Testimony of: 
Robert A. Vito 
Regional Inspector General for Evaluation and Inspections 
Office of Inspector General, U.S. Department of Health and Human Services 
________________________________________________________________________ 
Good afternoon, Madam Chairman.  I am Robert Vito, Regional Inspector General for 
Evaluation and Inspections in Philadelphia at the U.S. Department of Health and Human 
Services Office of Inspector General (OIG).  I appreciate the opportunity to appear 
before you today to discuss OIGs most recent work regarding Medicare Part B 
reimbursement for prescription drugs and the average sales prices (ASP) used to set this 
reimbursement. 
 
In short, the new system appears to have lowered the previously inflated Part B 
reimbursement amounts and, in turn, reduced overall Medicare expenditures for 
prescription drugs.  Even so, OIGs work has identified a small number of instances in 
which the reported ASPs, and the resulting Medicare reimbursement amounts, may still 
be higher than certain other prices in the marketplace.  We have also identified an issue 
with the method CMS uses to calculate reimbursement amounts.   
 
FLAWS IN THE PREVIOUS REIMBURSEMENT SYSTEM 
  
Prior to 2004, Medicare Part B reimbursed for most covered drugs based on the lower of 
either the billed amount or 95 percent of the average wholesale price (AWP) as published 
in national pricing compendia.  The AWP is not defined by law or regulation, nor is it 
typically based on actual sales prices.  As numerous reports by OIG and the Government 
Accountability Office have illustrated, the AWP-based reimbursement amounts for most 
covered drugs were significantly higher than the prices that drug manufacturers, 
wholesalers, and other similar entities actually charged the physicians and suppliers who 
purchase these drugs.  Consequently, under this flawed system, the Medicare program 
and its beneficiaries were overpaying by hundreds of millions of dollars per year for 
prescription drugs.     
 
To help align reimbursement amounts with actual acquisition costs, Congress included in 
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) 
provisions to reform Part B drug reimbursement.  The MMA specified that 
reimbursement amounts for most outpatient prescription drugs furnished in 2004 be set at 
85 percent of the AWP, until a new methodology could be implemented on January 1, 
2005.  This new methodology based reimbursement amounts on manufacturer-reported 
ASPs rather than AWPs.  Unlike the AWP, an ASP is defined by statute and based on 
actual sales transactions.  The MMA defines an ASP as a manufacturers sales of a drug 
to all nonexempt purchasers in the United States in a calendar quarter divided by the total 
number of units of the drug sold by the manufacturer in that same quarter.  The ASP is 
net of any price concessions such as volume, prompt pay, and cash discounts; free goods 
contingent on purchase requirements; chargebacks; and rebates other than those paid 
 
House Committee on Ways & Means 
Subcommittee on Health:  Hearing July 13, 2006    Page 1  under the Medicaid drug rebate program.1,2  Under this new methodology, Medicare 
reimbursement for most Part B drugs is set at 106 percent of the drugs volume-weighted 
ASPs.3
 
IMPACT OF ASPS ON MEDICARE REIMBURSEMENT 
  
The Congressional Budget Office estimated that the changes enacted by the MMA would 
save Medicare almost $16 billion over 10 years by reducing excessive Medicare 
reimbursement amounts for Part B-covered drugs.  Recent data on Medicare 
reimbursement and expenditures provide evidence confirming that the ASP-based 
reimbursement system has substantially lowered reimbursement amounts for numerous 
drugs.  For about one-quarter of the drugs covered under Part B, Medicare reimbursement 
amounts have been reduced by at least 50 percent when compared to pre-MMA levels.  
For example, in 20034 (when reimbursement was set at 95 percent of the AWP), 
Medicare paid almost $120 for a months supply of the inhalation drug albuterol; today, 
Medicare pays $20.5  For the cancer drug Zoladex, Medicare paid almost $450 per dose 
in 2003; Medicare currently pays $196 per dose.   
 
