Effective January 1, 2005, reimbursement for respiratory drugs administered via a nebulizer (inhalation drugs) will switch from 80% to 85% of average wholesale price (AWP) to average sales price (ASP) plus 6%. This change represents a significant cut in reimbursement, and many suppliers have argued that without an increase in the dispensing fee or payment of some other “service” fee to cover the overhead of supplying inhalation medications to Medicare patients, suppliers will no longer be able to afford to dispense these medications to Medicare beneficiaries. Fortunately, CMS agreed to a $57 monthly dispensing fee for inhalation therapies for 2005. CMS also set a fee of $80 for a 90-day supply of inhalation therapies. However, further cost-saving measures by CMS could ultimately result in another decline in reimbursement.

Prior to 2004, the Medicare allowable for inhalation drugs was 95% of the AWP. Due to a number of studies conducted by the Health and Human Services Office of Inspector General (OIG) and the Government Accountability Office (GAO), which found that suppliers’ actual acquisition cost of drugs was significantly lower than the published AWP, Congress revised the reimbursement schedule for inhalation drugs and most other drugs covered by Medicare Part B. Table 1 of the Interim Final Rule regarding Changes to Medicare Payment for Drugs and Physician Fee Schedule Payments for Calendar Year 2004, published in the January 7, 2004, Federal Register (69 FR 1084), showed average acquisition costs (averaging OIG and GAO results) for the following inhalation drugs:

• Ipratropium bromide    34% of AWP
• Albuterol sulfate    17% of AWP
• Cromolyn sodium    67% of AWP
• Acetylcysteine    46% of AWP

The statutory changes in Sections 303(b) and 305 of the Medicare Modernization Act (MMA) of 2003 reduced the Medicare allowable for most drugs furnished in 2004 to 85% of the AWP. For certain drugs that were the subject of GAO and OIG studies indicating average acquisition costs less than 85% of AWP, the Medicare allowable was further reduced to 80% of AWP.

In an effort to move away from reimbursement based on AWP, the statutory changes further required that for dates of service on and after January 1, 2005, the Medicare allowable will be set at 106% of the ASP. The statute explicitly defines how ASP will be calculated, and manufacturers are required to report the ASP (by National Drug Code [NDC]) quarterly, beginning with the first quarter of 2004.

The statute defines the manufacturer’s ASP for an NDC associated with a drug to be the manufacturer’s sales to all purchasers in the United States (excluding units associated with certain exempt sales) for the NDC for a quarter divided by the total number of units of that NDC sold by the manufacturer in that quarter (excluding units associated with exempted sales). In calculating the manufacturer’s ASP, the price reported must include any volume discounts, prompt pay discounts, cash discounts, and free goods that are contingent on any purchase requirement, chargebacks, and rebates (excluding Medicaid rebates).

ASP for Multi-Source Drugs
To establish the correct Medicare allowable, the statute provides that for multi-source drugs, the ASP will be a volume-weighted average of the ASP reported by the manufacturers. The ASP for a particular HCPCS code will be determined by multiplying the manufacturer’s ASP times the total number of units sold for each NDC assigned to that HCPCS code, adding these products together, and dividing the sum by the total number of units sold. For example, assume that there are three manufacturers (and five NDCs) for Drug X. Manufacturer one sold 30,000 units of NDC 0001 with an ASP of $2, and 40,000 units of NDC 0002 with an ASP of $1.80. Manufacturer two sold 70,000 units of NDC 0003 with an ASP of $1.50, Manufacturer three sold 10,000 units of NDC 0004 with an ASP of $3.00, and 12,000 units of NDC 0005 with an ASP of $2.60. The calculation of the ASP for Drug X would be as follows:

• 30,000 units 0001 x $2.00 = $ 60,000
• 40,000 units 0002 x $1.80 = $ 72,000
• 70,000 units 0003 x $1.50 = $105,000
• 10,000 units 0004 x $3.00 = $ 30,000
• 12,000 units 0005 x $2.60 = $ 31,200
• 162,000 units                        $298,200

• ASP for Drug X = $298,200 divided by 16,200 = $1.84
• Allowable for Drug X = 106% of ASP = $1.95

ASP for Single-Source Drugs
The allowable for single-source drugs will be the lesser of: 1) 106% of the manufacturer’s average ASP as calculated above for all NDCs for that drug, or (2) 106% of the wholesale acquisition cost of all NDCs for that drug. Wholesale acquisition cost is defined as the manufacturer’s list price for the drug to wholesalers or direct purchasers in the United States, not including prompt pay or other discounts, rebates, or reductions in price for the most recent month for which information is available (as reported in wholesale price guides or other publications of drug or biological pricing data).

Projected ASPs
In the proposed rule published in the Federal Register on August 5, 2004, CMS included a table of estimated 2005 allowables for a limited number of drugs based on manufacturers’ ASP reports for the first quarter of 2004. The actual 2005 allowables will be based on third quarter 2004 ASP information. The projected allowables for the inhalation drugs included in the table were as follows: the 2004 allowable for albuterol sulfate was $0.39 and the estimated 2005 allowable is $0.04; the 2004 allowable for ipratropium bromide was $2.82 and the estimated 2005 allowable is $0.30; the 2004 allowable for budesonide was $4.04 and the estimated 2005 allowable is $3.91. As you can see, the reduction in reimbursement for some drugs will be drastic.

Additional Cost-Saving Measure
In the CMS proposed rule published August 5, 2004, CMS announced that it is contemplating allowing a 90-day prescription of inhalation drugs be dispensed, rather than the current 30-day limitation—stating that “we believe that there will be significant savings in shipping for a 90-day prescription rather than a monthly prescription.” CMS notes that reasonableness would govern whether a 30-day or 90-day amount is dispensed, recognizing that initial orders would likely be for 1 month, with refills for 90-day periods.

The recent GAO report on dispensing fees found that providing a 90-day supply could reduce suppliers’ costs. The GAO determined that the cost for dispensing a 90-day supply was less than twice the cost for dispensing a 30-day supply. To calculate dispensing costs for a 90-day supply, the GAO included (1) a one-time cost for pharmacy, packaging and shipping, delivery, medication compliance and refill phone calls, other patient care, and billing and collection costs, and (2) triple the reported monthly costs for all other administrative and overhead costs. The final rule published by CMS used GAO methodology and adopted a $57 monthly dispensing fee and an $80 dispensing fee for a 90-day supply of inhalation drugs. Currently, CMS will allow the pharmacy to exercise reasonableness in determining whether to dispense a 30- or 90-day supply of inhalation therapies. Obviously, anticipated reimbursement will decline if CMS mandates that refills of inhalation drugs be dispensed as a 90-day supply.

Lisa K. Smith, JD, is an attorney with the Health Care Group of Brown & Fortunato PC, Amarillo, Tex. Smith represents DME companies, pharmacies, and other health care providers throughout the United States and Puerto Rico. She can be reached at (830) 896-0018 or via email: lsmith@bf-law.com