Medicare Outpatient Drugs: Program Payments Should Better Reflect
Market Prices (14-MAR-02, GAO-02-531T).
In some cases, Medicare's payment for covered outpatient drugs is
significantly higher than the actual costs to the physicians and
pharmacy suppliers. Yet attempts to reduce these payments have
been met with provider claims that overpayments for the drugs are
needed to cover underpayments for administering or delivering
them. Medicare's method for establishing drug payments is flawed.
Medicare pays 95 percent of the average wholesale price (AWP),
which, despite its name, is neither an average nor a price that
wholesalers charge. Instead, it is a number that manufacturers
derive using their own criteria. There are no requirements or
conventions that AWP reflect the price of actual drug sales.
Widely available purchase prices for drugs in 2001 were
substantially below AWP. For both physician-billed drugs and
pharmacy supplier-billed drugs, Medicare payments often far
exceeded widely available prices. Physicians and pharmacy
suppliers contend that the excess payments for covered drugs are
necessary to offset what they claim are inappropriately low
Medicare payments or no such payments for services related to the
administration or delivery of these drugs. While physicians
receive an explicit payment for administering drugs, Medicare's
payment policies for delivering pharmacy supplier-billed drugs
and related equipment are uneven. Pharmacy suppliers billing
Medicare receive a dispensing fee for one drug type--inhalation
therapy drugs--but not for other covered drugs, such as infusion
therapy or covered oral drugs. Other payers and purchasers, such
as private health plans and the Department of Veterans Affairs
(VA), employ different approaches in paying for or purchasing
drugs that may be instructive for Medicare. In particular, VA
uses the leverage from the volume of federal drug purchases to
secure verifiable data on actual market transactions and it uses
the prices paid by manufacturers' best customers to set Federal
Supply Schedule prices.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-531T
ACCNO: A02897
TITLE: Medicare Outpatient Drugs: Program Payments Should Better
Reflect Market Prices
DATE: 03/14/2002
SUBJECT: Drugs
Health care cost control
Health care programs
Medical equipment
Payments
Pharmaceutical industry
Physicians
Program management
Federal Supply Schedule
HCFA Common Procedure Coding System
Medicare Program
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GAO-02-531T
Testimony Before the Subcommittee on Health, Committee on Finance, U. S.
Senate United States General Accounting Office GAO
For Release on Delivery Expected at 10: 00 a. m. Thursday, March 14, 2002
MEDICARE OUTPATIENT
DRUGS Program Payments Should Better Reflect Market Prices
Statement of Laura A. Dummit Director, Health Care- Medicare Payment Issues
GAO- 02- 531T
Page 1 GAO- 02- 531T Mr. Chairman and Members of the Subcommittee: I am
pleased to be here as you discuss Medicare?s payments for covered outpatient
prescription drugs. As you know, Medicare pays for only a
limited number of outpatient drugs and biologicals- largely those that
cannot be self- administered or require certain medical equipment to be
administered. 1 The covered drugs are typically provided by a physician, as
is the case for chemotherapy drugs, or through pharmacy suppliers, as for
respiratory drugs. Medicare?s payments for covered drugs have been
scrutinized for several years. Recent studies by the Department of Justice
and the Office of the Inspector General (OIG) of the Department of Health
and Human Services (HHS) show that Medicare?s payment for covered outpatient
drugs in some cases is significantly higher than the actual costs to the
physicians and
pharmacy suppliers who bill Medicare for them. 2 Yet attempts to reduce
these payments have been met with provider claims that overpayments for the
drugs are needed to cover underpayments for administering or delivering
them. In September 2000, the Health Care Financing Administration (HCFA)-
now the Centers for Medicare and Medicaid Services (CMS) 3 -took steps to
reduce Medicare?s payment for covered
outpatient drugs by authorizing Medicare carriers, the contractors that pay
drug claims, to use prices obtained in Justice Department investigations of
providers? drug acquisition costs in setting payment rates. HCFA retracted
this authority in November 2000 following concerns raised by providers that
reducing Medicare?s drug payments could affect beneficiary access to these
drugs and related services. In December 2000, as part of recent Medicare
legislation, 4 the Congress directed us to study Medicare?s payments for
covered outpatient drugs and make recommendations for payment methodology
refinements. In September 2001, we reported our
1 For the remainder of this statement, we will refer to ?drugs and
biologicals? covered under Medicare part B, which generally covers physician
and outpatient hospital services, as ?outpatient drugs.? 2 For example, see
U. S. Department of Health and Human Services, Office of the Inspector
General, Medicare Reimbursement of Albuterol, OEI- 03- 00- 00311
(Washington, DC: June 2000) and Medicare Reimbursement of Prescription
Drugs, OEI- 03- 00- 00310 (Jan. 2001). 3 Our statement refers to HCFA when
discussing actions taken under that name. 4 The Medicare, Medicaid, and
SCHIP Benefits Improvement and Protection Act of 2000 (Pub. L. No. 106- 554,
App. F, 106 Stat. 2763, 2763A- 522).
