at the same time we fix the prices that Medicare is
paying, that we need to adequately reimburse providers and
physicians for their practice expenses. Our goal is to assure
access to quality care for our beneficiaries.
Chairman JOHNSON. Thank you very much.
Dr. O'Grady, and Mr. Jones, you can enter in on responding
to this question if you care. Dr. O'Grady, you mentioned that
the evidence is in on competitive bidding, and yet CMS has done
one competitive bidding in one county in Florida and one
competitive bidding in one city in Texas. They competitively
bid hospital beds, urological supplies, surgical dressings,
wheelchairs and accessories, and general orthotics. The only
drugs they competed were nebulizers and oxygen.
Now, to take that evidence and assume that you can
crosswalk it over to chemotherapy drugs is, in my mind, risky.
I believe competitive bidding has a place here, there is no
question about that. The examples that you give of competitive
bidding are amongst plans, and you also Mr. Jones, when a plan
bids competitively or uses the competitive approach in
purchasing, they have underneath them an integrated delivery
system and that is our problem. We do not have underneath drug
pricing and Medicare an integrated delivery system, and if we
do not pay properly for that, as Mr. McCrery said in his
questioning, which I had to miss some of, we should not have to
be doing this. If we had integrated delivery systems in
Medicare, we would not have to be doing this.
We do have to do this. So, in a sense, the Federal Employee
Health Benefit Plan analogy and Mr. Jones' Prescription
Solutions analogy, while useful and demonstrating the power of
competitive bidding, particularly in the setting of integrated
care delivery systems, in a sense, it circumvents the hardest
part of the nut that we have to crack.
So, I would like your comments on how do we get at the
practice expense. Then I just want to go on to Dr. Bunn. I want
him to be thinking about it. I mean, we need to understand,
what are these drugs we are talking about? When I read about
their toxicity, what is it? I go through a clinic, and they
show me a drug that if it gets misplaced and does not go
through the needle and it gets in the skin, it can cause a
chain of erosion.
So, I want us to understand a little more clearly, not only
what competitive bidding might do for us, but the terrific
challenge we face in managing the delivery of highly toxic
drugs that are highly sensitive to temperature and other
things. I do not think, Mr. Reeb, that the OIG has done any
investigations of these particular kind of drugs. The examples
we are getting are from Albuterol and others that are more
simple, either orally or nebulizer or injectably taken.
So, this issue of systems of delivery is the hard nut to
crack here. We cannot dodge it or seniors will not have access
to care. It is that simple. Dr. O'Grady and Mr. Jones, if you
would like to comment, and then, Dr. Bunn, if you would like to
comment, and finally, Mr. Reeb, if you would like to comment,
you are welcome to do so.
Dr. O'GRADY. Sure. To start off in terms of thinking about
the competitive bidding demo and also where this sort of
negotiation and bidding has been done in the past, and is there
enough of a track record to have some confidence to move
forward? Certainly, CMS has done a good job on this particular
demo. They have also followed up to find out whether there was
any problem with access, any problem with the quality of care
that the beneficiaries received, and they had outside people
come in from the University of Wisconsin, and kind of verify
what was going on and do the evaluation. That all came back
fairly positively.
Broader than that, you are absolutely right that the
experiment was on Albuterol. We know that from other public
purchasers, as well as private, including FEHBP, that this
notion of negotiating prices has certainly gone on for quite a
long time. It certainly works well within an integrated setting
where you can have this balance, that Mr. Jones talked about.
It is also, as Mr. Scully said, with the pre-65 population, the
Blue Cross-Blue Shield plans are doing this sort of stuff all
the time.
My point would not be that this is only one part of the
things to do. Certainly, you have to look at the other part of
the issue and make sure that the overall payment makes sense.
If it does not make sense, at some point, you will hit some
access problems.
So, it is certainly within Medicare's prime set of
responsibilities to make sure that they pay fairly, but mostly
that is to be because of their responsibility to beneficiaries
to protect them, and if they do not get the price right, that
will hurt beneficiaries. It is also balancing that protection
that they have to provide to taxpayers.
Chairman JOHNSON. It does not bother you that none of the
things that they have had experience in competitive bidding
with are complicated to deliver, that their experience, in
fact, is extremely limited?
Dr. O'GRADY. I think it would be a better experimental
design to use some of those drugs that you are talking about
and then find out, how much does the price come down?
The one thing I would also like to be quite clear on this
is if you look carefully at that report, there are other things
that go on there where, after competitive bidding, the price
was higher. Now, part of that is back to the point I made about
it is very hard in an administered price system to get the
price right, different locations, different things. Things
change.
Chairman JOHNSON. I appreciate that.
Dr. O'GRADY. So you are trying to pay kind of an accurate
price, and this sort of one-size-fits-all approach sometimes
overpays, other times underpays. A better situation in a public
policy sense would be something that could adapt to change,
adapt to different parts of the country, different markets, and
take that into account. That is one of the real positive
aspects of competitive bidding.
Chairman JOHNSON. Mr. Jones?
Mr. JONES. Prescription Solutions has a number of clients
that it serves as a PBM. PacifiCare is the largest of them. We
have other clients that are not integrated, and they look for
savings when it comes down to injectable drugs, as well.
Because we purchase large amounts of injectable drugs from
the manufacturers, we get good prices for all of our clients.
The delivery systems in delivering it to a clinic or to
physician offices is no different than the drug company would
use. We use the same protections in trying to make sure they
are shielded from temperature and humidity and all of those
things. So, the physician would get the drug product in the
clinic similarly as if they ordered it directly, but they would
be able to take advantage of our purchasing power.
So, it is really not much different than that. It is just
that we get better pricing because we are----
Chairman JOHNSON. Excuse me. I guess I did not quite
understand. So you only deal with the drug component? You do
not deal with the reimbursement to the physician and the
system?
Mr. JONES. In a non-integrated system, you are exactly
right. It is the drug alone.
Chairman JOHNSON. Furthermore, because we do also have
reports from users in California about problems, would you be
happy to work with us on any problems that you have seen
develop?
Mr. JONES. Surely.
Chairman JOHNSON. Dr. Bunn?
Dr. BUNN. Thank you for the opportunity. I agree with you
entirely. There are issues of quality as well as cost, and, of
course, as a physician, we are concerned with quality.
I guess the example that was incited this morning and, I
think, your examples were outstanding, of course, was the
pharmacist in St. Louis who decided he could make money by
diluting the drugs, and certainly the physicians would not feel
that a system that allowed that to happen is one that either
the Congress or the physicians should support. So, we are
certainly not opposed to some competitive system that would
ensure quality and that the physician has some control over the
quality.
You are also quite right that these agents are mixed and
they are toxic, and the way they are mixed and the way they are
stored is extremely important. Many of these will become
inactive at improper temperatures, with improper shipping or
storage. If they show up in a doctor's office overnight express
and sit there outside and they need to be refrigerated,
obviously, that is not going to work.
So, basically, I think what you said we would reiterate,
and I think you said it very well.
Chairman JOHNSON. Dr. Bunn, if we were motivated, could we
be using some of the dosages that are left? For instance, if
you open something and you use half of it, could we be using
the other half for a patient that is also there at the same
time if we were allowed by law? Should we be looking at the
sheer waste we impose on the system because something was
opened?
Dr. BUNN. That example would not be a great thing to be
doing, but things could be packaged potentially differently by
pharmaceutical manufacturers to optimize the flexibility so as
not to have waste. Using the same vial with multiple needle
sticks would not probably be the best way to get at that.
Chairman JOHNSON. What about the personnel that are
required? The practice expense formula looks at physician work
hours, but we have a hard time taking into account non-
physician contributions. You mentioned in your statement the
highly qualified support staff that clinics depend on. Could
you describe that in a little more detail and also some of the
equipment and insurance costs that are also part of the
practice expense bundle, that if not taken into account, will
not enable people to stay in the practice of delivering cancer
care?
Dr. BUNN. Right. We believe there have been two fundamental
problems with the practice expense side. First of all, there
was inadequate data and an inadequate database for which to
estimate the true costs. You brought up today, we agree
entirely with you that the GAO data is totally flawed and
totally inadequate. We agree that the CMS is has also not
developed adequate data. We do believe that the Gallup survey
now does provide that data.
We also believe, as you alluded to, that there is a flawed
methodology for making the calculations that is biased against
non-physician work, and it does happen that oncology practices
have the largest amount of that. So, we believe that in
addition to using the new data provided, both ASCO and the
Congress need to work with CMS to develop an adequate
methodology to account for those true expenses, which are the
non-physician-related expenses that are largely attributable,
like anything, to personnel, largely trained nurses,
pharmacists, and other health professionals. Each oncology
