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Drug reimbursement will decrease under new Medicare Modernization Act
Congress has ordered the CMS to change the way it reimburses physicians for drugs to more accurately reflect market prices.
Over the next 2 years, physicians will see a decrease in drug reimbursement and a possible change in how drugs are purchased. The decrease is supposed to be offset by an increase in physician fee reimbursement, but there are concerns over how the rule will affect patient access to care, according to an industry expert.
Currently, physicians are reimbursed for drugs by the average wholesale price (AWP), which is based on prices reported by drug manufacturers to commercial price reporting services such as Red Book or First DataBank, said Larri Short, JD, a partner at Arent Fox in Washington.
There are sometimes significant differences in the prices the pharmaceutical manufacturers report for drugs and the actual prices at which physicians buy them. In some cases, physicians profit from discounted drugs for which they receive a higher reimbursement, Ms. Short said. They often use the overpayment to offset being underpaid for drug administration services. Under the Medicare Modernization Act, Congress intends to rectify this discrepancy by ordering the Centers for Medicare and Medicaid Services (CMS) to pay more accurate drug prices and increase physician fee reimbursement, she said.
Average sale price calculated
The new calculation for drug reimbursement, called the average sale price (ASP), aims to create a reimbursement fee closer to market value, Ms. Short said. Starting in January 2005, physicians will receive the ASP plus an additional 6% to offset market-power-based variations in available prices and associated drug handling overhead expenses, she said.
Under the new rule, pharmaceutical companies will report the average price of each drug based on U.S. sales, excluding discounts or other price concessions, to all classes of trade except federal government and state pharmaceutical assistance programs. Ms. Short said manufacturers will report ASP to CMS on a quarterly basis, and physicians will be reimbursed using the ASP reported two quarters prior to a claim, she said.
Because of the way manufacturers are instructed to account for rebate and other discount data that is not available at the time ASP reports must be filed, some products are expected to show substantial variability in their ASP from quarter to quarter. As a result, Ms. Short said, physicians could face cash flow and business planning problems under the new reimbursement system.
Reimbursement may also vary depending on the way a drug is packaged (eg, multidose vs. single dose) since separate ASP values must be calculated and reported for each package in which a product is marketed.
For physicians, the switch to ASP may mean not only a decreased drug reimbursement, but also the inability to fund and maintain their added services, Ms. Short said. As a result of reimbursement shortfalls, “practices may be forced to cut or change some therapies or to refer patients needing certain drugs to outpatient services, which may be a problem if [the other facilities] can’t afford the extra patients,” she said. “Nobody knows what will happen.”
ASP and ophthalmology
For ophthalmologists, Visudyne (verteporfin for injection, Novartis Ophthalmics) will be the drug most affected by this change, Ms. Short said. It is the principal ophthalmic drug paid as an incident to benefit under Medicare Part B, where the ASP changes are applicable. Other ophthalmic drugs are usually paid for as part of the facility fee for ASCs, she said.
The new rule will have the greatest effect on oncologists because most oncology drugs are paid incident to physician services under Part B, Ms. Short said. There is also concern that the price changes will force physicians, especially oncologists, to change the type of therapy and services they provide.
Ms. Short said ophthalmologists should continue billing in the same way and realize that they will be reimbursed less for drugs.
She advised physicians to read the ASP rule and continue lobbying for increased physician fee reimbursement since it is supposed to compensate for decreased drug payments.
Was a change needed?
With all the uncertainty and the decreased payment, many physicians may question the necessity of changing from AWP to ASP. Ms. Short said that Congress sees this as a way to assume more control over reimbursement. With AWP, drug manufacturers had control over what Medicare would pay for a drug, she said, and pharmaceutical manufacturers could adjust their reported prices based on competition. At times, Congress believed that manufacturers increased with reported AWPs without increasing the prices they offered to physicians as a marketing tool to entice physicians to use their product because of increased spread between Medicare payments and discounted product costs, she said.
“There’s never been a statutory definition of AWP,” she said. “With ASP, the manufacturers report the price, but it is defined by the [CMS] calculation and is auditable. That’s the intent.”
It has been known for a long time that Medicare overpays for drugs, Ms. Short said. The government acknowledged overpayment for the first time back in 1968. In contrast to these drug overpayments, physicians were sometimes underpaid for their services. In 1992, there was congressional testimony acknowledging that oncologists were underpaid for their services but overpaid for the drugs they administered.
“Industry and physicians would argue that on balance, that there was no overpayment and the government consciously made the decision to overpay for drugs and underpay for services,” she said.
Currently, there are pending legal cases regarding alleged misuse of price reporting. There is a whistleblower suit and a class action suit against dozens of pharmaceutical manufacturers, but no court decisions have been handed down yet finding that manufacturers’ pricing practices violated the law.
What may happen
According to Ms. Short, manufacturers will want to ensure that their ASPs are as high as possible since the available profit to physicians under an ASP plus 6% reimbursement system will be increase with ASP. However, with CMS imposing stricter price calculations and requiring harder data from pharmaceuticals, Ms. Short said that she thinks the Office of Inspector General will become more involved in how pharmaceuticals market their products.
In 2006, physicians will have a choice between receiving the ASP plus 6% and having the drugs used in their practice provided and billed to Medicare by a private specialty pharmacy, which is a competitive acquisition program that would bid with CMS for drug coverage.
“Some people say the choice won’t be voluntary,” Ms. Short said. In the past with AWP, manufacturers and wholesalers would set the price to physicians 20% below the Medicare allowable to compensate for no-copay situations. Now that ASP eliminates the spread, physicians pay for the drug out of pocket with no cushion if they do not receive copayment, she said. Because of the bad debt problem, many believe physicians will be forced to select a specialty pharmacy in 2006 to provide drugs instead of providing them themselves.
Commercial managed care companies may also become involved and mandate that physicians go through a certain specialty pharmacy. Some have already tried this through mandatory vendor imposition programs, she said.
Other commercial carriers have implemented “brownbagging” programs, under which patients have to pick up the drug and take it to their physician to administer it, Ms. Short said. In essence, these programs prevent physicians from buying and billing for drugs and ensure that they do not profit from any spread between an AWP-based reimbursement rate and the market price available to them.
There is concern that counterfeiting, improper storage or incidence of diluted drugs may happen with specialty pharmacies, she said. Costs such as management of the drug – its storage, hazardous waste disposal or administration expenses — may not be compensated by the reimbursement fee, Ms. Short said.
Overall, there is a question of how effective the competitive acquisition program will be and whether it will save money, she said.
For Your Information:
- Larri Short, JD, can be reached at Arent Fox PLLC, 1050 Connecticut Ave., NW, Washington, DC 20036-5339; 202-775-5786; fax: 202-857-6395; e-mail: short.larri@arentfox.com.