Page 2 GAO- 02- 531T findings and made recommendations. 5 In October 2001,
we also reported on the adequacy of Medicare payments to oncologists for
administering
chemotherapy drugs as directed by the Congress. 6 My remarks today will
focus on (1) Medicare payment policies for covered outpatient drugs and
related services to administer or deliver the drugs and (2) opportunities to
improve the appropriateness of Medicare?s payments by adapting key features
of other federal payers? reimbursement policies. My comments are based
primarily on our studies of Medicare payments for covered outpatient drugs
and for administering chemotherapy.
In summary, Medicare?s payment for covered outpatient drugs is significantly
higher than prices widely available to providers. Medicare?s method for
establishing drug payments is flawed. Medicare pays 95 percent of the
average wholesale price (AWP), which, despite its name, is neither an
average nor a price that wholesalers charge. Instead, it is a number that
manufacturers derive using their own criteria; there are no requirements or
conventions that AWP reflect the price of any actual sale of drugs by a
manufacturer. Manufacturers report AWPs to organizations that publish them
in drug price compendia, and Medicare carriers base providers? payments on
these published AWPs.
We found that widely available prices at which providers could purchase
drugs in 2001 were substantially below AWP. For both physician- billed drugs
and pharmacy supplier- billed drugs, Medicare payments often far exceeded
widely available prices. Despite concerns that the discounts available to
large purchasers would not be available to physicians with a small number of
drug claims, these physicians with low volumes reported that their purchase
prices were the same or less than the widely available prices we documented.
Physicians and pharmacy suppliers contend that the excess payments for
covered drugs are necessary to offset what they claim to be
5 U. S. General Accounting Office, Medicare: Payments for Covered Outpatient
Drugs Exceed Providers? Costs, GAO- 01- 1118 (Washington, D. C.: Sept. 21,
2001). 6 This study was mandated in section 213 of the Medicare, Medicaid,
and SCHIP Balanced Budget Refinement Act of 1999 (Pub. L. No. 106- 113, App.
F, 113 Stat. 1501, 1501A- 350). See U. S. General Accounting Office,
Medicare Physician Fee Schedule: Practice Expense Payments to Oncologists
Indicate Need for Overall Refinements, GAO- 02- 53 (Washington, DC: Oct. 31,
2001).
Page 3 GAO- 02- 531T inappropriately low Medicare payments or no such
payments for services related to the administration or delivery of these
drugs. For administering
physician- billed drugs, such as those used in chemotherapy, Medicare makes
explicit payments under the physician fee schedule, typically through the
practice expense component of the payment. Our October
2001 report on practice expense payments under the fee schedule showed that,
overall, payments to oncologists relative to their estimated practice
expenses were comparable to those for all specialties. But we also found
that HCFA made inappropriate modifications to its basic method of setting
these payments, which resulted in a lowering of the average fees paid for
the administration of chemotherapy.
