CMS proposes new approaches to cut its payments for drugs covered by Medicare

Drug Cost Management Report, August 29, 2003

CMS on Aug. 15 proposed new rules to "pay appropriately for Medicare-related drugs," calling the current reimbursement mechanism an "unbalanced system" that needs correcting. Although Medicare does not cover most outpatient drugs, the program does pay for certain inpatient drugs and others that cannot be self-administered.

Now, Medicare is required by law to reimburse physicians at 95% of covered drugs' average wholesale price, or AWP. CMS says that this amount is far more than private insurers pay for the same drugs, although the agency adds it does not have sufficient data to determine exactly how much more.

However, the agency makes clear in the proposal that it feels a discount of even 20% less than AWP would not be a "reasonable" enough price. In one of four different approaches to implementing changes in the payment system proffered by the agency, a discount of between 10% and 20% would be applied to Medicare drug payments until "more reasonable payment updates" can be enacted. "The reported AWP is higher than what you'd find if you had access to [manufacturers'] financial books. The joke is that AWP stands for 'ain't what's paid,'" a CMS spokesperson says.

While the agency may lack information on private insurers' drug pricing rates, one reinsurance firm, Evergreen Re, claims to have a better idea of the amount that even private HMOs stand to save in the area of injectables and other specialty pharmaceutical costs. The company offers health plans a fully insured carve-out program that it says saved one insurer more than 27.7% annually on these medications. That insurer, which is "responsible for 85,000 lives," saved $640,150 in 2002 compared with the prior year by implementing the program, according to Evergreen Re.

Changes to the Medicare drug payment system also are called for in the version of Medicare reform legislation recently passed by the U.S. House of Representatives. But physicians have resisted changing the current payment system, since it allows them to purchase covered drugs at a lower price and earn substantial revenue from the markup (DCMR 7/11/03, p. 1). The CMS proposal "is consistent with the reform legislation," the CMS spokesperson contends, adding that CMS Administrator Tom "Scully has said we clearly prefer a legislative solution, but we'll move on our own if we have to."

However, "if Medicare manages to reduce reimbursements on chemotherapy agents and these types of drugs, every private insurer across the country is going to want to implement this too," says Chuck Newton, senior vice president at Evergreen Re.

"In the end it'll come down to the dynamics of supply and demand," Newton predicts. "It's easier to implement any type of reduced compensation for physicians where there's competition. It's always easier when there are more providers."

CMS acknowledges that additional changes would be necessary if Medicare lowers its reimbursement for drugs. As part of the proposed fix, the agency says it would "significantly" increase Medicare payments to physicians for administering cancer drugs.

The proposal was published in the Aug. 20 Federal Register, and a final rule is slated for release "later this year," according to the agency.

Call CMS's Peter Ashkenaz at (202) 690-6145 or Evergreen Re's Ana Bischoff at (772) 781-5280.