office has a large number of those.
Chairman JOHNSON. Thank you very much.
Mr. Reeb, would you just clarify for the record, if you
know--I am not sure whether you know or not, but has the OIG
looked at drugs used in chemotherapy or have the drugs that
they have focused on studying been more like Albuterol?
Mr. REEB. We have looked at both oncology drugs and other
drugs, but our work has come from the pricing side. We are a
problematic looking kind of an agency. The spread that is
created with the AWP difference to the acquisition costs,
whether it be at a physician's office or whether it be from a
Medicaid agency in their program. So, we have not looked--I
mean, we have focused on that because the amount of money at
stake allows for these kind of situations to develop.
Chairman JOHNSON. You have not done any work on what the
cost of the delivery system is and whether it is more or less
than the spread?
Mr. REEB. No, ma'am.
Chairman JOHNSON. I mean, it is also conceivable that in
some instances, it could be more than the spread, it could be
equal to the spread, it could be less than the spread, or it
could be a lot less than the spread.
Mr. REEB. Yes, exactly.
Chairman JOHNSON. Okay. Thank you.
Mr. REEB. We have not done work in that area.
Chairman JOHNSON. Mr. Stark?
Mr. STARK. Thank you, Madam Chair. I would like to thank
all of our witnesses, in particular Mr. Reeb and Mr. Vito from
the OIG, whose work in this area has called our attention to a
serious problem that we hopefully can correct and save the
government some money. Unfortunately, you do not get a raise.
You guys ought to work on commission. You would be better off.
We do appreciate and the public will appreciate the work that
you do.
Ms. Glaun, the work that you do for beneficiaries also
should not go unnoticed, and I am sure that my colleagues in
Maryland send their constituents to you frequently and that you
are a great deal of assistance. Unfortunately, California is a
little long distance for us to refer our constituent service
cases to you, but we also appreciate the work that you do in
this.
I guess I just have a couple of questions. It seems to me,
Dr. Bunn, if you will not mind my putting aside the question of
reimbursement for practice expense, I am really not sure that
is what this hearing is about. I recognize it as a problem, but
aside from yourself, the people here, I think we are dealing
more with the cost of the unit of a prescription that your
colleagues administer. We do recognize that some of that
problem has been exacerbated because of problems with the
reimbursement for the professional services that your group
renders.
I hope that we can separate that. I hope that we can find
an adequate reimbursement, an adequate, fair reimbursement
system for the physicians. I hope that we can find an efficient
way to get the best price to which we ought to be entitled from
the pharmaceutical industry for our beneficiaries.
I am not even sure it is a dispute or a disagreement, but
there seems to be at issue whether or not we should bid for a
pharmaceutical, the price of a drug, and then in what form. I
do not hear any enthusiastic support for a winner-take-all.
Somebody mentioned in the testimony, Dr. O'Grady, that you
could underpay. Now, I am missing something. If you are talking
about underpaying Dr. Bunn's gang, I am with you. How would you
underpay AMGEN for Epoetin alfa (EPO) once you set a price for
it? It is the same EPO in Wapakoneta, Ohio, as it is in
Oakland, California, is it not?
Dr. O'GRADY. One of the things that can happen here, and I
guess the best example I can think of right now is--one of the
things involved when CMS tries to do this, that is just a very
tough nut for them to crack, is that there is always this lag
having to do with the data that they collect. So they are
always working from about 2 years behind.
Mr. STARK. Okay----
Dr. O'GRADY. No, but----
Mr. STARK. I am with you, but once you set a price for a
pharmaceutical that is in a specially compounded potion, and if
you are buying basically branded, ethical prescription drugs,
you cannot underpay for it. I mean, you are paying the same
price across the country. There is nothing wrong with that, is
there?
Dr. O'GRADY. No.
Mr. STARK. Okay.
Dr. O'GRADY. It is not so much that. It is more the idea
that the price changes, and you have not taken it into account.
Mr. STARK. All right. I just wanted to--because the
question comes up, and Mr. Scully was talking about it, that if
you have got a lot of clout, a big purchasing base, you can get
a better price than some small clinic in a small State that
does not have the market clout to demand a lower price based on
volume.
To that end, I would ask Mr. Jones to deal with the issue
that was brought up where you find that we can get, what, a 25
percent savings in these, as Mr. Scully pointed out, but we can
get almost a 65 or 80 percent savings, a lot more, where we
took the actual price. So, why should we not do it with the
actual price as long as that dichotomy holds?
Mr. JONES. Our company would try to assess on a regular
basis what that actual price is. Because we also buy drugs, we
have a pretty good indication of----
Mr. STARK. So we pay based on what you pay, right?
Mr. JONES. They take advantage of that, yes.
Mr. STARK. I mean, that is what I would think. Do you know
whether PacifiCare uses more than one PBM to service its
beneficiaries?
Mr. JONES. No. It is one PBM. It is ours. We are a
subsidiary company of PacifiCare.
Mr. STARK. Even if you were not, would it not be to their
advantage to use one? Would they not get better prices by
concentrating their buying power in one provider?
Mr. JONES. In this case, almost every year, the question is
are we giving PacifiCare the very best deal, and they will
actually make us compete against competitors. They will invite
people in to check, yes.
Mr. STARK. How many of your other clients--you serve other
managed care plans.
Mr. JONES. Yes.
Mr. STARK. How many of them have multiple PBMs?
Mr. JONES. There are a few, not many. Most of them will
choose one after a competitive process.
Mr. STARK. Although that is a concern that we have heard
here if the government went to bidding, and there are some
impracticalities, some people may not be able to serve the
entire country, but I am just trying to find out, my sense is
that if we do go to bidding, which I am less comfortable with,
we do not have a system, that the extreme, the most competitive
would be winner-takes-all, would it not? That really would be
the toughest competition.
Mr. JONES. If that winner can provide all services----
Mr. STARK. Yes. You hit it right on the head. If they could
provide the quality and the coverage for the market.
Mr. JONES. Then there is the issue of ongoing competition.
A winner with a long contract may not be that----
Mr. STARK. Then the price goes up and you have knocked the
other competitors out of the box, so there is nobody to come up
and bid the next time.
Mr. JONES. Yes.
Mr. STARK. That is a good observation, and it further is a
problem. I think this is between us and the Committees here
and--I still want to say Health Care Financing Administration,
I can never remember what their name is now--between CMS, we
are going to have to figure out what is a system. It seems that
we could go to the actual price now and phase into something
else if that worked.
Dr. Bunn, did you want to add something to the discussion?
Dr. BUNN. I think there are a couple of other facts in the
drug cost besides what you just mentioned, which is what you
pay for. First of all, these drugs have to be given on a very
set schedule and they have to be available when the patient is
due. If you delay, it is going to decrease the effectiveness.
So, there are several things here that will adversely
affect a rural practitioner. Again, you have to have an
inventory and you have to have it available at the time. If,
for example, the patient progressed or had some toxicity, then
you would be stuck with that drug and that drug might go out of
date before it could be used in another patient in a rural
area. Also, sometimes the pharmacist or the nurse make a
mistake and spill the drug. Obviously, this is not often, but
that is an added cost. You cannot bill that to somebody else.
So, that is sort of a cost of the drug that has to be taken
into consideration, as well.
So, I think there are some issues with inventory and
wastage and so on that have to be considered in the cost, as
well.
Mr. STARK. Keep going. How does that--so I will stipulate
to that. Now, what is better, to use an average price across
the Nation so that the Marshfield Clinic pays the same amount
as Kaiser in Oakland, or do you suggest a different system that
would resolve that problem? Finish that up.
Dr. BUNN. Well, I think we all have the same goal, which is
come the closest to the actual cost as possible. I am not sure
that having an average cost for the entire United States of
America would be best, because, obviously, the cost in a
physician practice is going to be different, and then you are
going to create some huge winners and some huge losers.
Mr. STARK. Can you generalize, and my time is up, but Dr.
Bunn, can you generalize for us, in the non-Medicare payers,
Blue Cross, whomever, when they reimburse oncologists, do they
pay for spillage, wastage, how do you bill there? Is it
different from what we have been discussing here? Is there a
general standard procedure that the Blues across the country,
say, would reimburse your members for non-Medicare payers that
is different from what we are talking about today?
Dr. BUNN. Largely not. As you know, government to a certain
extent sets standards. I would say in non-Medicare patients, we
have some of the same cross-subsidization going on where
actually the insurance companies will a bit overpay for the
drugs, knowing that practice expenses and spillage and so on
are going to be covered by the overage. Again, we do not think
that is probably the best way for either the insurance company
or the government to be reimbursing.
Mr. STARK. Do they pay you as a percentage of average
wholesale or do they negotiate a rate with you, a price for the
drug? How is that done?
Dr. BUNN. It is actually variable, but in many instances,
it is the same as the government.
Mr. STARK. Thank you. Thank you, Madam Chair.
Chairman JOHNSON. Thank you very much. Congresswoman
Thurman?
Mrs. THURMAN. Madam Chairman, a lot of the questions have
been asked today. We have kind of exhausted some of this, but
maybe you can just help me reemphasize a little bit of this,
because one of these competitive bidding areas is now in a new
part of the district, so obviously I am going to be more
actively involved in the competitive bidding issue.