The reductions in the reimbursement amounts for individual drugs have had a substantial 
effect on overall Part B expenditures.  Before the MMA was enacted, CMS data indicated 
that Medicare expenditures for Part B drugs had increased by at least 20 percent annually 
every year since 1994.  By 2004, Medicare was paying almost $11 billion for covered 
drugs, up from $4 billion just 6 years earlier.  Due to changes made by the MMA, this 
trend has reversed, with Medicare Part B spending close to $1 billion less on covered 
drugs in 2005 than in 2004.  This decrease occurred despite rising utilization for the 
drugs. 
 
OIG WORK INVOLVING MEDICARE PART B DRUGS 
 
Prior to the passage of the MMA, OIGs primary role in Medicare drug pricing involved 
identifying and reporting on flaws in the AWP-based system that left the program 
vulnerable to fraud, waste, and abuse.  In more than a dozen reports, we repeatedly found 
that Medicare paid too much for prescription drugs due to inflated AWPs.  In addition, 
working with our many law-enforcement partners, we assisted in investigations of pricing 
issues that resulted in significant civil and criminal settlements.   
 
                                                 
1 Section 1847A(c) of the Social Security Act, as added by the MMA. 
2 Pursuant to section 1847A(c)(2) of the Social Security Act, sales that are nominal in amount are exempted from the 
ASP calculation, as are sales excluded from the determination of best price for Medicaid drug rebate purposes. 
3 Although manufacturers submit an ASP and sales volume for each individual drug product they sell, CMS does not 
establish a reimbursement rate for each specific drug product.  CMS uses ASP data for individual drug products to 
calculate an overall ASP for the procedure code.  The ASP for an individual drug product is weighted by the amount of 
that drug sold during the quarter.  This means that the ASP for a drug with a high volume of sales should have greater 
influence on the reimbursement amount for a procedure code than an ASP for a drug with a low volume of sales.   
4 All data and methods described in the testimony refer to calendar years.
5 These figures relate only to reimbursement for the drugs themselves.  They do not include the dispensing fees paid 
to the supplier. 
 
House Committee on Ways & Means 
Subcommittee on Health:  Hearing July 13, 2006    Page 2  The MMA established two mandates for OIG that changed and expanded our role in 
monitoring Medicare drug pricing.  First, the MMA mandated that OIG conduct a study 
on the adequacy of ASP-based reimbursement amounts for certain cancer drugs.  Second, 
the MMA required OIG to perform an ongoing monitoring function that compares ASPs 
to other pricing points.  As discussed below, we have recently completed studies that 
address both of these mandates. 
 
OIG WORK REQUIRED BY THE MMA   
 
Adequacy of ASP-Based Reimbursement for Certain Cancer Drugs    
The MMA required that OIG conduct a study on the ability of physician practices of 
different sizes in the specialties of hematology, hematology/oncology, and medical 
oncology to obtain drugs and biologicals at 106 percent of the ASP.  This requirement 
responded to concerns that the new reimbursement amounts based on ASPs may be lower 
than the drug acquisition costs for physicians in these specialties.  OIG completed this 
study in September 2005.6     
 
We compared the average prices paid by physicians for drugs represented by 39 
procedure codes to Medicare reimbursement amounts and concluded that physician 
practices in the three specialties could generally purchase drugs for the treatment of 
cancer patients at less than the MMA-established reimbursement rates (i.e., 106 percent 
of the ASP).  Overall, the report found that the average prices paid for 35 of the 39 drugs 
under review were less than the Medicare reimbursement amounts.  Larger physician 
practices purchased drugs at greater discounts (i.e., at least 15 percent below Medicare 
reimbursement) for more drugs than smaller practices.  In addition, we also estimated that 
for 35 of the 39 codes, physician practices could purchase drugs for less than the 
reimbursement amounts during at least half of the months reviewed. 
 
OIG Comparisons of ASPs to Other Pricing Points 
The MMA also mandated that OIG conduct studies that determine whether the ASP 
exceeds certain other prices.  Specifically, the MMA required OIG to compare 
manufacturer-reported ASPs to both average manufacturer prices (AMP)7 and widely 
available market prices (WAMP).8  In certain situations where the ASP of a drug exceeds 
the AMP or the WAMP by a certain threshold, the MMA gives the Secretary the 
authority to reduce the reimbursement amount for the drug to either 103 percent of the 
AMP or 100 percent of the WAMP.  Currently, the threshold amount is 5 percent, 
although the Secretary has the authority to raise or lower this percentage in the future. 
 
