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Medicare Drug Reimbursements: A Broken System for Patients and Taxpayers
Subcommittee on Oversight and Investigations
The Honorable George Grob
Good morning Mr. Chairman.
I am George Grob, Deputy Inspector General for Evaluation and
Inspections, Department of Health and Human Services. I am here today to discuss Medicare payments for prescription
drugs. Medicare pays too much for
prescription drugs-more than most other payers.
The method it uses to determine the amount to be paid is flawed.
In fact, it makes no sense at all. It allows the price to be set arbitrarily by drug
manufacturers, not the marketplace. Their
published wholesale prices for many drugs are far above what suppliers and
physicians actually pay for them. This
allows physicians, for example, to make substantial profits from the drugs they
administer during the course of treatment in their offices.
For the year 2000 we found that Medicare's authorized payments for 24
leading drugs were $887 million more than actual wholesale prices available to
physicians and suppliers and $1.9 billion more than prices available through the
Federal Supply Schedule. Until the
system is changed, Medicare and its beneficiaries will continue to pay excessive
amounts for prescription drugs; and the amount of excessive payments will
increase every year. Medicare
Coverage and Payments for Prescription Drugs 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. However,
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 2000, it paid $5 billion. Between 1999 and 2000 alone, payments increased by $1
billion. This rapid growth
illustrates the necessity of ensuring that Medicare pays reasonable prices for
the drugs it covers. Physicians and suppliers
purchase these drugs, administer or provide them to Medicare beneficiaries, and
then submit a bill to Medicare for reimbursement.
In general, Medicare reimburses physicians and suppliers for 95 percent
of the average wholesale price (AWP) published by the drug manufacturers. Of this amount, Medicare beneficiaries are responsible for a
20 percent coinsurance payment. Excessive
Payments Over the past 4 years, the
Office of Inspector General has produced a number of reports, all of which have
reached the conclusion that Medicare and its beneficiaries pay too much for
prescription drugs. Although it
might be sufficient for me to quote only from our most recent studies, I would
like to summarize all of our work here, because it demonstrates the consistency
of our findings and the relentless growth of the problem. A table summarizing the results
of our reports is provided on the next page, followed by a more detailed
description.
Summary of OIG Medicare Prescription Drug Reports
Drugs
in general In
December 1997, we released a report which compared Medicare payments for 22
drugs to actual wholesale prices available to the physician and supplier
communities. These 22 drugs
accounted for $1.5 billion of the $2.3 billion in Medicare payments for
prescription drugs in 1996. The
wholesale prices were computed using catalogs from drug wholesalers and group
purchasing organizations which sell drugs to physicians and suppliers.
The report found that Medicare
allowances for the 22 drugs exceeded wholesale prices by $447 million in 1996. Medicare paid more than the available wholesale price for all
22 drugs under review. For more
than one-third of the drugs, Medicare reimbursement amounts were more than
double the wholesale prices available to the physician and supplier community. We followed up this report in
November of 1998 by comparing Medicare allowances for prescription drugs to
prices available to the Department of Veterans Affairs (VA) and several other
Federal agencies through the Federal Supply Schedule (FSS).
(The supply schedule provides agencies lie the VA with a simple process
for purchasing commonly-used products in various quantities while still
obtaining the discounts associated with volume buying.
Using competitive procedures, contracts are awarded to companies to
provide services and supplies at the FSS prices over a given period of time.)
This report included 34 drugs which accounted for $2.1 billion of the
$2.8 billion in Medicare spending for prescription drugs in 1997. We found that Medicare and its
beneficiaries would have saved $1 billion in 1998 if the allowed amounts for the
34 drugs were equal to prices obtained through the FSS.
The potential savings for just one drug, leuprolide acetate, accounted
for over $275 million. Medicare
paid more than double the VA for 14 of the drugs.
Overall, it paid between 15 percent and 1600 percent more than the VA for
each of the 34 drugs. The biggest
difference was for the drug leucovorin calcium, with a VA price of $1.18 and a
Medicare price over $20. In January of this year, we
released another report comparing Medicare reimbursement to prices available to
the physician/supplier community, the Department of Veterans Affairs, and
Medicaid. This time, we studied the
prices for 24 drugs which represented $3.1 billion of the $3.9 billion in
Medicare drug expenditures in 1999. 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.