I would say to Dr. O'Grady, when you talk in your
testimony--and if this has already been answered, it is okay, I
am just trying to clarify it--recent findings from Medicare's
competitive bidding demonstrations for durable medical
equipment in which Medicare saved 25 percent over what it would
have otherwise paid for one particular drug, Albuterol, based
on these findings, you argue that Medicare should undertake
competitive bidding. When GAO reported in September 2001 that
the average widely available discount from AWP in 1999 for the
unit dose form of Albuterol was 85 percent, why should Medicare
just accept the savings of only 25 percent when discounts of 85
percent are widely available to us?
Dr. O'GRADY. I think that the difference between the 85 and
the 25 percent figure are a big question mark. This was not
done in Polk County. This was done over in San Antonio. So,
what they did is have a number of bidders who went out and
negotiated.
Now, back to Mr. Stark's point, it was not a winner-take-
all. It was so that the providers could, or in this case the
beneficiaries were choosing this for their nebulizers, could
pick between a number of different suppliers, and so it might
be price that they pick on or it might be service or
availability, things like that.
Now, when they negotiated this, they got 25 percent off the
Medicare rate and the GAO guys found 80. I made a note to call
GAO and ask them what was going on there, what they thought.
Perhaps the folks from the Inspector General have a feel for
what might explain that kind of a gap.
Mrs. THURMAN. Mr. Jones, you wanted to respond?
Mr. JONES. Albuterol is a good example of a drug that
changes dramatically. If you bid, the product can fall in price
fairly dramatically. So you can bid here and it falls down
here, and your bid is still in effect.
These drugs change often, dropping by 80 percent over a 6-
month time period once the patent expires and various
competitors come onto the scene and produce it generically, and
it is not uncommon for drugs to drop that rapidly. It makes us
quickly take notice and try to adjust, and it is one of the
issues of how you establish your contracts, can you take
advantage of those pricing drops.
I empathize in doing a pilot in trying to get a window in
time on the costs of things. It is difficult to do.
Mrs. THURMAN. Mr. Reeb, do you have anything to add to
that?
Mr. VITO. Yes, ma'am. I believe that the price of Albuterol
that we were able to track over time has dropped significantly,
yet the AWP has remained the same. That is why the Medicare
Program has continued to pay that amount of money, because they
base their reimbursement on AWPs, not on the acquisition costs
that people were able to get the product for.
Mrs. THURMAN. Dr. Bunn, I also am concerned with what
happens to some--we have a lot of larger areas, and then, quite
frankly, what I am seeing out there is that there actually are
larger cancer centers now than there have been in the past. I
am curious of how smaller groups or sole practitioners actually
purchase their medicines, and how do we give them the
opportunity to participate in any of this? It is a real concern
when you have a lot of rural areas around. How do they do it?
What happens to them? Do we end up losing some folks and not
giving them the care because of this?
Mr. JONES. I have experienced both in rural and urban
areas. I have lived most of my life in rural areas, and I have
lived the last 30 years in urban areas. We have buying groups
that are available to small pharmacies and mom-and-pop stores
as well as the mega-chains that have their own buying
structure. It is not impossible for smaller pharmacies to
aggregate and get better pricing.
Mrs. THURMAN. Ms. Glaun, did you want to add to that? You
looked like you were----
Ms. GLAUN. No.
Mrs. THURMAN. Okay. My time is up, but we thank you all
and, hopefully, we can all sit down and work some of this out
together. Always remember, it is about the patient and us on
this end who have to worry about the taxpayers.
Chairman JOHNSON. I thank the panel very much. That was
very interesting, Mr. Jones, the varied sizes of buying groups
within the same structure. Perhaps we will follow up on that
later.
Thank you all very much for your testimony. I appreciate
it. I do believe that this is a problem that needs to be
addressed, that with adequate data and with a good methodology
and with a legal structure that guarantees that we will be able
to use the savings to reimburse practice costs, we should be
able to save the taxpayers really a dramatic number of dollars
and make Medicare more efficient and also a better program to
serve our seniors. Thank you.
Finally, I would like to include in the record a statement
submitted by Laura Thevenot, Executive Director of the American
Society for Therapeutic Radiology and Oncology, Incorporated.
[The statement of Ms. Thevenot follows:]
Statement of Laura Thevenot, Executive Director, American Society for
Therapeutic Radiology and Oncology, Inc.
Introduction and Summary
The American Society for Therapeutic Radiology and Oncology, Inc.
(``ASTRO'') is a professional organization of more than 7,000 members,
including physicians (radiation oncologists), radiation scientists
(radiobiologists, radiological physicists), radiation therapy
technologists and radiation oncology nurses. These specialists comprise
the expert medical team that uses radiation to treat patients with
cancer. Radiation therapy is recognized as one of the most effective
methods of treating cancer and other diseases. Between 50 and 60
percent of cancer patients are treated with radiation at some time
during the course of their disease. ASTRO's Membership represents
community cancer centers and hospitals as well as major education and
research centers from the U.S. and around the world. ASTRO publishes
the leading scientific journal in radiation oncology in the world.
ASTRO commends the Subcommittee on Health for examining issues
related to Medicare payments for those prescription drugs that are
currently covered by Medicare. However, ASTRO is concerned that
proposals to revise Medicare's payment methodology for drugs, and to
more properly reimburse medical oncologists for the practice expenses
\1\ involved in the administration of cancer drugs, may have an
unintended and adverse impact on continued patient access to high-
quality radiation oncology services. While we agree that there are
weaknesses in Medicare's system for reimbursing medical oncology
services, we are concerned about the potential unintended consequences
of correcting these problems. We request that Congress include
appropriate statutory language to ensure that payment for radiation
oncology services and other similarly impacted services are not reduced
as a result of efforts to ensure appropriate payment for medical
oncology services.
---------------------------------------------------------------------------
\1\ Practice expenses include the provision of facilities,
equipment, supplies and non-physician personnel. For radiation
oncology, these services include radiation therapy delivery, and
services with substantial amounts of resource-intensive physicist time.
---------------------------------------------------------------------------
Background
Medicare's method for determining payments for practice expenses
for physicians' services is extremely complex. In addition to the
specialty-specific payment ``pools'' that exist under the Medicare
payment system, there is a pool reserved for a group of technical
component-only services (i.e. services for which there is no physician
work component) provided by a number of different specialties. Many of
the medical oncologists' procedures reside in this so-called ``zero
work pool'' (``ZWP''), along with other capital-intensive procedures
for specialties such as radiation oncology, diagnostic radiology,
cardiology and others. In 2002, services in the ZWP experienced a 4-6%
cut in practice expense payments due to relatively minor shifts in the
mix of services shown in the utilization data. These cuts, combined
with the 5.4% cut in the conversion factor for 2002, equaled a 10% or
greater loss in reimbursement for those services. Since publication of
the 2002 Physician Fee Schedule, we have worked with other specialties
and with the Centers for Medicare & Medicaid Services (``CMS'') to
determine why these losses occurred, and to ensure that similar cuts do
not occur again in the future.
It is our understanding that Congress may consider changing the way
that drugs, including chemotherapy drugs, are reimbursed. In addition,
we understand that the practice expense payment methodology for
chemotherapy administration is being examined. Related to this review
is a proposal for modifying the practice expense payment methodology
for chemotherapy administration. This proposal, if adopted, would
effectively remove chemotherapy administration from the ZWP. As
previously stated, the mix of services in the pool, which changes based
on each year's utilization data, significantly affects the amount of
money allocated to the entire pool. Since chemotherapy administration
is among the most frequently performed services in the ZWP, the removal
of these services would have a significant, negative impact on the
remaining specialties in the pool.
Request for Congressional Assistance
For radiation oncology, technical component services are the
foundation of our work. In addition to physician planning and
management, the care we provide to cancer patients is heavily dependent
on the skilled services of medical physicists, dosimetrists and
radiation therapists, whose codes in the ZWP have been hit especially
hard. The decreased Medicare payments--compounded by decreases from
many insurers that base their payments on the Medicare Fee Schedule--
will adversely affect our ability to maintain critical staff and to
provide therapy using the advanced technology that is now available. In
the long term, without sufficient practice expense reimbursement,
future research and development will slow as device manufacturers see
that their customers are unable to afford their products. The net
effect of all these cutbacks will be reduced access to quality care by
cancer patients. These problems must not be exacerbated by inadvertent
reductions that could result from revisions in payment methodology for
medical oncology services.
ASTRO requests that if Congress decides to enact legislation that
addresses the practice expense payments for chemotherapy
administration, that it do so in a manner that protects the practice
expense payments for all medical services remaining in the ZWP,
including radiation oncology, from further inappropriate reductions.

