OIG: Cuts essential for Medicare drug payments

Physicians contend ‘98 cuts are short-sighted

Effective Jan. 1, 1998, Medicare officials mandated a reduction in Medicare’s payment for pharmaceuticals to 95% of the average wholesale price (AWP), a move that hit practices with managed Medicare patients hard and that could reverberate throughout the private-payer market.

But that cutback is only the harbinger of vast payment reductions and regulatory arm wrestling to come if federal investigators have their way. (See related story on p. 20 to see how one practice at risk for pharmacy costs is handling pharmacy cost overruns.)

Physicians feel the brunt of drug-price chaos the most in pharmacy capitation, where doctors are held to tight cost targets. Yet specialists also are hit with it hard, even in discounted fee-for-service situations. To some extent, drugs price variations have plagued physician practices for years, but only recently have physicians been held so accountable for the costs of many drugs.

Soaring drug costs finally made Medicare officials hit the roof in late 1997. Investigators with the Office of the Inspector General unearthed what they view as uncontrolled, excessive spending. Here are some examples cited by OIG:

For more than 33% of 22 common drugs used in the Medicare program, Medicare’s allowed amounts were more than double the actual wholesale prices available to physicians and suppliers. OIG implies that physicians are overpaid, but many physicians argue that drugs are improving clinical outcomes, and that managed care practices encourage drugs as prevention — often reducing the need for more acute medical care.

The 22 drugs studied are used chiefly for cancer/leukemia, valve replacement, immunodeficiency, severe infections, inhalation, and vaccines. The AWP, which is a drug price list made available to physicians and other suppliers, is a misnomer and is far from being the best benchmark for pricing, OIG investigators say. By basing reimbursement on AWPs rather than on real wholesale prices, Medicare and its beneficiaries paid nearly $1 billion more than necessary for the 22 drugs studied.

For every one of the 22 drugs reviewed, Medicare allowed more than the highest average wholesale drug price. The chart on p. 19 shows a complete listing of the 22 drugs OIG officials reviewed and their projected overpayments for 1995 and 1996. This can be a useful reference for physician groups engaged in pharmacy capitation, or for other practices, such as oncology groups, in which drug therapy is frequently used. This chart offers a guide toward what actual wholesale prices ought to be, and to areas where Medicare is experiencing excessive costs.

The range of Medicare’s payment varied between two and 10 times beyond the actual average wholesale prices. At the highest end was payment for an injection of leucovorin, 50 mg, which is coded JO640; in this case, Medicare allowed 900% more than the AWP in 1995 and 673% more in 1996. At the low end were payments for two drugs in 1995 and four drugs in 1996 for which reimbursement ranged between 11% and 18% more than the AWP. After researching several references for drug prices, OIG projects that savings for the drugs they studied could range from as low as 13% up to 92%. Almost half of the drugs had an estimated savings of 40%.

Overall, Medicare allowances for drugs increased 25% from $1.8 billion in 1995 to $2.3 billion in 1996. That doesn’t fit at all, officials say, with the 9% allowed increase in number of services permitted in that two-year time frame.

In response to these findings, you can expect some major changes. Here are proposals on the drawing board:

Require physicians to bill Medicare the "actual acquisition cost" for drugs rather than the average wholesale cost. This was proposed in the 1998 budget, but it did not get through the final version. Experts expect this provision to have smoother sailing, however, in the 1999 budget year. This suggests HCFA would have to provide a price list of what represents an actual wholesale price, rather than the price list now in use, which officials say doesn’t really discount drugs.

Develop an electronic file of average wholesale prices for drugs covered by Medicare. This is a resource very much needed for physicians and insurers. HCFA is establishing a work group to develop this resource so that carriers and other users can have a uniform price list from which to negotiate drug purchases.

Explore rebate programs for the Medicare programs. Just as private-sector insurers often work out rebates for using certain drugs, Medicare should also consider this, OIG officials recommend. Some coding changes would be required to do this, however, so that the codes identify the manufacturer and indicate if the drug is a brand name or generic equivalent.

Count on the 95% mandated discount of the AWP. "Medicare adopted this payment cut effective Jan. 1, so you should have already noticed the 5% adjustment in reimbursements."