While physicians receive an explicit payment for administering drugs,
Medicare?s payment policies for delivering pharmacy supplier- billed drugs
and related equipment are uneven. Pharmacy suppliers billing Medicare
receive a dispensing fee for one drug type- inhalation therapy drugs- but
there are no similar payments for the other covered drugs, such as
infusion therapy or covered oral drugs. Suppliers do receive an additional
Medicare payment for the rental or purchase of durable medical equipment
(DME) and related supplies that are used to administer drugs, such as
inhalation and infusion therapy, that require DME. However, in 1998 we
reported two problems with the program?s payments for DME- a wide variety of
products may be covered under a single fee and fee schedule allowances were
out of line with current market prices. 7 These
problems may result in overpayments that implicitly compensate for some
service delivery costs not covered by Medicare. Other payers and purchasers,
such as private health plans and the Department of Veterans Affairs (VA),
employ different approaches in paying for or purchasing drugs that may be
instructive for Medicare. In particular, VA uses the leverage from the
volume of federal drug purchases to secure verifiable data on actual market
transactions and it uses the
prices paid by manufacturers? best customers to set Federal Supply Schedule
(FSS) prices. VA also uses competitive bidding to obtain lower prices for
certain products for its own facilities. These approaches may be instructive
for Medicare provided that they are adopted in ways that reflect Medicare?s
unique responsibilities and characteristics.
7 See U. S. General Accounting Office, Medicare: Need to Overhaul Costly
Payment System for Medical Equipment and Supplies, GAO/ HEHS- 98- 102
(Washington, DC: May 12, 1998).
Page 4 GAO- 02- 531T In our view, Medicare should pay for each service
appropriately and not rely on overpayments for some services to offset
inadequate payments for complementary services. Our recommendation that
Medicare begin to
establish payment rates using information about actual market transactions
for covered drugs at levels that reflect providers? acquisition costs is
consistent with this principle. We have also recommended that the CMS
administrator use consistent methods in setting physician practice expense
fees for all services, including those for administering chemotherapy.
While the traditional Medicare program does not have a comprehensive
outpatient prescription drug benefit, the program does cover roughly 450
outpatient drugs. The outpatient drugs with the highest Medicare payments
and billing volume fall into three categories: those that physicians bill
for and that are typically provided in a physician office
(such as chemotherapy drugs); those that pharmacy suppliers bill for and
that are administered through DME, such as a respiratory drug given in
conjunction with a nebulizer; 8 and those that are also billed by pharmacy
suppliers but are patient- administered and covered explicitly in statute. 9
In 1999, spending for Medicare- covered outpatient prescription drugs
totaled almost $4 billion. 10 Although Medicare reimburses providers for
roughly 450 outpatient drugs, spending is concentrated on a small number of
products billed by pharmacy suppliers and a few physician specialties. For
example, just 35 drugs accounted for 82 percent of Medicare spending and 95
percent of the claims volume in 1999. These 35 products included certain
injectible
drugs to treat cancer, inhalation therapy drugs, and oral immunosuppressive
drugs, such as those used by organ transplant patients. Physician- billed
drugs accounted for the largest share of Medicare program spending, while
pharmacy supplier- billed drugs
8 A nebulizer is a device driven by a compressed air machine. It allows the
patient to take medicine in the form of a mist (wet aerosol). 9 Medicare-
covered outpatient drugs that can be self- administered include such drugs
as blood clotting factors and some oral drugs used in association with
cancer treatment and immunosuppressive therapy. 10 Spending is defined as
Medicare?s total payment, of which the program?s share is 80 percent and the
beneficiaries? share is 20 percent. Background Small Number of Products
Accounts for Majority of Program Spending and Volume
Page 5 GAO- 02- 531T constituted the largest share of the billing volume.