For example, Medicare reimburses $43 for 10 mg of the drug doxorubicin,
more than four times the wholesale price of $10.
The VA pays even less, with a Federal Supply Schedule price of $6.29.
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. We have recently updated the
findings of this report with more current drug pricing information.
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 some
cases, the VA price for a drug was less than the amount a Medicare beneficiary
would pay in coinsurance. More
conservatively, Medicare and its beneficiaries would save $887 million a year by
paying the actual wholesale prices available to physicians and suppliers for
these 24 drugs. Beneficiaries would
pay over $175 million less in coinsurance if Medicare paid for these drugs based
on catalog prices. The potential
savings to both Medicare and its beneficiaries is probably higher, assuming data
for all Medicare drugs is similar to that for the 24 we analyzed. Nebulizer
and End Stage Renal Disease (ESRD) Drugs In addition to our reports
summarizing a number of drugs, we have also produced targeted reports on
specific nebulizer and end stage renal disease (ESRD) drugs that Medicare
covers. In June 2000, we released a
report which looked at Medicare's reimbursement of albuterol, a drug used with
a nebulizer to treat asthma, emphysema, and other respiratory problems. Albuterol is one of the top drugs covered by Medicare, with
more than $250 million per year in Medicare allowances. This report updated the findings of several of our prior
albuterol studies, all of which noted that Medicare's reimbursement amount
exceeded prices available through other sources. We found that Medicare paid
nearly double the Medicaid payment amount and
almost seven times what the VA pays for one milligram of albuterol. Furthermore, nearly every pharmacy we contacted sold generic
albuterol at prices less than Medicare paid for it. According to our survey results, consumers could go to
popular drug stores across the country and buy a monthly supply of albuterol for
around $95. For the same monthly
supply, Medicare and its beneficiaries would pay a total of $118, with Medicare
paying $94 and the beneficiary paying the remaining $24. The VA's entire monthly payment of $17.50 for albuterol is
less than just the beneficiary's $24 coinsurance payment under Medicare.
We calculated that Medicare could save between $47 million and $209
million per year by setting prices for albuterol equal to those available
through these other sources. Once again, we have recently
updated this report with new pricing data.
Preliminary findings show that VA prices for albuterol have decreased
since last year. 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. In 2000, published wholesale
acquisition costs for albuterol ranged from $0.09 to $0.18 per mg.
These wholesale acquisition costs were provided by manufacturers to drug
compendiums such as Red Book.
The Medicare reimbursement rate of $0.47 per mg was anywhere from three
to five times the wholesale acquisition costs reported by manufacturers.
Recently, we have begun to look
at who actually supplies albuterol to Medicare beneficiaries.
We found that Medicare reimbursed more than 6,500 pharmaceutical
suppliers for albuterol claims in 2000. However,
less than 3 percent of these suppliers (184) accounted for approximately 80
percent of albuterol reimbursement. Each
of these suppliers had over $150,000 in paid Medicare claims for albuterol last
year. Thirty-four of these
suppliers were each responsible for more than $1 million in Medicare
reimbursement for albuterol in 2000, with five having between $11 million and
$35 million in reimbursement. Thus,
the vast majority of the albuterol supplied to Medicare beneficiaries was
provided by suppliers that purchase and bill for a large quantity of the
product. We believe that suppliers
that purchase albuterol in such large quantities are likely to receive volume
discounts similar to those provided to the VA and other large purchasers.
Our work in this area is continuing. Also in June 2000, we released
a report comparing Medicare payments for ESRD drugs to those of the VA and
Medicaid. We focused this
inspection on five drugs used by renal dialysis facilities to help treat renal
failure. These five drugs accounted
for $379 million in total charges to Medicare in 1998. We found that Medicare paid
between 37 percent and 56 percent more than the VA for these drugs.