                                                 
6 Adequacy of Medicare Part B Drug Reimbursement to Physician Practices for the Treatment of 
Cancer Patients, A-06-05-00024. 
7 AMPs, also reported by drug manufacturers to CMS, are used in the determination of rebates in the 
Medicaid program.  As defined in section 1927(k)(1) of the Social Security Act, the AMP is the average 
price paid to the manufacturer for the drug in the United States by wholesalers for drugs distributed to the 
retail pharmacy class of trade, minus customary prompt pay discounts. 
8 Section 1847A(d)(5) of the Social Security Act generally defines widely available market price to be 
the price that a prudent physician or supplier would pay for the drug, net of any routinely available price 
concessions.   
 
House Committee on Ways & Means 
Subcommittee on Health:  Hearing July 13, 2006    Page 3    Comparisons of ASPs to AMPs.  OIG completed the first of its studies comparing 
ASPs to AMPs and issued a report earlier this year.9   We found that in the third 
quarter of 2004, 51 of the 364 procedure codes (14 percent) included in this 
review had an ASP that exceeded the AMP by at least 5 percent.  If 
reimbursement amounts for these 51 codes had been lowered to 103 percent of the 
AMP, Medicare expenditures would have been reduced by an estimated $164 
million in 2005.   
 
In response, CMS stated that the information in the report was helpful in its 
continuing efforts to monitor payment adequacy under the ASP methodology.  
However, CMS noted that OIGs review was conducted using data submitted 
during the initial implementation phase of the ASP methodology.  Although CMS 
acknowledged the Secretarys authority to adjust ASP payment limits when 
certain conditions are met, it believed that other factors should be considered, 
including the timing and frequency of pricing comparisons, stabilization of ASP 
reporting, the effective date and duration of rate substitution, and the accuracy of 
ASP and AMP data. 
 
In June 2006, OIG released a second report comparing ASPs to AMPs.10  We 
found that for 46 of the 341 procedure codes (13 percent) included in this review, 
ASPs exceeded AMPs by at least 5 percent in the fourth quarter of 2005.11  
Twenty of these codes were identified in OIGs previous report as having ASPs 
that exceeded AMPs by at least 5 percent in the third quarter of 2004.  If 
reimbursement amounts for the 46 codes had been based on 103 percent of the 
AMP, we estimate that Medicare expenditures would have been reduced by $64 
million in one year.   
 
  Comparison of ASPs to WAMPs.  In addition to the comparisons of ASPs and 
AMPs, OIG released a report comparing ASPs to WAMPs in June 2006.12  For 
this analysis, we specifically selected a purposive sample of nine procedure codes 
for which we suspected that the ASP might exceed the WAMP by at least 5 
percent.  The purposive sample was based on the results of the September 2005 
OIG report on adequacy of reimbursement for cancer drugs.   
 
We found that 5 of the 9 procedure codes included in this review met or surpassed 
the 5-percent threshold defined by the MMA.  For these 5 codes, the ASPs 
exceeded the WAMPs by a range of 17 to 185 percent.  We estimate that 
Medicare expenditures would be reduced by as much as $67 million in 2006 if 
reimbursement amounts were lowered to the WAMPs for these 5 codes.  In 
                                                 
9 Monitoring Medicare Part B Drug Prices:  A Comparison of Average Sales Prices to Average 
Manufacturer Prices, OEI-03-04-00430, May 2006. 
10 Comparison of Fourth Quarter 2005 Average Sales Prices to Average Manufacturer Prices: Impact on 
Medicare Reimbursement for the Second Quarter of 2006, OEI-03-06-00370. 
11 Fourth-quarter 2005 ASPs are used to set second-quarter 2006 reimbursement amounts. 
12 A Comparison of Average Sales Prices to Widely Available Market Prices:  Fourth Quarter 2005, 
OEI-03-05-00340. 
 