Drugs provided in physician offices accounted for more than 75 percent of
total Medicare
spending for drugs in 1999 and just three specialties- hematology oncology,
medical oncology, and urology- submitted claims for 80 percent of the total
physician billings for outpatient drugs. By contrast, pharmacy suppliers
accounted for more than 80 percent of Medicare drug billing volume and less
than 20 percent of corresponding payments. Two inhalation therapy drugs
accounted for 88 percent of the Medicare billing volume for pharmacy-
supplied drugs administered in a patient?s home. 11 Medicare bases its
reimbursements to physicians and other providers for a
covered outpatient drug on the product?s AWP, with Medicare beneficiaries
contributing 20 percent of the payment. The AWP, however, is neither
?average? nor ?wholesale;? it is simply a number assigned by the product?s
manufacturer. The AWP is often described as a ?list price,? ?sticker price,?
or ?suggested retail price,? reflecting that it is not
necessarily the price paid by a purchaser or a consistently low, or
?wholesale,? price. Because the term AWP is not defined in law or
regulation, the manufacturer is free to set an AWP at any level, regardless
of the actual price that purchasers pay. Manufacturers periodically report
AWPs to publishers of drug pricing data. While there is no required
frequency for manufacturers to report AWPs, most publishers said they
attempt to update AWPs at least annually. The Medicare- allowed amount, or
payment level, for each HCFA Common Procedure Coding System (HCPCS) -coded
drug is 95 percent of its AWP. 12 Given the latitude manufacturers have in
setting AWPs, these payments need not be related to market prices that
physicians and suppliers actually pay for the products.
11 These two drugs are ipratropium bromide and albuterol (unit dose form).
12 The payment is based on the AWP for all the drugs having the same HCPCS
code. A National Drug Code (NDC) identifies an individual drug. The Food and
Drug Administration assigns the NDCs, which are the universal product
identifiers for drugs for human use. Each NDC specifies a chemical entity,
manufacturer, dosage form, strength, and package size. For example, a single
drug- marketed by one manufacturer in one form and strength but in three
package sizes- would have three NDCs. HCFA defines HCPCS codes, which
generally include multiple NDCs. For single- source drugs, Medicare?s
payment is 95 percent of the drug?s AWP. For multisource drugs, generally
those available from multiple manufacturers, the payment allowance is 95
percent of the lower of (1) the median AWP of all generic forms of the drug
or (2) the lowest brand name product?s AWP. Medicare Payments for Drugs Are
Based on
?Prices? Set by Manufacturer
Page 6 GAO- 02- 531T Common drug purchasing arrangements can substantially
reduce a provider?s actual acquisition price for a drug. Physicians and
suppliers may
belong to group purchasing organizations (GPO) that negotiate prices with
wholesalers or manufacturers on behalf of GPO members. GPOs may negotiate
different prices for different purchasers, such as physicians, suppliers, or
hospitals. In addition, providers can purchase covered outpatient drugs from
general or specialty pharmaceutical wholesalers or can have direct purchase
agreements with manufacturers. In these arrangements, providers may benefit
from transactions, including rebates and ?chargebacks? that also reduce the
actual costs providers incur. Rebates offered by drug manufacturers or
wholesalers may be based on
the number of different products purchased over an extended period. Under a
chargeback arrangement, the provider negotiates a price with the
manufacturer that is lower than the price the wholesaler normally charges
for the product, and the provider pays the wholesaler the negotiated price.
The manufacturer then pays the wholesaler the difference between the
wholesale price and the price negotiated between the manufacturer and
provider.
For the outpatient drugs accounting for the bulk of Medicare spending and
claims, Medicare payments in 2001 were almost always considerably higher
than wholesalers? prices widely available to physicians and suppliers. 13
This was true regardless of whether there were competing drug products or
whether a particular drug was available from only one
manufacturer. Physicians who had few Medicare claims for covered drugs were
able to obtain these wholesalers? prices or even more favorable prices.
