Medicare Part B Drugs: Program Payments Should Reflect Market Prices

The pricing of Medicare's part B-covered prescription drugs--largely drugs that cannot be administered by patients themselves--has been under scrutiny for years. Most of the part B drugs with the highest Medicare payments and billing volume fall into three categories: those that are billed for by physicians and typically provided in a physician office setting, those that are billed for by pharmacy suppliers and administered through a durable medical equipment (DME) item, and those that are also billed by pharmacy suppliers but are patient-administered and covered explicitly by statute. Studies show that Medicare sometimes pays physicians and other providers significantly more than their actual costs for the drugs. In September 2000, the Health Care Financing Administration's (HCFA)--now the Centers for Medicare and Medicaid Services--took steps to reduce Medicare's payment for part B-covered drugs by authorizing Medicare carriers, the contractors that pay part B claims, to use prices obtained in the Justice Department investigations of providers' drug acquisition costs. HFCA retracted this authority in November 2000 after providers raised concerns. GAO found that Medicare's method for establishing drug payments is flawed. Medicare pays 95 percent of the average wholesale price (AWP), which, despite its name, may be neither an average nor what wholesalers charge. It is a price 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 that pay claims for part B drugs base providers' payments on the published AWPs. In 2001, widely available prices at which providers could purchase drugs were substantially below AWP, on which Medicare payments are based. 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 or nonexistent Medicare payments for services related to these drugs. For delivery pharmacy supplier-billed drugs, Medicare's payment policies are uneven. Pharmacy suppliers billing Medicare receive a dispensing fee for one drug type--inhalation therapy drugs--but there are no similar payments for other DME-administered or oral drugs. Other payers and purchasers, such as health plans and the Department of Veterans Affairs, use different approaches to pay for or purchase drugs that may be instructive for Medicare. In general, they make use of the leverage from their volume and competition to secure better prices.