Medicare would have saved up to $162 million in 1998 if they paid the
same amount as the VA for the five drugs. Furthermore,
Medicare paid between 5 percent and 38 percent more than Medicaid.
Medicare would have saved as much as $42 million in 1998 by using
Medicaid reimbursement amounts. Flawed
Payment Method Our reports have shown time
after time that Medicare pays too much for drugs.
Why does Medicare pay so much? We
believe that it is because Medicare's payment methodology is fundamentally
flawed. By statutory requirement,
Medicare's payment for a drug is equal to 95 percent of the drug's average
wholesale price (AWP). However,
the AWPs which Medicare uses are not really wholesale prices. For the most part, AWPs are
reported by manufacturers to companies that compile drug pricing data, such as
First DataBank and Medical Economics which publishes the Red
Book. As our reports
have indicated, the published AWPs that Medicare uses to establish drug prices
bear little or no resemblance to actual wholesale prices available to
physicians, suppliers, and large government purchasers. Aside from the obvious problem
of inflated AWPs resulting in inappropriate Medicare payments, the use of AWP
also 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 drug product 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 would increase the profit of the suppliers or physicians who purchase
the drug because, while not paying the artificially inflated AWP amount, they
can bill Medicare for it and get paid at that inflated amount. While the published AWP does not increase the amount the
manufacturer receives for each unit of the drug product, it may induce an
increase in market share because of the higher profits made by physicians and
suppliers. This in turn increases
the profits of the drug company. All
of this occurs at the expense of the Medicare program and its beneficiaries. For the drug albuterol, the
spread is so large and Medicare reimbursement so lucrative that 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 has been reached with
one pharmacy that succumbed to this temptation. Physicians'
Concerns Some physician groups have
raised concerns about Medicare's attempts to lower reimbursement for
prescription drugs. For example,
some oncologists have stated that Medicare does not adequately reimburse
physicians for the practice costs associated with providing treatment to cancer
patients. 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.
We do not think that the decision as to how much Medicare pays for
physicians' practice costs should be made by them or by drug manufacturers.
The Medicare program or the Congress should have responsibility for this
calculation. We certainly do not
believe that the basis for their compensation and medical practice expenses
should be artificially inflated, misleading, and mis-named average wholesale
prices. The Medicare program already
has a procedure for determining and the amount of paying physicians for their
practice costs. If the current
calculations are incorrect, they should be modified.
Physicians deserve fair reimbursement for their valuable services.
There is no reason to resort to a make-believe process to accomplish
this. Options
for Reforming the Payment System There
are a number of options for revising Medicare's drug reimbursement
methodology. We recognize that
there may not be one perfect solution to solving all of Medicare's drug
pricing issues. However, we believe
these options provide reference points for considering how to reform the
Medicare drug payment system. A few general remarks are in
order before discussing specific options. First,
some of the options offer a way to calculate a base amount for Medicare
reimbursement. These include using
the Federal Supply Schedule, the average manufacturer's price, or the AWP, for
example. For each such option,
additional sub-options are possible. One
would be to set Medicare prices at a fixed percentage above or below the base.
For example, Medicare currently has its payment rate set at 95 percent of
AWP. That percentage could be
dropped. Alternatively, if the
Federal Supply Schedule were used as a base, then Medicare's payment could be
set at, say, 105 or 110 percent of this number. Second, the options are not
necessarily exclusive of one another. In
the Medicaid program, most States set payment rates at a percentage below AWP,
but they also get rebates from manufacturers.
The same could be done for Medicare.