Physicians and pharmacy suppliers told us that the higher payments are
necessary to cover costs of administering and dispensing their drugs that
Medicare does not pay. Our work indicates that CMS?s method of computing
Medicare fees for physician- administered drug claims, which are submitted
primarily by oncologists, inappropriately reduced those fees. Furthermore,
Medicare?s coverage and payment policies for pharmacy supplier- billed drugs
are uneven: Medicare pays a dispensing fee for delivering some pharmacy
supplier- billed drugs; for
13 We attempted to analyze prices for 35 high- volume and high- expenditure
outpatient drugs, however, our analysis excluded some high- volume and high-
expenditure drugs because of inadequate pricing data. Our results are based
on wholesaler and GPO prices for 19 physician- administered drugs and 6
drugs provided primarily by pharmacy suppliers. Volume for a drug is
measured in terms of the number of units provided. Varying Payment
Arrangements Affect Providers? Final Purchase Price
Medicare?s Payment for Covered Outpatient Drugs Is Significantly Higher
than Prices Widely Available to Providers
Page 7 GAO- 02- 531T others, however, Medicare makes no explicit payment for
delivery and administration services.
Physician- billed drugs account for the bulk of Medicare spending on
outpatient drugs. Of those billed by physicians, drugs used to treat cancer
accounted for most of Medicare?s expenditures. The prices available to
physicians through wholesaler and GPO catalogues are far lower than
Medicare?s payment. The catalogue prices ranged from 13 percent to 34
percent less than AWP for most drugs that we examined and up to 86 percent
less for one. These prices indicate that Medicare?s payments for physician-
administered outpatient drugs were at least $532 million higher
than providers? potential acquisition costs in 2000. Further, the
overpayment is likely even greater because additional reductions provided to
certain purchasers through chargebacks, rebates, and other discounts drive
down the actual acquisition costs to providers even more.
Concerns have been expressed that providers who had few beneficiaries
requiring chemotherapy drugs either could not or do not obtain such
favorable prices. Therefore, we surveyed a sample of physicians who billed
Medicare for low volumes of chemotherapy drugs to see if they were able to
obtain discounts similar to those of providers with a high volume of claims.
More than one- third of these physicians who billed for a low
volume of drugs actually belonged to large, hospital- based, or national
chain oncology practices that likely had access to widely available drug
discounts. The low- volume providers who responded to our survey reported
similar or better discounts than the widely available prices we
documented, although these discounts may not be as high as those obtained by
high- volume purchasers.
Inhalation therapy drugs administered through DME and oral immunosuppressive
drugs represent most of the high- expenditure, highvolume drugs billed to
Medicare by pharmacy suppliers. As with physicianbilled drugs, Medicare?s
payments for pharmacy supplier- billed drugs generally far exceeded the
prices available to these suppliers. Further, the discounts we found were
largest for products that could be obtained from more than one source. Based
on the discounts for six drugs billed
primarily by pharmacy suppliers, we found that Medicare?s payments were at
least $483 million more than what the suppliers potentially paid in 2000.
Specifically, two DME- administered drugs, albuterol and ipratropium
bromide, that accounted for most of the pharmacy supplier- billed drugs
paid for by Medicare were available to pharmacy suppliers at prices that
averaged, respectively, 85 percent and 78 percent less than AWP. Two Wide
Disparities Exist
Between Drug Acquisition Costs and Medicare Payments
Page 8 GAO- 02- 531T other high- volume DME- administered drugs had prices
averaging 69 percent and 72 percent less than AWP. Two of the high- volume
oral immunosuppressives were available from wholesalers with average
discounts of 14 percent and 77 percent. Although wholesale price information
on the two other oral drugs was not available, retail prices from online
pharmacies were as much as 13 percent and 8 percent below AWP.