Chairman JOHNSON. The hearing is adjourned.
[Whereupon, at 12:49 p.m., the hearing was adjourned.]
[Submissions for the record follow:]

STATEMENT OF THE AMERICAN ASSOCIATION FOR HOMECARE

The American Association for Homecare (AAHomecare) submits the
following testimony on the Pricing Mechanisms for Drugs Covered Under
the Medicare Program to the Subcommittee on Health of the Committee of
Ways and Means. AAHomecare represents home health agencies and
suppliers of durable medical equipment (DME), supplies and services.
AAHomecare members represent every segment of the homecare community,
including suppliers that furnish infusion and inhalation therapies to
Medicare beneficiaries in their homes.
Under the Balanced Budget Act (BBA) of 1997, Congress established
payment for Medicare covered drugs at 95% percent of the average
wholesale price (AWP) for the drug. A drug's AWP is set by the
manufacturer and published in compendia of drug prices produced by a
number of companies. Medicare carriers use the prices published in the
compendia to calculate drug payments. This payment methodology has been
criticized recently because there can be a wide spread between the
drug's AWP and the price a physician or supplier pays to acquire the
drug. While AWP may not be an ideal methodology for Medicare Part B
drug payments, AWP payments for the drugs used in home infusion and
home inhalation therapies cover the cost of services necessary to
furnish these therapies safely and effectively in the home. Because
Medicare does not otherwise reimburse suppliers for the costs of these
services, this payment system has permitted beneficiaries to receive
quality infusion and inhalation therapies in their homes.
Current Medicare policy limits payment for infusion and inhalation
therapies to what is covered and paid for under the DME benefit. This
means that the Medicare program does not explicitly reimburse homecare
pharmacies for the array of services necessary to furnish these
therapies safely and effectively to patients in their homes. This is in
contrast to the way private sector health plans typically define and
pay for these therapies. Typically, private sector plans make separate
payments for the drug and non-drug components of the therapy. The
private sector has embraced home infusion and inhalation therapies,
recognizing the patient care benefits and significant savings that
accrue from moving care to non-acute settings and preventing otherwise
predictable hospitalizations.
A change in the way Medicare pays for covered drugs will require a
corresponding change in how these medically necessary services and
functions are paid for. Trimming drug payments back without providing
for separate payment for those activities that, until now, have been
subsidized by the drug payment would be an unwise policy that may have
potentially grave consequences for Medicare beneficiaries.
LA Revision To AWP Drug Payments Must Include Payment For The Service
Costs Of Furnishing Inhalation And Infusion Therapies To
Beneficiaries In Their Homes
There is no question that there can be a large spread between the
AWP and acquisition costs of drugs used in homecare. However, the
acquisition cost of the drug is only a small part of the costs that
homecare pharmacies incur in furnishing inhalation and home infusion
therapies to Medicare beneficiaries in their homes. Medicare policy
limits coverage and payment for these therapies to only the drugs,
equipment, and supplies that are used in the therapy. In actuality,
however, inhalation and infusion therapies furnished to patients at
home involve far more than simply the delivery of drugs, supplies, and
equipment to a patient. Provided safely and properly, these therapies
require an array of services and ancillary functions provided by
trained health professionals. While not separately paid for by the
Medicare program, these services and functions are reimbursed in large
part through the payments for the drugs, supplies, and equipment. The
drug payment in particular subsidizes these services and functions.
In 2001, the American Association for Homecare commissioned a study
by the Lewin Group, ``Product and Service Cost of Providing Respiratory
and Infusion Therapies to Medicare Patients in the Home.'' The study
included statistically valid data from 19 homecare pharmacies of
varying sizes and geographic locations. The Lewin study found that the
acquisition cost of drugs used in inhalation and infusion therapies
represented only 26 percent of the total costs of caring for Medicare
beneficiaries. The remaining 74 percent of the total costs were
comprised of clinical and administrative labor, billing and collection
costs, indirect or overhead costs, inventory/warehouse/delivery
expenses and bad debt. These functions and costs clearly are subsidized
by the drug payment.
Importantly, these staff and administrative expenses are legitimate
clinical and operating costs that are generally recognized by Medicare
for providers in other care settings. Direct patient services for home
infusion and inhalation therapies include patient evaluation and
monitoring and compounding and dispensing drugs and solutions. These
therapies require specialized pharmacy services, and pharmacies must
have staff available to respond to emergencies and questions regarding
therapy. Pharmacies also provide training and education to the patient
(and often the patient's family). Inhalation and infusion therapies
also require the services of a nurse or respiratory therapist to
perform a variety of functions, including patient screening and
assessment, patient training regarding the administration of the
pharmaceuticals, and general monitoring of the patient's health status.
The pharmaceuticals, equipment, and supplies are delivered to the
patient's home. Finally, staff, including licensed pharmacists,
pharmacy technicians, respiratory therapists, and registered nurses are
on call 24 hours a day. We describe these patient care services and
administrative expenses more fully below.
LDirect Patient Services For Home Infusion And Inhalation Therapies
Patient Evaluation
Initial patient intake is an important component for both
inhalation and infusion therapies. The pharmacy must collect
information on the clinical status of the patient and assess the
potential for drug interactions. For home infusion and inhalation
therapies, the patient evaluation is usually based on clinical
information obtained from the nurse's assessments, communications with
the physician and patient, the physician's orders, analysis of
laboratory test results and other pertinent clinical information.
Sometimes, the pharmacist will visit an infusion therapy patient,
particularly if he or she has the appropriate clinical training and
experience.
As therapy proceeds, the pharmacist's findings and recommendations
are communicated at intervals to the physician, nurse, and other
professionals involved in the care of the patient. Interdisciplinary
communication occurs at team conferences and as needed throughout the
course of home treatment. Detailed information about the patient's
compliance with and response to the prescribed treatment regimen is
documented in the database the pharmacist maintains for each patient.
Therapy goals are updated periodically and modifications are
communicated to other caregivers. The pharmacist also obtains
laboratory and other data on the patient from the physician or other
sources and adds these data to the clinical monitoring file on the
patient.
Compounding and Dispensing Drugs and Solutions
Before filling an order for an infusion or inhalation patient, the
pharmacist gathers information about the patient's medical history,
reviews and updates the patient's medication profile, examines the
attending physician's orders for new or continuing prescriptions,
prepares computations needed for processing orders for drugs or
equipment, and, if necessary, telephones the patient to answer
questions and schedule deliveries.
Home infusion drugs and solutions must be prepared under
environmentally controlled conditions, as mandated by various
regulatory and accreditation agencies. Sterile admixtures are prepared
in a Class 100 clean air environment, using aseptic techniques. Final
documents are subject to routine quality control procedures designed to
insure the accuracy of the preparations, product integrity, and
sterility. Depending on the pharmacy's volume of business and
applicable legal restrictions, trained pharmacy technicians may prepare
drugs under a pharmacist's supervision.
Each patient's prescription is filled in quantities and at
intervals sufficient for continuous service. Frequency of drug
preparation depends on several factors, including expected duration of
treatment, frequency of dose administration, home delivery schedules,
drug stability or shelf-life, and patient stability. The average time
required to compound, dispense, assemble, and package a patient's order
depends, in part, on the number of doses in an order, the quantity of
each dose, the number of compounded doses per delivery, the volume and
number of ingredients and the complexity of compounding.
An order for a medication may be filled in single or multiple
doses. Where the patient base is large, a pharmacy technician may
perform related tasks under a pharmacist's supervision, if state law
permits. If a pharmacy's volume is small, the pharmacist typically
performs all tasks needed to compound and dispense drugs.
Patient Monitoring
Appropriate clinical monitoring is essential to ensure the safe
administration of home infusion and inhalation drugs. With respect to
inhalation therapies in particular, monitoring patient compliance is
essential to achieve therapeutic effectiveness. Homecare pharmacies
maintain ongoing programs to oversee patients' compliance and to ensure
that patients receive appropriate refills of their prescriptions.
As with any other type of medical care, complications may result
from infusion therapy. If these complications are not recognized and
addressed in a timely manner, serious injury and even death may occur.
Ongoing clinical monitoring is therefore essential to minimize or
prevent complications associated with infusion therapy and to optimize
desirable outcomes. Nurses and pharmacists must be adept in identifying
the signs and symptoms of the infectious, metabolic, physiological, and
psychosocial complications that can occur, and in managing them.
Throughout the course of therapy, and particularly after a nursing
visit, the pharmacist reviews an infusion patient's clinical
information collected by the nurse, discusses the findings with the
attending physician, assesses the continuing appropriateness of the
current medication schedule, participates in multidisciplinary patient
care conferences to examine the patient's progress and to establish
future goals, and communicates with the patient's other caregivers
regarding the patient's compliance and progress. Clinical monitoring
activities also include establishing testing and monitoring schedules,
reviewing laboratory findings, evaluating any identified problems that
may have occurred, and developing corrective action plans.
LAdministrative And Support Services For Home Infusion And Inhalation
Therapies
There are significant direct and indirect administrative and
support services that impact the quality of patient care. Home infusion
and inhalation therapies cannot be coordinated and delivered
effectively without adequate administrative and support personnel. Many
of these requirements are established by licensing boards, accrediting
bodies, private insurance plans, and Federal and state health programs.
Other activities are simply part of managing and operating any health
care entity. Examples of administrative and support services include
quality improvement programs, utilization review, medical records
management, coordination of insurance benefits, claims processing,
medical waste management, personnel management, inventory control,
orientation programs for new employees, and clinical development and
education programs for management and staff.
Accreditation, for example, is an indirect cost that affects the
quality of care delivered by homecare suppliers and providers.
Accredited companies must meet quality standards for patient care and
business functions in order to maintain accreditation. Accreditation
offers the public the assurance that an accredited company meets or
exceeds an objectively verifiable standard of care. It will be a
setback for Medicare beneficiaries if Medicare reimbursement does not
adequately reimburse providers and suppliers for the cost of meeting
quality standards. If accreditation costs are ignored by Medicare,
Medicare beneficiaries will receive a lower standard of care than
individuals enrolled in private sector health plans. In addition to
accreditation, there are costs associated with complying with state
licensure and professional board requirements.
Homecare pharmacies also incur significant costs in complying with
Medicare program rules, especially those pertaining to billing and
documentation. These include, among others, the following:

Accumulating documentation to support claims for
services
Preparation of claims
Communication with physicians regarding completion of
certificates of medical necessity and other documents required
by the program of physicians.
Communication with carriers regarding claims and
documentation
Participating in medical review process with carriers
on particular claims
Delays in payment from the program