Another example might be basing Medicare payment rates on average
manufacturer prices (AMP) (used for calculating rebates in the Medicaid
program), but making upward or downward adjustments on the basis of surveys of
amounts paid by of large institutional health care providers such as hospitals
or managed care organizations. Each option has its own
advantages and disadvantages. Some
things to consider when comparing them are: the cost of gathering data to set
the base, the reliability of the data, the time needed to collect and analyze
it; how easily it can be gamed or misrepresented. Logistical considerations are
important too, such as: who will collect and analyze data, who will propose the
Medicare payment rate, and how often this will be done; how will the underlying
data be verified, by whom, and how often; what method will be used to
periodically update the payment amounts, and how frequently will this be done. Finally, some broader
principles and concerns need to be addressed, such as: how proprietary data will
be protected; the consequences of drug manufacturers, suppliers, wholesalers,
and medical care providers not providing the needed data or misrepresenting it;
ways to minimize the burden of public reporting associated with data collection;
the need for, nature of, and length of a transitional phase in introducing the
new payment method; and whether any adjustment is needed in the practice cost
component of Medicare's physician payment rate. Keeping these factors in mind,
the following options may be considered for reforming Medicare's drug payment
method: 1.
Authorize a commission to set payment rates.
A commission could be established similar to MEDPAC, which recommends
rate increases for Medicare hospital and physician payments and analyzes prices
and economic trends. Such a
commission could recommend a periodic update of Medicare prices based on a
market basket of drugs, including any new drugs.
It would be granted authority to require manufacturers to provide them
with drug wholesale prices, but would not disclose any of the proprietary data
collected from manufacturers.
3.
Collect more accurate average wholesale prices from drug pricing catalogs
or other sources.
This option would entail requiring manufacturers or wholesalers to
provide their pricing information or catalogues to an appropriate commission or
federal agency. Protection of the
confidentiality of proprietary data could be guaranteed in the authorizing
statute. 4.
Increase the discounting of the published AWP. If this option
were used, a provision would be needed to prevent manufacturers from just
raising AWP by an amount greater than the newly discounted rate. 5.
Base payment on physician/supplier acquisition costs.
This option would require obtaining invoices of actual payments made.
Payment could not be based solely on the listed invoice price as that
price often gets discounted by rebates and volume discounts.
Net cost would need to be obtained and this might be difficult because
many of the manufacturers rebates are not calculated until the end of the year. Additionally, since Medicare would be reimbursing drugs based
on cost there would be little incentive to get the best price. 6.
Establish manufacturers' rebates similar to those used in the Medicaid
program.
A Medicare rebate program could be modeled on Medicaid's program.
However, if a Medicare rebate program
were used in conjunction with, instead of as a replacement for the current AWP
system, then the rebates should be based on AWP rather than the AMP used by
Medicaid. This would minimize
manufacturers' incentives to inflate AWP because rebates would increase as AWP
increased. 7.
Create
a fee schedule for covered drugs based on the Federal Supply Schedule negotiated
by the Department of Veterans Affairs.
The payment amounts could be set at the Federal Supply Schedule price or
that price plus a certain percentage. 8.
Use CMS's inherent reasonableness authority.
This authority allows CMS to reduce its payment rates if it can be shown
that payment amounts are excessive. A
recent study by the General Accounting Office (GAO), mandated by the Congress,
found this authority to be appropriate, and
it supported some recent studies performed by CMS in its proposed used of it.
According to the law which mandate the GAO study, the inherent
reasonableness authority may be used as soon as CMS promulgates regulations for
it. 9.
Use competitive bidding. The
CMS currently has the authority to demonstrate the efficacy of competitive
bidding for medical supplies. The
demonstrations have already proven that inhalation drugs can be obtained at
prices lower than 95 percent of AWP. A
statutory amendment to make general use of this authority might be appropriate,
at least for some categories of drugs, particularly those which are provided by
a small number of suppliers or by mail-order firms. Conclusion There
can be no doubt that Medicare pays too much for prescription drugs.
This finding has been confirmed year after year.
At the same time, Medicare payments overall, including excessive amounts,
are increasing substantially. This
adversely affects the Medicare trust fund and Medicare's beneficiaries, who
are responsible for 20 percent of the bill.
While no payment method will perfectly address all conceivable technical
problems, many options are available that are superior to the current payment
method, with its misleading nomenclature and artificially inflated prices.
Currently, Medicare payments are being set not by the Medicare program
but by drug manufacturers and
indirectly by health care providers. Until
this problem is corrected Medicare and its beneficiaries will unnecessarily pay
more and more each year. I hope this testimony has been
constructive in explaining the problem and offering some ideas for its solution.
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