Based on our findings, we recommended that Medicare revise its drug payment
policies to more closely parallel market prices that providers actually pay
to acquire drugs. To set such prices, Medicare needs to use information on
actual market prices, accounting for rebates and other discounts. It is
important in setting payment levels to be mindful that providers? ability to
secure discounts likely varies, and that prices need to be sufficient to
ensure that beneficiary access is not compromised. Physicians and pharmacy
suppliers contend that the excess in Medicare?s
payments for covered outpatient drugs compensates for related service costs
inadequately reimbursed or not explicitly covered at all. Medicare payment
policies for administering or delivering a drug vary, depending on who
provides the drug to the patient. Physicians are compensated directly for
drug administration through the physician fee schedule. Pharmacy suppliers
are compensated for dispensing inhalation therapy drugs used with a
nebulizer, which make up the majority of their Medicare outpatient drug
claims. No explicit payments are made to pharmacy suppliers for
dispensing other drugs, but the suppliers receive payments for equipment and
supplies associated with DME- administered drugs. Medicare pays physicians
based on a fee schedule that includes rates for administering chemotherapy.
Payments for chemotherapy administration are important because chemotherapy
drugs represent the bulk of Medicare payments for physician- administered
drugs. Medicare?s payment for chemotherapy administration is usually
determined by the practice expense component of the fee schedule, as there
is generally no direct physician involvement with these services. 14
Payments for practice
expenses were revised beginning in 1999. These payments, which had 14
Practice expenses include the salaries of nurses, technicians, and
administrative staff, and rent, utilities, equipment, and supplies. Practice
expenses constitute one of three components in Medicare?s physician fee
schedule. The other two are the physician work component and the malpractice
component. Current Drug Payments
Called Necessary to Offset Inadequate Payments for Related Services
Page 9 GAO- 02- 531T been based on charges physicians had billed in prior
years, were recomputed to reflect the relative resources required to provide
each service. Implementation of these resource- based practice expense
payments has been controversial. This is in part because the Congress
required that payments be budget neutral so that if one specialty?s fees
increased on average, some others would have to be reduced. Such
redistributions have occurred, and some are significant. However, Medicare?s
physician payments were deemed adequate in the aggregate, as almost all
physicians participated in Medicare and accepted the program?s fees as
payment in full, so that budget neutrality appeared unlikely to cause access
problems for beneficiaries.
Oncologists argue that Medicare?s payments for administering chemotherapy
are inappropriately low and that the excess Medicare drug payments based on
the AWP are needed to offset their losses. Yet, oncology is one of the
specialties to gain from the introduction of new practice expense payments
under the physician fee schedule. In our October 2001 study on physicians?
practice expenses under Medicare?s fee schedule, we showed that practice
expense payments to oncologists were 8 percent higher than they would have
been if the prior payment method had been maintained; we also showed that
overall oncologists? payments
relative to their estimated practice expenses were close to the average for
all specialties.
While oncologists do not appear disadvantaged overall under the fee
schedule, adjustments that HCFA made to the basic method of computing
payments reduced fees for some oncologists? services, particularly
chemotherapy administration. In those adjustments, HCFA modified the basic
method in computing payments for services delivered without direct physician
involvement, like much of chemotherapy administration. 15 The
modifications were intended to correct perceived low payments for these
services, but instead resulted in reduced payments for some of these
services, particularly those provided by oncologists. Further, the agency
reduced oncology?s reported supply expenses, one of the data elements used
to compute fees, to keep from paying twice for drugs that are
reimbursed separately by Medicare. Oncologists acknowledge that the supply
expense estimate needed to be reduced, but argue that the reduction was too
large. We recommended in our October 2001 report that 15 In the case of
chemotherapy drugs, the common practice is for a nurse employed by a
physician to administer the drug and for the physician to bill Medicare.