It is worthwhile to note that both the General Accounting Office
(GAO) and the Office of Inspector General (OIG) for the Department of
Health and Human Services have acknowledged that the costs of complying
with Medicare program rules are higher than the costs of compliance for
other government and private payers \1\ In a comparison of payments for
home oxygen therapy by Medicare and the Veterans Administration (VA),
the GAO concluded that Medicare's documentation and other
administrative requirements warranted a 30% higher payment for oxygen.
The GAO also acknowledged that CMS must account for the costs of the
services necessary to furnish Medicare covered items when performing
inherent reasonableness reductions. Similarly, the OIG concluded that
the higher costs of complying with Medicare program rules could justify
charging Medicare more than other private or government payers.
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\1\ Letter dated May 15, 1997, Re: Comparison of Medicare and VA
Payment Rates for Home Oxygen, from William Scanlon, Director, Health
Financing and Systems Issues, GAO to William Roth, Chairman Committee
on Finance, United State Senate; Medicare Payments Use of Revised
``Inherent Reasonableness'' Process Generally Appropriate, GAO/HEHS-00-
79, July 2000; OIG Advisory Opinion 98-8.
---------------------------------------------------------------------------
LUtilization For Drugs Used In Inhalation Therapies Is Directly Related
To The Increase In The Number Of Patients With Chronic
Obstructive Pulmonary Disease (COPD)
It has been suggested that the increase in the utilization of drugs
used in inhalation therapies is related to the difference between the
drugs' acquisition costs and the AWP for the drugs. It is important to
remember that physicians--not homecare pharmacies--prescribe these
medications. It is likewise crucial to consider the broad demographics
of the patient population that receives these drugs.
Patients who require inhalation therapy suffer from chronic
obstructive pulmonary disease (COPD). According to a report recently
released by the National Institutes of Health \2\, COPD is the fourth
leading cause of death in the United States, and, of all leading causes
of death in the United States, the incidence of COPD continues to rise.
Death rates from COPD increased 22% in the last ten years. The number
of patients with COPD doubled in the last 25 years, along with expenses
related to the disease. Between 1985 and 1995, for example, the number
of physician visits for COPD increased from 9.3 million to 16 million.
The number of hospitalizations for COPD in 1995 was estimated to be
500,000. Medical expenditures for COPD in 1995 amounted to $14.7
billion.
---------------------------------------------------------------------------
\2\ GOLD Initiative For Chronic Obstructive Pulmonary Disease,
April 2001.
---------------------------------------------------------------------------
Inhalation drug therapy plays a critical role in the management and
stabilization of COPD. COPD patients are diagnosed earlier and placed
on these medications sooner to stabilize their symptoms and, as a
result, reduce other medical expenses, such as repeat hospitalizations
and physician visits, that are associated with the disease. The use of
two respiratory medications, Ipatropium Bromide and Albuterol Sulfate,
individually and in combination are widely supported in the clinical
literature. The costs of treating these patients with inhalation
therapy are modest, especially in light of the potential for a
reduction of other health care expenses for this population.
Finally, respiratory drugs are for a chronic, ultimately fatal
illness that requires daily drug therapy to help people with COPD avoid
exacerbations. Many of these individuals remain on these medications
for the remainder of their lives. As COPD progresses, the number of
treatments per patient increases, accounting for the higher volume for
these drugs.
Conclusion
A comprehensive analysis of the services necessary to safely
furnish inhalation and infusion therapies to beneficiaries in their
homes must be part of any proposal to revise drug payments. Medicare
payment for covered drugs should not be changed without providing a
mechanism for Medicare to cover and pay for those services. For any
reduction in payment for covered drugs, there must be a corresponding
payment for the services required to furnish inhalation and infusion
therapies in the home. We remain willing to work with Congress and the
Centers for Medicare and Medicaid Services to develop an appropriate
mechanism to accomplish this important objective. For additional
information, contact Asela M. Cuervo, 703-836-6263.

Statement of the American College of Rheumatology

Introduction
The American College of Rheumatology (ACR) is an organization of
physicians, health professionals, and scientists that serves its
members through programs of education, research, and advocacy that
foster excellence in the care of people with arthritis, rheumatic and
musculoskeletal diseases. Arthritis means swelling, pain and loss of
motion in the joints of the body. There are more than 100 rheumatic
diseases that cause this condition that can sometimes be fatal--in both
children and adults of all ages. These chronic diseases cause life long
pain and disability.
Arthritis is the leading cause of disability in the United States,
affecting approximately forty-three million Americans. Arthritis has
been found to rank first among the ten leading health problems of
individuals age 50 and older. By the year 2020, the prevalence of
arthritis will increase to an estimated 60 million Americans. The
provision of care to people who are disabled contributes significantly
to the financial costs paid by the government, private insurers, and to
society as a whole. More than $65 billion are spent yearly due to
medical costs and lost productivity associated with arthritis and
related diseases each year.
ACR appreciates the opportunity to provide written testimony to the
Ways and Means Health Subcommittee, and our organization is available
as resource to the Subcommittee as it continues its review of the
issues surrounding the current pricing methodology for Medicare Part B
covered drugs and the possible downstream effects of reform in this
area. The College's testimony will discuss the potential impact of
pricing revisions that are implemented without corresponding
adjustments accounting for the costs of administering these services.
Within that framework, the focus of our testimony will be the
profoundly life-improving infusion therapy services provided by
rheumatologists to many Medicare beneficiaries with arthritis and
related diseases.
Discussion
The College emphatically believes that physicians should be
adequately reimbursed by Medicare and private payers to a degree that
covers all costs associated with care and allows for reasonable payment
to physicians, in keeping with the underlying philosophy of the
resource-based relative value system that is the basis for
reimbursement in the Medicare program. However, current reimbursement
levels for infusion therapy services are based on pre-1998 data.
Therefore, reimbursements for newer therapies often do not reflect the
complexity, risks, and true practice expenses associated with their
administration. The lack of adequate compensation will only increase as
additional biologics complete clinical trials and are approved for use.
In the current payment methodology, the College recognizes that
payments to physicians for the purchase and administration of drugs
subsidize physician practices in many cases where adequate practice
expenses are not being reimbursed. Much of the current debate relates
specifically to infusion therapies.
A change to the drug reimbursement policy that does not reflect the
needs of practitioners to meet their costs and receive reasonable
compensation for their services will force some physicians to stop
offering infusion services to Medicare patients, which will limit
patients' access to valuable, life-affecting therapies. If physicians
cannot offer these therapies, patients may be referred to hospitals and
academic medical centers--institutions that may not be equipped to
handle the increased demand and to whom significantly higher
reimbursements will be provided through Medicare.
Further, the College is concerned that proposed methodological
adjustments intended to address shortfalls in practice expense
reimbursement subsequent to the implementation of pricing revisions may
be directed toward specific specialties or categories of services. We
therefore urge Congress to examine the entire universe of disease
groups and specialties that might be affected by such methodological
revisions to ensure that broad categories of patient populations and
provider groups, such as those with arthritis and related diseases and
the rheumatologists who treat them, are not adversely affected by such
a change.
Recommendations
In recognition of these facts, and for the overall purpose of
assuring that patients will continue to have access to the best
available therapies, the College believes that policymakers in Congress
within the Ways and Means Health Subcommittee and beyond should:
Aggressively support those payment methodologies that
allow physicians to be paid at a reasonable level for their
services;
Oppose payment methodologies that rely on outdated or
incomplete data to calculate reasonable payment levels;
Advocate for coverage of all competitive treatment
methodologies, regardless of their route or frequency of
administration;
Ensure that any methodological revisions apply to all
affected disease groups and specialties.
Conclusion
The ACR commends the Ways and Means Health Subcommittee for
addressing issues surrounding the quality of care delivered to Medicare
beneficiaries, with particular emphasis on patients with arthritis and
related diseases. We appreciate the opportunity to provide input to
your efforts, and look forward to working collaboratively with the
Congress to advance the goal of comprehensive health care delivery
within the Medicare program and appropriate and fair payment for
Medicare providers.

Statement of Timothy M. Bateman, M.D., Chairman, Government Relations
Committee, American Society of Nuclear Cardiology, Kansas City,
Missouri
The American Society of Nuclear Cardiology (ASNC), a 4,500 member
professional society dedicated to education and quality clinical
excellence in the delivery of nuclear cardiology services, is pleased
to submit its views on proposals to revise Medicare's payment
methodology for drugs being considered by the Ways and Means Health
Subcommittee.
ASNC believes that solutions proposed for reforming practice
expense reimbursement in administering cancer drugs may have an
unintended, extremely severe adverse impact on continued patient access
to many important services. The Society is particularly concerned that
many patients who need diagnostic tests for cardiovascular disease may
not receive those tests resulting in the unnecessary expenditure of
millions of dollars at a later date. Heart disease remains the leading
killer of both men and women. Testing by nuclear cardiologists to
ascertain the existence of cardiovascular artery disease has led to
reduced incidences of death from heart disease. This progress could be
reversed by unwise legislative decisions. The Society is particularly
concerned that while the subcommittee corrects one problem, it could
create unintended burdens for many specialties including nuclear
cardiology. ASNC requests that the Ways and Means Health Subcommittee
include statutory language in any legislation it approves related to a
readjustment of practice expense payments to physicians that would
ensure that payments for services with no physician work component
(``Zero Work Pool'' services) are not reduced as a result of the
subcommittee's action related to the adjustment of practice expense
payments for medical oncology services.
Medicare's method for determining payments for practice expenses
for physicians' services is extremely complex. In addition to the
specialty-specific payment ``pools'' that exist under the Medicare
payment system, there is a pool reserved for a group of technical
component-only services (i.e. services for which there is no physician
work component) provided by a number of different specialties. Many of
the medical oncologists' procedures reside in this so-called ``Zero
Work Pool'' (ZWP), along with other capital-intensive procedures for
specialties such as diagnostic radiology, radiation oncology, nuclear
cardiology, nuclear medicine, echocardiography, and others. In 2002,
services in the ZWP experienced a 4-6 percent cut in practice expense
payments due to relatively minor shifts in the mix of services shown in
the utilization data. These cuts, combined with the 5.4 percent
reduction in the conversion factor for 2002, equaled a 10 percent or
greater loss in reimbursement for those services. Since publication of
the 2002 Physician Fee Schedule, specialties affected by these cuts
have worked together, and with the Centers for Medicare & Medicaid
Services (CMS), to determine why the losses occurred, and to ensure
that similar cuts do not occur again in the future.
Today's hearing examines proposals for changing methodologies of
reimbursing chemotherapy drugs and practice expense payment methodology
for chemotherapy administration. Should the subcommittee modify the
practice expense payment methodology for chemotherapy administration,
clinical oncology services could be removed from the ZWP. This
modification potentially could have a devastating impact on those
specialties that remain in the ZWP. The mix of services in the pool
which changes based on each year's utilization data, significantly
affects the amount of money allocated to the entire pool. Since
chemotherapy administration is among the most frequently performed
services in the ZWP, the removal of these services would have a
significant negative impact on the remaining specialties in the pool.
Technical component services are the foundation of many of the
specialties in the ZWP. The decreased Medicare payments--compounded by
decreases from many insurers that base their payments on the Medicare
Fee Schedule--will adversely affect the ability to provide care using
the newest and most advanced technology to detect CAD that is now
available. In the long term, without sufficient practice expense
reimbursement, future research and development will slow as
pharmaceutical and device manufacturers see that their customers are
unable to afford their products. The net effect of all these cutbacks
will be reduced patient access to quality care. These problems must not
be exacerbated by inadvertent reductions that could result from
revisions in payment methodology for medical oncology services.
The American Society of Nuclear Cardiology requests that should the
Ways and Means Health Subcommittee address practice expense payments
for chemotherapy administration legislatively, that it do so in a
manner that protects the practice expense payments for all medical
services remaining in the ZWP from further inappropriate reductions.

