The Health Care Financing Administration (HCFA) has proposed a drastic cut in reimbursement for many drugs covered by the Medicare program. The proposed cuts, if adopted by the Durable Medical Equipment Regional Carriers (DMERCs), will become effective October 1, 2000.

For several years, Congress has been critical of the current reimbursement methodology of average wholesale price (AWP), believing that AWP is not an accurate measure of the actual costs providers are paying to drug manufacturers and wholesalers.

The US Department of Justice (DOJ) has been investigating drug manufacturers, as well as First DataBank, the company that publishes the list of AWP amounts for Medicaid in a compilation known as the Blue Book. The DOJ recently stepped up its investigation and put pressure on First DataBank to publish a more accurate list of AWP amounts for approximately 50 drugs. The DOJ and the state Medicaid Fraud Control Units compiled data from catalogs of drug wholesalers on the prices charged for these drugs and provided this information to First DataBank.

Although the state Medicaid programs cover a large number of drugs, the approximately 50 drugs targeted by the DOJ for reimbursement cuts fall into three classes: respiratory medications, infusion drugs, and injectable drugs that cannot be self-administered. These three classes of drugs are also the classes of drugs covered by the Medicare program.

First DataBank published its list of new AWP amounts effective May 1, 2000. If the DMERCs adopt the new AWPs published by First DataBank, the AWP for albuterol 0.083 unit dose will be reduced from $1.21 to $0.37 effective October 1, 2000. Since the current Medicare reimbursement is 95% of AWP, the allowable will be $0.35. Since Medicare pays 80% of the allowable (the beneficiary is responsible for the 20% co-payment), Medicare will reimburse the provider $0.28 per unit dose.

Prior to this, the state Medicaid Fraud Control Unit Directors wrote a letter to all of the state Medicaid Pharmacy Directors explaining that First DataBank would base AWP on market prices rather than the prices reported by drug manufacturers. This letter also explained that reductions in reimbursement would result from the change in calculation of AWP. To date, approximately 25 states have adopted the new reimbursement rates published by First DataBank. However, two states (Kentucky and Missouri) that originally adopted the new reimbursement rates have rescinded their decision and have now gone back to using the old reimbursement rates.

The House Commerce Committee, chaired by Rep Thomas Bliley (R-Va), has urged HCFA to take steps to reduce reimbursement for Medicare-covered drugs. On May 5, 2000, Bliley wrote a letter to Donna Shalala, Secretary of the Department of Health and Human Services, that requested specific information on the steps HCFA has taken in the past, the steps HCFA is presently taking, and the steps HCFA intends to take in the future to address the high reimbursement rates it is paying for Medicare-covered drugs.

On May 31, 2000, Shalala responded in writing, giving the history of Medicare drug reimbursement and the efforts HCFA has taken to reduce reimbursements for Medicare-covered drugs. She also states that HCFA is “moving administratively to take advantage of the newly available, more accurate data on average wholesale prices developed for Medicaid as a result of Department of Justice investigations.”

Sometime this summer, HCFA will send the newly calculated AWP data from First DataBank to the DMERCs and will advise the DMERCs to use this data, when determining their next quarterly update of Medicare drug allowances, which will become effective October 1, 2000. The DMERCs are not required to use this new AWP data and it is an open question as to whether they will do so.

Also on May 31, 2000, Nancy-Ann Min DeParle, the HCFA Administrator, sent a letter to Rep Pete Stark (D-Calif), the ranking member of the House Ways and Means Health Subcommittee. This letter is virtually identical to Shalala’s letter to Bliley.

