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Medicare Drug Reimbursements: A Broken System for Patients and Taxpayers
Subcommittee on Oversight and Investigations
Mr. Thomas A. Scully
Chairman
Greenwood, Chairman Bilirakis, Congressman Deutsch, Congressman Brown,
distinguished Subcommittee members, thank you for inviting me to discuss
Medicare payment for outpatient prescription drugs. As you know, prescription drugs are becoming an increasingly
important component of modern health care, particularly for Medicare
beneficiaries. We are working with
Congress to modernize Medicare to cover prescription drugs and provide
relief to seniors from high drug costs. In
addition, it is clear that the payment system for selected outpatient drugs that
are now covered by Medicare is a mess. Medicare now pays more than many other purchasers for the
drugs we cover due to the way that drug manufacturers report their prices and
Medicare's payment policies. Medicare
should pay appropriately for all Medicare benefits, including the drugs we
currently cover, and it is unacceptable that the current system results in
Medicare paying excessive prices. We
also need to pay appropriately for the services required to furnish these drugs.
I appreciate your dedication and leadership on this issue, and I look
forward to working with you and your colleagues to ensure that Medicare
beneficiaries have access to the drugs they need and that Medicare pays
competitive prices for these prescription drugs. By
law, Medicare does not pay for most outpatient prescription drugs.
However, there are some specific exceptions where Medicare covers
pharmaceuticals, such as drugs furnished incident to a physician's covered
services, and in these cases, the law mandates that we pay physicians and other
providers based on the lower of the billed charge or 95 percent of the drugs'
average wholesale price (AWP). Numerous studies have indicated that the industry's reported
wholesale prices, the data on which Medicare payments are based, are vastly
higher than the amounts that drug manufacturers and wholesalers actually charge
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. Some affected
physicians and providers have suggested that they need these Medicare "drug
profits" 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.
I believe we need to pay appropriately for both the drugs and the
services related to furnishing the drugs. Clearly,
Medicare drug pricing is a complex issue. Over
the years, numerous legislative efforts have failed to develop an effective
alternative to AWP and ensure that Medicare and its beneficiaries do not pay
more than they should for the limited number of prescription drugs that Medicare
covers. We are committed to working
with Congress on a bipartisan basis to ensure that Medicare pays accurately for
all of its benefits. As we look to
the future, particularly in the context of developing a Medicare drug benefit
that does not make the same mistakes, I think it might be important to review
previous efforts to reform the AWP payments so that together we can develop a
workable solution. 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 we were creating the Medicare program today, a prescription drug benefit certainly would be included. However, in 1965, prescription drugs played a less prominent role in health care, and the emphasis then was on ensuring access to inpatient hospital care in Medicare Part A and providing access to physicians in Medicare Part B. Today, Medicare beneficiaries rely on prescription drugs as an integral part of their health care. Although by law, Medicare does not generally cover over-the-counter or outpatient prescription drugs, currently Medicare does cover some drugs, including:
These
drugs are typically provided in the hospital outpatient setting, dialysis
centers, or in the doctor's office, and are purchased directly by the physician
or provider. Additionally, vaccines
for diseases like influenza, pneumonia, and hepatitis are considered drugs, and
are covered by Medicare. By
law, we generally pay for these drugs based on 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 for by the Medicare program. In general, Medicare beneficiaries must also share in the
cost of purchasing these drugs through their Part B premiums, and except for the
flu and pneumonia vaccines, 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 reported by drug
manufacturers and published in compendia such as the
Red Book, which is published by Medical Economics Company, Inc. However, manufacturers and wholesalers increasingly give
physicians and providers discounts that reduce the actual amount that the
physician or provider actually pays for the drugs. These discounts are not reflected in the published
price and reduce the amount providers actually pay to levels far below those
prices published in the Red Book. Furthermore,
use of the AWP, as reported by manufacturers to companies which compile such
prices creates a situation where a manufacturer can, for certain drugs, increase
the reported AWP and, in turn, offer physicians a deeper discount. This
Committee, CMS, the Department's Office of the Inspector General (IG), and
others have long recognized the shortcomings of AWP as a way for Medicare to
reimburse for drugs. The IG has
published numerous reports showing that true 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 like 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 amount.
By offering physicians and providers deep discounts compared to the price
they could bill Medicare, the drug manufacturers are able to use profit margins
to manipulate physicians and providers to use their products for Medicare
beneficiaries. It is simply
unacceptable for Medicare to continue paying for drugs in a 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 competitively by physicians
and providers. However, these
efforts have not been successful. For
example, in CMS/HCFA's June 1991 proposed physician fee schedule, the Agency
proposed that payment be based on 85 percent of AWP.
We also proposed that certain very high volume drugs be reimbursed at
levels equal to the lesser of 85 percent of AWP or the physician's or provider's
estimated acquisition cost. We
received many comments, primarily from oncologists, indicating that this 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.
Others 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, a policy was established for Medicare to pay 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 were still significantly greater
than the competitive discounts obtained by physicians and 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 DOJ and the National Association of Medicaid Fraud Control Units
made accurate market wholesale prices for 49 drugs covered by
Medicaid available to State Medicaid programs and to First Data Bank, a drug
price compendia owned by the Hearst Corporation.
These wholesale prices, culled from wholesale catalogs circulated among
the provider community, reflected the actual Average Wholesale Prices for these
drugs far more accurately than the drug manufacturers' AWP.
Last year, HCFA 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. However, due to
concerns about Medicare payments related to 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. In
December 2000, Congress enacted the Medicare, Medicaid, and SCHIP Benefits
Improvement and Protection Act (BIPA), which established a moratorium on
decreases in Medicare drug payments while the General Accounting Office (GAO)
conducted a study of Medicare drug pricing and related payment issues.
HCFA postponed Medicare carriers' use of the DOJ data until we could
review the GAO report. We look
forward to reviewing the GAO's findings and working with you to revise
Medicare's drug payment policy. We
must ensure that beneficiaries and Medicare pay appropriately for both the drugs
that we cover and the services related to furnishing the drugs. Medicare beneficiaries rely on prescription drugs, and the coinsurance they pay for covered drugs is tied directly to the prices that Medicare pays. We must find a competitive way to ensure that Medicare beneficiaries and taxpayers are no longer paying excessive prices for drugs that are far above the competitive discounts that are widely available today. We need to pay appropriately for all Medicare benefits, including the prescription drugs we cover and the services required to furnish those drugs. We look forward to reviewing the GAO report, and working with you Mr. Chairman, this Subcommittee, and the Congress to revise Medicare's payment policy for currently covered drugs. Thank you for the opportunity to discuss this important issue with you today, and I am happy to answer your questions. ###
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