Page 10 GAO- 02- 531T CMS revert to using the basic methodology to determine
practice expense payments for all services and develop the appropriate data
to more accurately estimate oncology supply expenses. If these
recommendations had been followed in 2001, we estimate that payments to
oncologists
would have been about $51 million higher. Similar to the physicians who bill
for outpatient drugs, pharmacy suppliers and their representatives contend
that the overpayments for DME- related drugs are needed to compensate them
for costs not covered by Medicare- that is, clinical, administrative, and
other labor costs associated with delivering the drug. These include costs
for billing and collection; facility and employee accreditation; licensing
and certifications; and printed patient education materials. Medicare pays a
$5 dispensing fee for inhalation therapy drugs used with a nebulizer, the
vast majority of the pharmacy- supplied drugs. The fee is higher than
dispensing fees paid by pharmacy benefit managers for private insurance
plans, which
average around $2, and comparable to fees paid by state Medicaid programs,
which range from $2 to more than $6. Besides payments for the DME- related
drugs, pharmacy suppliers may receive additional compensation through the
payment for DME and related supplies. Our prior work shows that, for two
reasons, Medicare DME and supply payments may exceed market prices. 16
First, because of an imprecise coding system, Medicare carriers cannot
determine from the DME claims they process which specific products the
program is paying for. Medicare?s coding system groups products that may
have significantly
different characteristics and, therefore, different prices. Medicare,
however, pays one fee for all products classified under a single billing
code, regardless of whether their market prices are below or above that fee.
17 Second, DME fees are often out of line with current market prices. Until
recently, DME fees had generally been adjusted only for inflation since the
process required to change the fees for any other reason was lengthy and
cumbersome. As a result, payment levels may not reflect changes in
technology and other factors that could significantly change market prices.
16 U. S. General Accounting Office, Medicare: Need to Overhaul Costly
Payment System for Medical Equipment and Supplies, GAO/ HEHS- 98- 102
(Washington, DC: May 12, 1998). 17 The equipment and supply payment is
determined from a DME fee schedule, whose rates are based on a state-
specific fee schedule and subject to national minimum and maximum payment
limits.
Page 11 GAO- 02- 531T Private insurers and federal agencies, notably VA,
employ varying approaches in paying for drugs, generally using the leverage
of their
volume and competition to secure better prices. While private payers can
negotiate with some suppliers to the exclusion of others and arrive at terms
without clear criteria or a transparent process to secure lower prices, some
of these practices would not be acceptable for a public program like
Medicare, given the program?s size and need to ensure access for providers
and beneficiaries. VA uses the leverage of federal purchasers to secure
verifiable data on actual market transactions by private
purchasers to establish FSS prices for federal agency and public hospital
purchasers. VA also uses competition to secure even lower prices in
purchasing selected drugs for its own facilities. In considering how these
approaches might prove instructive for Medicare, the program?s unique
responsibilities and characteristics need to be carefully considered to
avoid untoward consequences for beneficiaries and providers.
VA sets FSS prices based on actual prices paid by private purchasers-
specifically, the prices that drug manufacturers charge their ?mostfavored?
private customers. 18 In exchange for state Medicaid programs covering their
drugs, manufacturers agree to offer VA and other government purchasers drugs
at these prices. To enable VA to determine the most- favored customer price,
manufacturers provide information on price discounts and rebates offered to
domestic customers and the terms and conditions involved, such as length of
contract periods and ordering and delivery practices. 19 Manufacturers must
also be willing to supply similar information to CMS to have their drugs
covered by Medicaid. The information is the basis for rebates required by
the Medicaid program. With Congressional sanction, CMS might utilize this
information to determine appropriate prices for Medicare that would be based
on actual prices being paid in the market. Medicare prices most likely could
not be
the prices paid by most favored customers, but would need to be high enough
to assure access for all beneficiaries.
18 Under federal procurement regulations, the government seeks to obtain a
price that is intended to equal or better the price that the manufacturer
offers its most- favored nonfederal customer under comparable terms and
conditions. 19 Because the terms and conditions of commercial sales vary,
there may be legitimate reasons why the government does not always obtain
the most- favored customer price. Hence, under the regulations, VA may
accept a higher price if it determines that (1) the
price offered to the government is fair and reasonable and (2) awarding the
contract is otherwise in the best interest of the government. Other
Purchasers? Practices Are Instructive for
Reforming Medicare Payments for Covered Outpatient Drugs
Page 12 GAO- 02- 531T VA has been successful in using competitive bidding to
obtain even more favorable prices for certain drugs for its own facilities.