In addition to his May 5 letter to Shalala, Bliley sent several letters to manufacturers of drugs covered by Medicare. Of particular interest to the respiratory medication industry, two of the letters were sent to manufacturers of albuterol. The letters allege that manufacturers may have artificially inflated the prices of their drugs when reporting the AWP to the publishers of the Blue Book (Medicaid) and the Red Book (Medicare), so that current AWP is grossly inaccurate. Bliley asked the manufacturers to provide to the Commerce Committee by May 26, 2000 (i) pricing data, (ii) advertisements listing the price of the drug for suppliers and wholesalers, and (iii) other information regarding how drug pricing is determined. The manufacturers’ responses, if any, are not yet available.

On June 21, 2000, the Office of Inspector General (OIG) released its latest report on Medicare reimbursement of albuterol. The report includes a memorandum from the HCFA Administrator to the Inspector General containing HCFA’s comments on the report. In this memorandum, HCFA states that it believes that “the Administration’s original approach—to base Medicare’s payment for drugs on the physician’s actual acquisition costs—is probably the most effective means to ensure that Medicare is paying fairly.”

Bliley and the House Commerce Committee are dissatisfied with HCFA’s stopgap plan of simply using new AWP data and are in favor of a more permanent solution. Bliley appears to be in favor of legislation to change Medicare drug reimbursement methodology away from AWP to a cost-based reimbursement. Based on comments contained in HCFA’s response to the OIG report, it appears that HCFA would also support such a change.

On June 21, 2000, the House Ways and Means Committee approved a Medicare prescription drug bill, which included an amendment requiring the General Accounting Office (GAO) to conduct a study of the ramifications of changing the current payment methodology for drugs from AWP to an average acquisition cost reimbursement methodology. The GAO would also be required to determine whether an additional payment would be necessary to cover handling, storage, and administration costs if an average acquisition cost reimbursement methodology is implemented.

Currently, large mail-order respiratory pharmacies are lobbying Congress for legislation addressing reimbursements. It is imperative that the mail-order respiratory industry highlight the following:

1. Mail-order pharmacies have many administrative costs associated with the delivery of pharmaceuticals to Medicare beneficiaries. Most of these administrative costs are associated with duties that must be performed to comply with current Medicare regulations, such as shipping and handling fees, obtaining the proper medical documentation, and performing follow-up services such as calling the beneficiaries on a monthly basis and sending respiratory therapists to the beneficiaries’ homes to ensure that they are using the medications and medical equipment properly and to rectify any problems.

2. If HCFA’s current proposal is implemented, the reimbursement cuts will be so drastic that the mail-order pharmacy business will be eliminated. The result will be that Medicare beneficiaries will be required to have their prescriptions filled by retail pharmacies. Most retail pharmacies do not take Medicare assignment because of the limited number of drugs covered by Medicare. Therefore, beneficiaries will be required to pay the entire cost of the drugs up front and attempt to secure Medicare reimbursement on their own, likely resulting in noncompliance by many beneficiaries.

Also, many beneficiaries on fixed incomes will be unable to afford to purchase the unit-dose respiratory medications. As a result, they will be relegated to purchasing the less expensive bulk concentrate form of respiratory medications, if it is available, and then mixing it with saline for each treatment. This will result in (i) misdoses, (ii) contamination, and (iii) failure by the beneficiary to take the necessary number of treatments each day. The end result will be that many beneficiaries will end up in the hospital, either in the emergency department or as inpatients, which will cost the Medicare program much more through Part A hospital charges than will be saved through cutting Part B drug reimbursements.

3. There is a large service component associated with delivering Medicare-covered drugs to beneficiaries. HCFA and the House Commerce and Ways and Means Committees must realize that mail-order pharmacies have many more costs associated with delivering respiratory medications to Medicare beneficiaries than do physicians who administer drugs (eg, injectables) in their offices and who can also charge Medicare for an office visit.

The current Congressional session will end around the first of October; any legislative changes must occur by October 1, 2000.

Jeffrey S. Baird, JD, is chairman of the Health Care Group of the Amarillo, Tex-based law firm of Brown & Fortunato. Baird can be reached at (806) 345-6320 or jbaird@bf-law.com.