Statement of Peter Blitzer, M.D., President, Association of
Freestanding Radiation Oncology Centers
My name is Dr. Peter Blitzer, and I am the President of the
Association of Freestanding Radiation Oncology Centers (AFROC). We are
a national association representing over 150 freestanding radiation
oncology centers throughout the country, dedicated to the conduct of
high quality radiation oncology services in non-hospital settings. On
behalf of our members, I would like to thank Chairman Nancy Johnson,
Ranking Member Pete Stark, and the entire Ways & Means Health
Subcommittee for allowing AFROC to submit this testimony concerning the
issue of the Medicare program's use of average wholesale price (AWP) in
determining reimbursement rates for prescription drugs, particularly as
it relates to the field of medical oncology.
AFROC is concerned that certain proposals in Congress aimed at
revising Medicare reimbursement rates for practice expenses associated
with the administration of oncology drugs by medical oncologists may
have an unintended and disproportionate impact on radiation oncology
services provided in freestanding centers to cancer patients. We
request that, in implementing and enacting legislation aimed at
changing current reimbursement policies in this area, Congress include
appropriate statutory language to ensure that radiation oncology and
other highly capital intensive services are not subjected to unintended
consequences that may arise from the effort to ensure appropriate
payment for medical oncology services.
Medicare payments for practice expenses associated with the
provision of radiation oncology, medical oncology, and other highly
resource intensive services (``technical component services'' \1\) are
reimbursed under the Physician Fee Schedule and are subject to a
special payment methodology--the ``zero work pool'' (ZWP) methodology.
The ZWP methodology essentially groups all technical component and
certain other services into the same ``pool'' for Medicare payment
purposes. Due to the structure of the overall ``pool'' of services,
should Congress seek to modify the reimbursement methodologies for some
of the services in the ``pool'' (e.g., chemotherapy administration),
such a modification could potentially have an unintended impact on
other ZWP services (e.g., radiation oncology technical component
services).
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\1\ ``Technical component services'' are comprised of the provision
of facilities, equipment, supplies, and non-physician personnel. These
services differ from ``professional component services,'' which are
primarily comprised of physician work.
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A case in point is this year's Medicare payment levels for ZWP
services, which were reduced by approximately 4% as a result of
relatively minor adjustments in the ``mix'' of services in the pool.
Because of this reduction, budget neutrality adjustments, and the 5.4%
reduction in the Medicare conversion factor, Medicare payment for
radiation oncology technical component services was reduced by a
devastating 9%-12% this year. AFROC has been working with the Centers
for Medicare & Medicaid Services to ensure that any future adjustments
to the utilization ``mix'' in the ZWP do not result in further
unintended payment reductions for technical component services.
It is our understanding that Congress is currently considering
modifying the Medicare payment methodology for reimbursing medical
oncologists and others for drugs furnished ``incident to'' physician
services. In conjunction with its consideration of this issue, it is
also our understanding that Congress is considering whether medical
oncologists who administer oncology drugs in their offices are
appropriately reimbursed for their practice expenses. Indeed, proposals
already have been made to significantly modify the methodology used to
determine payment for medical oncologist's practice expenses.
AFROC is not in a position to comment on Medicare payment for
oncology drugs or the cost of administering these drugs. However, AFROC
is concerned that if chemotherapy administration services are removed
from the ZWP methodology or if other steps are taken to establish a
special payment methodology for these services, there may be a
significant, unintended and disproportionate impact on radiation
oncology and other services that remain in the ZWP.
As freestanding radiation oncology centers have already discovered
this year, even relatively minor adjustments in the ``mix'' of ZWP
services can dramatically affect Medicare payment levels for all
services in the pool. Since chemotherapy administration services are
among the most frequently performed services in the pool, any
adjustment to the payment methodology applicable to these services may
have an extraordinary impact on radiation oncology and other ZWP
services, unless CMS is directed to implement any modifications in the
payment methodology applicable to chemotherapy administration in a
manner that does not have a disproportionate impact on ZWP services.
To that end, AFROC requests that if Congress pursues legislation
aimed at addressing the practice expenses of medical oncologists for
the administration of oncology drugs, it do so in a manner that does
not disproportionately affect radiation oncology or other ZWP services.
In the event that such legislation is pursued, AFROC would welcome the
opportunity to work with you to craft appropriate statutory language
that meets the goals of your policy objectives while guarding against
any unintended consequences that may arise.

Statement of the National Alliance for Infusion Therapy, and the
National Home Infusion Association, Alexandria, Virginia
The National Alliance for Infusion Therapy (NAIT) and the National
Home Infusion Association (NHIA)--representing providers and
manufacturers of home infusion drug therapy supplies, equipment and
services--submits this statement for the hearing record for
consideration by the Subcommittee of Health.
Home Infusion Drug Therapy
Home infusion drug therapy involves the administration of a drug
through a needle or catheter. Typically, infusion drug therapy involves
the full clinical management of patient care for those who require a
drug therapy that is administered intravenously. It may also involve
situations where drugs are provided through other parenteral (non-oral)
routes. Infusion drug therapies are used only when less invasive means
of drug administration are clinically unacceptable or less effective.
Medications are administered by infusion only upon the prescription of
a treating physician.
A team of clinical pharmacists, high-tech infusion nurses, patient
service representatives and delivery and reimbursement professionals
support patients and their caregivers throughout the treatment process.
The services provided by the team are inextricably linked to the
therapies and are often mandated by accrediting bodies whose standards
ensure quality of care outside of the hospital setting, as well as by
the professional standards of practice of the American Society of
Health-System Pharmacists and the Intravenous Nurses Society. Due to
the extremely sensitive and invasive nature of infusion therapies, the
standards of practice are some of the most rigorous in the practice of
pharmacy and nursing.
This high level of practice standards is also echoed in the
facility requirements for the provision of home infusion drug
therapies. Home infusion drug therapies must be prepared in high-tech,
stringently controlled environments. Due to the nature of these
therapies, in many cases the quality assurance standards even exceed
hospital inpatient facility standards for preparation of intravenous
medications.
In short, the professional pharmacy services, supportive staff
infrastructure and practice expenses required to ensure the safe and
effective administration of infusion therapies are extensive. Despite
this extensive clinical infrastructure, home infusion drug therapy
provides a safe, patient-preferred and extremely cost-effective
alternative to inpatient treatment.
Medicare Coverage and Payment for Home Infusion Drug Therapy
Providers and suppliers of infusion drug therapies in the home
setting are not paid separately by Medicare for the critical services
and practice expenses described above. Medicare does not have a
separate benefit for infusion therapy, but instead, infusion drugs
provided in the home setting are covered exclusively under Medicare's
benefit for durable medical equipment. The only items that are
explicitly covered and reimbursed under this limited benefit are the
drugs, equipment and supplies. Unlike other health care professionals
who administer infusion and injectable drugs currently covered under
Medicare Part B, providers and suppliers of home infusion drug
therapies do not have a mechanism under Medicare that provides them
with reimbursement for the services and facilities necessary to provide
these therapies.
This is an extremely important point for policymakers to consider
as they seek to reform outpatient drug reimbursement. Since the
Medicare program does not explicitly reimburse pharmacists for their
practice expenses and professional services (including such home
infusion services as compounding), pharmacists currently are ``paid''
for these costs and functions primarily through reimbursement for the
drugs. Similarly, Medicare does not explicitly pay for nursing services
provided by infusion therapy providers. A nurse performs many
functions, including patient screening and assessment, patient training
regarding administration of the pharmaceuticals and general monitoring
of the patient's health status. To the extent that Medicare reimburses
for such services, it is largely through the drug payment. As explained
in greater detail below, reductions in drug payments must be
accompanied by a contemporaneous re-allocation of payment for these
necessary professional services. If drug payments are reduced
drastically without such a re-allocation, Medicare beneficiaries will
not be able to receive home infusion drug therapy because the costs of
therapy will exceed by a large margin the available reimbursement for
the therapy.
It is important to emphasize that none of the specialized pharmacy
services are covered under any other Medicare benefit. In a minority of
cases, Medicare home infusion patients may meet the ``homebound''
requirement and qualify for the home health benefit. In such instances,
the nursing services described above might be covered under that
benefit. For all other Medicare home infusion patients, the nursing
services are not covered by the home health benefit. Likewise, the home
health benefit does not cover the provision of drugs.
In contrast to Medicare, private sector insurance plans and private
managed care plans have embraced home infusion drug therapy over the
course of the last two decades, and commercially insured patients
represent 70 to 80 percent of home infusion drug therapy patients. The
private managed care community has recognized that infusion therapy
administered in the home is a tremendous source of cost-savings, and
the private sector provides coverage for a growing list of infusion
therapies.
Private sector health plans and payers typically recognize the
professional services and practice expenses necessary to provide
infusion drug therapy in the outpatient setting through a separate
``per diem'' reimbursement that is paid for each day the patient is
receiving therapy. This per diem payment is made in addition to the
cost of the drug and nursing visit.
As home infusion drug therapy has become a staple of major medical
coverage in the private sector, Medicare's refusal to see these
therapies as anything other than the delivery of supplies and equipment
is crossing a line from poor policy to surreal. Despite the
uncontradicted and overwhelming evidence of the clinical need for these
services, the Medicare program persists in defining these multifaceted
drug therapies as requiring no greater effort than is involved in the
delivery of a walker or wheelchair. Unless Medicare's coverage of these
therapies is brought into line with the private sector, Medicare
beneficiaries ultimately will suffer in two important ways. If the
provision of therapy becomes limited to what Medicare actually covers,
then the beneficiaries will suffer from seriously reduced levels of
care. Or, more likely, suppliers will simply cease providing care to
Medicare beneficiaries to avoid the consequences of providing
substandard care.
Reliance on AWP to Calculate Reimbursement
NAIT and NHIA understand the criticism expressed by Members of this
Subcommittee, as well as other Members of Congress, regarding the
current practice of relying on average wholesale price (AWP) as a basis
for calculating Medicare and Medicaid outpatient drug reimbursement.
The imperfections of the AWP methodology are well-known and extensively
documented.
It should be noted that the September 2001 General Accounting
Office study highlighted that home infusion therapies represent only a
small percentage of current Medicare Part B drug expenditures. As a
result, the GAO ``did not analyze the costs of infusion therapy drug
provided in the home setting because they do not account for a
substantial share of Medicare drug spending or volume.''
For the reasons stated above, at the present time the drug payments
for infusion therapy subsidize other functions that the Medicare
payment methodologies do not reflect appropriately. The costs of these
services and functions far outweigh the costs of the drug product, but
these costs are clearly lower than the charges that would be incurred
if the patient received treatment in an alternate setting. For home
infusion drug therapy, the drug payment is the only available payment
mechanism for the services that are essential to providing good quality
care. The long-standing use of AWP to determine reimbursement has
masked the failure of Medicare and Medicaid payment policies to define
and account for the service component.
If changes to the methodology used to calculate drug reimbursement
result in substantially reduced drug payments, without corresponding
changes to ensure adequate reimbursement for the service component of
providing infusion therapies, the end result will virtually guarantee
an inability of providers to continue to provide these services.
Without the availability of home infusion services, Medicare
beneficiaries will be treated in more costly settings.
Recommendations
We urge Congress to recognize the need for a meaningful analysis of
all of the drugs, items, professional services, and facility
requirements necessary to provide various types of drug therapies to
beneficiaries in a manner that is consistent with the standard of care
in this country and private accreditation standards. To restrict the
analysis to the difference between drug acquisition cost and Medicare
reimbursement is to examine only one small piece of the equation. Such
a narrow analysis would fail to meet the overarching goal of using
Medicare resources as judiciously as possible.
Before instituting drug payment reform, Medicare must accurately
define infusion therapy and create quality standards based on the
standards currently and widely used in the private sector. Medicare
should then establish a fee schedule that reflects all the covered
components of the therapies to accompany the AWP-based drug payment
changes.
We look forward to working cooperatively with the Subcommittee to
explore solutions that are in the best interests of the financial
integrity of the Medicare program, as well as the best interests of the
health care needs of the Medicare beneficiaries that rely on home
infusion drug therapies.