20 Through these competitive bids, VA has obtained national contracts for
selected drugs at prices that are even lower than FSS prices. These
contracts seek to concentrate the agency?s purchase on one drug within a
class of therapeutically equivalent products for the agency?s national
formulary. In 2000, VA contract prices averaged 33 percent lower than
corresponding
FSS prices. Medicare?s use of competition has been restricted to several
demonstration projects authorized by the Balanced Budget Act of 1997. 21 In
one of these demonstrations under way in San Antonio, Texas, suppliers bid
to provide nebulizer drugs, such as albuterol, to Medicare
beneficiaries. While Medicare normally allows any qualified provider to
participate in the program, only 11 bidders for nebulizer drugs were
selected to participate under the demonstration. In exchange for restricting
their choice of providers to the 11 suppliers, beneficiaries are not liable
for any differences between what suppliers charge and what Medicare allows.
Preliminary CMS information on the San Antonio
competitive bidding demonstration suggests no reported problems with access
and a savings of about 26 percent for the inhalation drugs. Expanding
competitive bidding for additional drugs could be beneficial. However, use
of competitive bidding would not be feasible for all drugs, for example,
those that have no or few therapeutic equivalent alternatives, which is the
case for many chemotherapy drugs.
Our September 2001 study on Medicare payments for outpatient drugs shows
that Medicare payments and Medicare beneficiary copayments to providers for
these drugs are much higher than necessary, given what the providers likely
paid to purchase these drugs from manufacturers, wholesalers, or other
suppliers. Unlike the market- based fees paid by VA
and other federal agencies, Medicare?s fees are based on AWP, which is a
manufacturer- reported amount that generally does not reflect actual
transactions between seller and purchaser. Physicians contend that the
profits they receive from Medicare?s payments for outpatient drugs are
needed to compensate for inappropriately low Medicare fees for most 20 U. S.
General Accounting Office, Prescription Drugs: Expanding Access to Federal
Prices Could Cause Other Price Changes, GAO/ HEHS- 00- 118 (Washington, DC:
August 7, 2000). 21 Pub. L. No. 105- 33, sect.4319, 111 Stat. 251, 392.
Concluding Observations
Page 13 GAO- 02- 531T drug administration services. Similarly, the case
argued by some pharmacy suppliers for Medicare?s high drug payments is that
not all of their costs of dispensing the drugs are covered. If Medicare were
to follow the principle of paying for each service
appropriately and incorporate lessons from other payers in setting fees for
outpatient drugs, the program would use information on actual market prices,
accounting for rebates and discounts, to establish its payments for
drugs. Manufacturers whose drugs are used by veterans or Medicaid recipients
are already required to provide this information to VA and CMS. Medicare
could also determine market- based fees for certain drugs through
competitive bidding. If drug payments are tied closer to providers? likely
acquisition costs, Medicare would need to ensure that separate and
appropriate payments are made to pay for the administration and delivery of
covered drugs. Changes to Medicare payments for chemotherapy
administration under the current physician fee schedule are needed to make
these payments comparable to payments for other services. While Medicare
also provides a separate payment for the dispensing of inhalation therapy
drugs, dispensing fees for other drugs that physicians do not administer
need to be considered. Different methods of determining these payments may
be necessary because of differences in
the way certain drugs are supplied and administered. Paying for these
services explicitly would enable Medicare to eliminate implicit payments
that may have been made through excessive payments for DME and the drugs
associated with the DME payment.
Any change to Medicare?s payments, particularly a reduction in fees, for
covered outpatient drugs or related administration or delivery services
needs to be accompanied by an ongoing assessment of whether the new
fees adequately support Medicare beneficiaries? access to the drugs and
services. Such monitoring should involve examining recent use of these
services so that prompt fee adjustments can be made if access problems are
found.
Mr. Chairman, this concludes my prepared statement. I would be happy to
answer any questions that you or other Subcommittee Members may have. For
further information regarding this testimony, please contact me at (202)
512- 7119. Kathryn Linehan, James Mathews, and Michael Rose made
contributions to this statement. (290174) Contact and Acknowledgments
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