It will come as no surprise to anyone in the respiratory pharmacy business that reductions in Medicare payment rates for Part B-covered drugs are being proposed once again. According to the Centers for Medicare and Medicaid Services (CMS), Medicare spending for covered outpatient drugs increased from $3.3 billion in 1998 to $8.4 billion in 2002. Respiratory and infusion drugs paid under the DME benefit accounted for a large percentage of those payments, second only to cancer drugs. Payments for albuterol and ipratropium alone totaled nearly a billion dollars in 2002.

The rapid growth of Medicare spending for drugs, coupled with a steady stream of General Accounting Office (GAO) and Office of Inspector General (OIG) reports critical of Medicare’s current drug payment methodology, has pressured CMS to limit drug payments. It has responded with a proposed rule requesting comments on four different approaches to the “reformation” of Part B drug payment.

Option 1
CMS refers to its first proposal as “comparability.” If this proposal is implemented, it will prohibit a carrier from paying more to a Medicare supplier for a drug than it pays for the same drug for a patient insured under one of the carrier’s own private insurance plans. Each carrier will be required to provide information to CMS about drug payment rates under the carrier’s private plans. CMS will determine whether those rates have “comparability.” If a carrier’s private payment rate for a drug in a certain locality is found to be comparable, and is lower than the Medicare fee schedule amount, then the Medicare payment limit for that drug in that locality will be reduced to the private payment rate.

If implemented, this option will result in significant regional variation in drug payment rates because, among other factors, regional rates reflect the extent of the insurer’s negotiating leverage in a particular market. This leverage is determined in large part by the insurer’s local market penetration. Therefore, providers in an area where the DMERC’s affiliates are dominant in the private insurance market may get lower Medicare payments than those in areas where the carrier has a smaller market share.

Option 2
The second option proposed by CMS is to apply an average wholesale price (AWP) discount to all covered outpatient drugs. Initially, CMS would apply an across-the-board discount to the AWPs published in national compendia such as Red Book, Price Alert, and Medispan as of April 1, 2003. CMS suggests that the initial discount would probably be in the range of 10% to 20%. The rates would be adjusted annually based on the change in the consumer price index for medical care.

This option would be the easiest to implement and administer, but, from CMS’s point of view, it would also be the least effective at correcting the current system’s problems. If CMS chooses this option, it will almost certainly follow up with additional measures to further reduce payments for respiratory drugs.

Option 3
CMS refers to the third option as “market monitoring.” CMS would define AWP to be the widely available market price, determined initially from GAO and OIG studies and later from data obtained from wholesalers, group purchasing organizations, third-party payors, and other sources. The Medicare payment limit would be set at 100% of the widely available market price. These prices would be updated annually based on the consumer price index for medical care, unless data become available indicating changes in the widely available market price.

In cases where a drug’s widely available market price is more than 15% below the current Medicare payment limit, the price would not be reduced all at once, but be decreased by 15% per year until the widely available price was reached.

Option 4
The fourth option proposed by CMS is a combination of two payment systems. For oncology drugs and certain other drugs, CMS would establish a competitive bidding program. For other drugs, including drugs paid under the DME benefit, payment limits would be based on Average Sales Price (ASP) as reported by the drug manufacturer. For multi-source drugs, CMS suggests that the fee schedule amount would be between 101% and 112% of ASP. For single-source drugs, the fee schedule amount would be the lesser of 101%-112% of ASP or the Wholesale Acquisition Cost, meaning the manufacturer’s list price to wholesalers and direct purchasers.

In addition to these four payment options, CMS is also proposing significant changes in physician fee schedule payments as they relate to the administration of chemotherapy drugs and other physician-administered drugs. For oncologists, who account for a very large percentage (45% in 2002) of Medicare spending for outpatient drugs, these changes are more significant than the drug pricing changes. Oncologists’ professional groups are on record as agreeing that Medicare drug payments are too high, but they have insisted that reductions in drug costs must be accompanied by increases in payments to physicians for drug administration. CMS seems inclined to agree and will probably make some changes in physician payments for drug administration. The agency has no plans to make similar adjustments to payments to HME providers, however. CMS says that it is not aware of any studies indicating that Medicare payments for nebulizers and infusion pumps are inadequate, but that it would be interested in receiving “convincing and comprehensive data” about underpayment for infusion and inhalation equipment.

Although the physician fee schedule changes will not affect HME providers directly, they may have an impact on overall drug payment levels. When Congress directed CMS to revise the payment system for outpatient drugs, it also authorized changes in drug administration payments. However, it included a requirement that aggregate payments for drugs and administration may not exceed projected payments under the current payment system. Therefore, increases in drug administration payments to physicians could mean fewer dollars available for drug payments. The interests of physicians are therefore considerably different from those of HME providers and pharmacies, and that fact should make for an interesting dialogue over the proposed drug payment changes.

Timothy Webster, JD, is an attorney with the health care group of Brown & Fortunato PC, Amarillo, Tex. He can be reached at (806) 345-6347 or at twebster@bf-law.com.