Oncology Nursing Society
Pittsburgh, Pennsylvania 15275-1214
October 13, 2002
The Honorable Nancy Johnson
Chair
Health Subcommittee
House Committee on Ways and Means
United States House of Representatives
Washington, DC 20515

Dear Chairwoman Johnson:

On behalf of the Oncology Nursing Society (ONS)--the largest
professional oncology group in the United States composed of more than
30,000 nurses and other health professionals dedicated to ensuring
access to quality care for people with cancer--we are writing to submit
this letter as written testimony to be included in the record of your
recent hearing on ``Medicare Payments for Currently Covered
Prescription Drugs.'' We very much appreciate this opportunity to
provide our input and stand ready to work with you, your colleagues,
the Centers for Medicare and Medicaid Services (CMS), and others to
address Medicare oncology and nursing payment related issues to ensure
that Medicare beneficiaries with cancer receive quality care.
ONS shares the concerns of Congress and CMS regarding the ongoing
viability of the Medicare program and recognizes the need to take steps
now to preserve access to care for all beneficiaries with cancer. In
the attached ``principles'' document, you will see that ONS--along with
seventeen of our partner organizations in the cancer community--has
endorsed Representative Jim Greenwood's principles for Medicare
``reform'' of the current Average Wholesale Price (AWP) system of
payment for Medicare reimbursable prescription drugs. ONS feels
strongly that the Medicare program should neither overpay nor underpay
for benefits and services. Moreover, ONS maintains that the current AWP
payment policy unfairly results in larger co-payments for Medicare
beneficiaries and distorts the entire cancer care payment system.
To that end, we join you and your colleagues in calling for reform
and advocate that Congress develop--and CMS implement--new policies
that ensure that the full range of services provided in the provision
of cancer care is reimbursed adequately and appropriately. The attached
principles document--along with a joint letter (attached) sent by ONS
with the National Patient Advocate Foundation (NPAF) to Senate Finance
Committee Chairman Max Baucus--make clear that ONS fully supports
reform but maintains that changes to the ``AWP system'' cannot occur at
the expense of patient access to community-based, quality care. We feel
strongly that reductions in drug payments should occur only
simultaneously with commensurate increases in reimbursement for
chemotherapy administration and associated supportive care services.
As you know, cancer is a complex, multifaceted, and chronic
disease, and people with cancer require specialty-nursing and clinical
interventions at every step of the cancer experience. To that end,
people with cancer are best served by multi-disciplinary teams of
health care professionals specialized in oncology care, including
nurses certified in that specialty. Approximately 4 out of 5 cancer
care encounters occur in community settings, where oncology nurses play
a central role in the provision of quality cancer care as they are
principally involved in the administration and monitoring of
chemotherapy and the associated side-effects patients may experience.
The shift in the provision of cancer care from inpatient to outpatient,
community-based settings has resulted in significant benefits for
patients and savings for the health care system as a whole.
However, despite this important change in the provision of cancer
care, ONS believes that the current Medicare payment system fails to
adequately recognize the reality of the current contributions made by
oncology nursing and other clinical staff in this ``new'' outpatient
system of care. As anyone ever treated for cancer will attest, oncology
nurses are intelligent, well-educated, highly skilled, compassionate
professionals who provide quality clinical, psychosocial, and
supportive care to patients and their families. In short, they are
integral to the cancer care delivery system. Therefore, it is essential
that we assure that Medicare payment policies recognize the full range
of health professionals who contribute to the delivery of quality
cancer care to beneficiaries in need.
In addition to updating Medicare payment for the administration of
chemotherapy and supportive care services provided by oncology nurses
and other health professionals, ONS urges Congress and CMS to ensure
that the Medicare program does not unintentionally devalue the work of
oncology nurses and other non-physician clinical staff. Specifically,
we call upon you to eliminate the use of the term ``zero work pool''
for those services provided by nurses and other non-physician health
professionals. While we realize that the actual name for services
without physician work Relative Value Units (RVUs) is ``zero physician
work pool,'' the vernacular used by agency and Congressional staff and
other stakeholders is ``zero work pool.'' This nomenclature suggests
that the work done by oncology nurses and other clinical staff is
without value--that their work is of ``zero'' value. We understand that
while it is not the intention of Congress or CMS to connote a zero
value for oncology nurses' contributions, the reality is that our
organization, our members, and others--such as oncology social workers
and radiology technicians--take offense at its use. Moreover, in a time
in which our country is facing a nursing shortage--the nature and scope
of which we have never before experienced--we must make positive policy
changes that work to elevate the visibility and express the importance
of nursing. One of the causes of the current nursing shortage is low
morale within the profession. Now more than ever is the time to
highlight the range of work done by our nation's nurses, not to
diminish it.
Therefore, as you consider changes to the Medicare program, we urge
that you and your colleagues take actions to ensure that the Medicare
program better acknowledge the essential and unique role of oncology
nurses in the provision of quality cancer care. Through official
comments to CMS on the 2003 Physician Fee Schedule, we have asked the
agency to rename the ``zero physician work pool'' in the final rule for
the 2003 Physician Fee Schedule. We are advocating a title that better
reflects the significant contributions made by nurses and other non-
physician cancer care providers in outpatient settings. We understand
that the ``zero work pool'' may be eliminated altogether and/or
oncology services may be pulled out from it. However, in the interim,
while the methodology is still being used, we propose the following as
possible appropriate alternative titles:

Non-physician clinical staff time;
Non-physician work components; or
Non-physician work pool;
Non-physician health professional pool.

We would appreciate it if you and your committee colleagues would
please contact CMS to voice your support of this change. We welcome an
opportunity to discuss these or other suggested titles with you as well
as agency staff as they review and consider modifications for the final
rule. A change such as this would send a strong message to the oncology
nursing community that the nation values their work. Such a step would
help boost morale within the nursing community in a time when our
nation is facing a nursing shortage of serious proportion.
Again, ONS would like to express its gratitude to you and the
Subcommittee for this opportunity to provide comments on these issues
of priority for our organization. We believe that bringing Medicare
payments for drugs more in line with actual costs--coupled with
increasing and expanding practice expense payments for chemotherapy
administration and supportive care and recognizing the contributions of
oncology nurses--will help ensure that Medicare beneficiaries will have
access to the quality care they need and deserve.
If ONS can be of any assistance to the agency on these or other
nursing or oncology matters, please do not hesitate to contact our
Health Policy Associate, Ilisa Halpern (202/857-8968,
[email protected]).
Sincerely,
Judy E. Lundgren, RN, MSN, AOCN
President
Pearl Moore, RN, MN, FAAN
Chief Executive Officer
Attachments
__________
Guiding Principles: \1\
---------------------------------------------------------------------------
\1\ These principles are the same as outlined earlier this year by
House Energy and Commerce Oversight and Investigations Subcommittee
Chairman Jim Greenwood.

The system should not adversely affect patient access
to quality health care.
Medicare reimbursement for drugs should be closely
linked to the cost of the drugs.
Reimbursement for services should be based on actual
expenses.
Drug reimbursement should not impact medical
decision-making.
Payments should be equalized to ensure there is no
incentive to choose one setting for receiving care over
another.
Additional Policy Positions:

The role of oncology nurses in the provision of
cancer care should be reflected explicitly in Medicare
legislation, statute, regulation and other policies.
Nursing specifically should be included--and named in
statutes, regulations, and other policies as included
participants--in any policy making, policy analysis, and policy
review processes in which the Centers for Medicare and Medicaid
Services, the General Accounting Office, and other Federal
agencies engage with regards to Medicare reimbursement for care
involving the direct or indirect contribution of nurses.
Medicare reimbursement for oncology nursing practice
expenses should be based on current practice data using a
bottom-up methodology. The Centers for Medicare and Medicaid
Services (CMS) should support ``work sampling'' studies and
incorporate the results into its practice expense calculations
to ensure that Medicare reimbursement is based on real costs
and real practice patterns.
Changes to Medicare policy and associated
reimbursement must be considered in aggregate to ensure that
adjustments in one area do not have unintended consequences
with regards to patient access to quality care. The Medicare
program should monitor and evaluate--on an ongoing basis--the
impact that reimbursement policy changes have on patient
migration, access, and outcomes. Such tracking studies involve
the Agency for Healthcare Research and Quality (AHRQ), the
Institute of Medicine (IOM), and the Medicare Payment Advisory
Commission (MedPAC).
If the CMS maintains the ``zero work pool''
alternative methodology, the ``zero work pool'' should be
renamed to reflect more accurately the substantive
contributions that nurses and other non-physicians make to the
provision of care to Medicare beneficiaries. The current
nomenclature connotes a lack of value of the critical
contribution that nurses make and further exacerbates a
misconception that the work that nurses do is not quantifiable
or significant.
As nursing specialty organizations typically lack the
resources of physician specialty groups, regulatory and
statutory requirements relating to public input into
policymaking processes should be reasonable, accommodating, and
flexible to ensure that nurses are not disenfranchised.
With the current and impending shortage of nurses
coupled with the expected growth in cancer incidence over the
next two decades, all Medicare policy and reimbursement must be
crafted with the goal of preserving and strengthening the
nation's system of community-based cancer care.
To ensure long-term solvency, Medicare policy should
prove fiscally responsible; however, changes to Medicare
reimbursement should not result in such financial pressures
that patients would lose access to nurses specially trained in
oncology. Oncology nurses are an integral part of a
comprehensive cancer care team and studies have shown that
patients fare much better when they receive care from health
care providers specially trained in oncology. To ensure the
highest quality of cancer care for Medicare beneficiaries,
Medicare policy should seek to safeguard the provision of
chemotherapy administration and related services by nurses
specially trained in oncology.
The Medicare program should provide adequate
reimbursement for the full-range of supportive care services
provided to oncology patients. Such services include: patient
counseling/psychosocial support, oncology social work, oncology
case management, medical nutrition therapy, and investigating
and enrolling patients in cancer clinical trials.

Endorsing Organizations:

Alliance for Lung Cancer Advocacy, Support, and Education

Association of Community Cancer Centers

Cancer Care, Inc.

Cancer Research Foundation of America

Candlelighters Childhood Cancer Foundation

Colorectal Cancer Network

International Myeloma Foundation

Kidney Cancer Association

Leukemia & Lymphoma Society

Men's Health Network

National Association of Pediatric Oncology Nurses

National Association of Social Workers

National Patient Advocate Foundation

North American Brain Tumor Coalition

Oncology Nursing Society

Ovarian Cancer National Alliance

Pancreatic Cancer Action Network, Inc.

US Oncology

------

National Patient Advocate Foundation, and
Oncology Nursing Society
September 30, 2002
The Honorable Max Baucus
Chairman
Committee on Finance
United States Senate
219 Dirksen Senate Office Building
Washington, DC 20510

Dear Mr. Chairman:

On behalf of our organizations committed to ensuring access to the
full-range of quality cancer care for all individuals in need, we are
writing to voice our concerns about linking the reform of the Average
Wholesale Price (AWP) for drugs with the provision of coverage for oral
anti-cancer therapies under Medicare. While we support both reform of
the current AWP system and the expansion of Medicare coverage to
include all oral anti-cancer drugs, we have serious concerns about the
possibility of a proposal to do so without the necessary and
appropriate adjustments to Medicare practice expenses for the actual
provision of oncology care. Unless Medicare provides adequate
reimbursement for the full-range of oncology care associated with
chemotherapy, such a dramatic change in the Medicare program could have
devastating effects on beneficiary access to the care they need and
deserve.
Due to the tremendous progress that has been achieved in biomedical
research, significant advances have been made in the development of new
cancer therapeutics that are having a dramatic impact on the quality of
cancer care in America. However, as you know, many of the newest anti-
cancer drugs are not covered under Medicare because they are available
only in oral form and there is no injectable equivalent. To address
this inequity, Senator Olympia Snowe has introduced S. 913, the
``Access to Cancer Therapies Act,'' which will provide Medicare
coverage for these life-saving oral anti-cancer therapies. More than
half of your colleagues in the United States Senate have co-sponsored
this legislation. While we strongly support a comprehensive Medicare
prescription drug benefit, we believe Medicare coverage for oral anti-
cancer drugs would serve as an important first step. We advocate
passage of S. 913 either as a free-standing bill or as part of other
Medicare legislation enacted this year.
We are concerned, however, that some are considering that an
expansion of Medicare coverage to include oral anti-cancer drugs should
be funded by an overall reduction in payments for chemotherapy. As you
know, the issue of reforming the payment methodology for chemotherapy
and related practice expenses has been discussed for many years. Our
organizations have participated in numerous meetings with your
colleagues and your staff to highlight the concerns of cancer patients
and their families surrounding this issue. We strongly support balanced
reform of the current Medicare reimbursement system for cancer care.
However, we are extremely concerned that access to quality cancer care
will be endangered if balanced reform is not achieved.
The key to balanced reform is ensuring that the providers of cancer
care to our nation's seniors have the resources necessary to ensure
that Medicare beneficiaries with cancer can receive high quality care
in their own communities. Currently, the Medicare system wrongly and
grossly overpays for drugs while simultaneously dramatically underpays
for chemotherapy administration and the practice expenses associated
with cancer treatment and supportive care. This distorted reimbursement
system must be remedied by decreasing drug payments to a level more
aligned with actual cost while at the same time increasing practice
expense payments so they more accurately cover real expenditures.
Using the ``savings'' from AWP reform to fund coverage of oral
anti-cancer drugs without a commensurate increase in the oncology
nursing and related practice expenses is a short-sighted and flawed
approach. First, it fails to ensure that community-based cancer
providers will have the overall resources necessary to continue to
provide quality cancer care. Second, the use of oral anti-cancer
therapies necessitates the active involvement of a multi-disciplinary
cancer care team involved in patient and therapy management. Many
erroneously believe that Medicare beneficiaries will just get a
prescription filled and disappear from the cancer care system. Those
individuals taking oral therapies will need to be trained and educated
as to how to take their therapy regimen, monitored by their cancer care
team to ensure compliance and manage side-effects, and counseled
regarding other prescription drugs they may be taking as the average
Medicare beneficiary takes four prescriptions a day and fills 18 a
year. Providing oral-drug coverage without also allocating the
resources necessary to oncology practices so they can provide their
patients with the supportive care they need is irresponsible and not to
the benefit of our nation's seniors.
We believe, however, that balanced reform can be achieved and we
have worked with our colleagues in the cancer community to develop the
attached comprehensive reform proposal for your consideration. We
welcome the opportunity to speak with you and your staff about our
proposal and believe we can strike a much-needed balance in proving
fiscally responsible while ensuring access to quality cancer care that
Medicare beneficiaries need and deserve.
We strongly encourage you to resist efforts to provide Medicare
coverage for oral anti-cancer drugs by reducing payments to physicians
for chemotherapy and related practice expenses. One is not a
replacement for the other. Coverage for traditional chemotherapy and
the full range of oral anti-cancer drugs coupled with adequate
reimbursement for care provided by a multi-disciplinary oncology care
team are essential if Medicare beneficiaries with cancer are to
continue to have access to quality cancer care in their communities.
Thank you for your consideration of our viewpoint on this important
issue. Should you have any questions on this or other cancer-related
matters, please do not hesitate to contact any of our organizations.
Sincerely,
Nancy Davenport-Ennis
President & CEO
Pearl Moore, RN, MN, FAAN
Chief Executive Officer
(Similar correspondence was sent to Senate Finance Committee
Ranking Member Charles Grassley.)