House Committee on Ways & Means 
Subcommittee on Health:  Hearing July 13, 2006    Page 4  addition, the prices that physicians pay for these drugs may be even lower than 
the WAMPs that were calculated, as all of the responding distributors offered 
price discounts to physician customers that were not reflected in the calculation of 
WAMPs.13
 
ADDITIONAL OIG WORK INVOLVING ASP 
 
CMSs Calculation of ASPs 
For the most part, the Medicare Part B reimbursement amount for a drug is now based on 
a volume-weighted ASP that CMS derives from the underlying ASPs for individual drug 
products reported by manufacturers.  In the process of conducting the mandated price 
comparisons, we identified a problem with the method CMS uses to calculate volume-
weighted ASPs.  We alerted CMS to the problems with its calculation and issued a report 
on this subject in February 2006.14  We found that CMSs method for calculating a 
volume-weighted ASP is mathematically flawed because CMS does not consistently 
weight the number of units of a drug that were sold throughout its equation.  As a result, 
many procedure codes have a reimbursement amount that is higher or lower than the 
amount that would have been calculated if the weighting were applied consistently.   
 
According to OIGs analysis of prices published in the first quarter of 2005, the flawed 
calculation caused 46 percent of procedure codes to be reimbursed at amounts that were 
higher than they should have been, resulting in an estimated $115 million in excessive 
Medicare reimbursements in 2005.  For 13 percent of procedure codes, CMSs 
reimbursement amount was lower than it should have been, representing an estimated 
$5 million loss to providers in 2005.  The flawed calculation did not affect 
reimbursement amounts for the remaining 41 percent of procedure codes.  OIG 
recommended that CMS change its calculation of volume-weighted ASPs.  Although 
CMS stated that it may consider altering the ASP methodology in the future, the agency 
has yet to make any changes to its calculation of volume-weighted ASPs. 
 
Drug Manufacturers Calculations of ASPs  
OIG is currently auditing eight drug manufacturers to evaluate their methodologies for 
calculating ASPs for individual drug products.  Several more audits are planned in the 
near future.   
 
Adequacy of Reimbursement for Intravenous Immune Globulin 
This Subcommittee and the House Committee on Energy and Commerce Subcommittee 
on Health requested that OIG evaluate the current state of pricing and supply for one 
specific drug, intravenous immune globulin (IVIG).  Patient advocacy groups and 
physicians have repeatedly expressed concerns that, under the ASP-based reimbursement 
methodology, the cost for physicians to acquire IVIG exceeds Medicares reimbursement 
                                                 
13 The most common type of price discount offered to physician customers was a prompt pay discount.  
Three of the five companies that responded to our request for information offered this type of incentive, 
with percentage discounts ranging from 1 to 3 percent, depending on the time of payment.   
14 Calculation of Volume-Weighted Average Sales Price for Medicare Part B Prescription Drugs,                    
OEI-03-05-00310.   
 
House Committee on Ways & Means 
Subcommittee on Health:  Hearing July 13, 2006    Page 5  amount.  OIGs work in this area is ongoing.  A final report that addresses Medicare 
reimbursement for IVIG, provides perspectives on the supply and distribution of this 
unique product, and makes any recommendations that are warranted will be issued in the 
near future. 
 
Dispensing Fees for Inhalation Drugs 
In tandem with the reimbursement reductions resulting from the MMA, CMS raised the 
dispensing fee paid by Medicare in 2005 for inhalation drugs from $5 to an interim 
amount of $57 for a 30-day drug supply.  It did so based in large part on industry 
statements claiming that beneficiaries receive numerous, important services from their 
suppliers.  Last year, OIG issued a report that reviewed the nature and extent of 
dispensing services that Medicare beneficiaries received from inhalation drug suppliers in 
2003.  OIG found that the most common service beneficiaries received was contact for 
drug refills.  Few beneficiaries received more intensive services such as education, care 
plan revision, or a respiratory assessment, and 16 percent of beneficiaries received no 
services at all.  The most common way beneficiaries received services was by telephone; 
only 1 in 10 beneficiaries received a home visit. 
 
CONCLUSION 
 
Prior to the passage of the MMA and the implementation of the new ASP-based 
methodology, Medicare reimbursed for many prescription drugs at prices that did not 
reflect actual acquisition costs for physicians and suppliers.  Under the new system, there 
has been a substantial reduction in reimbursement amounts for many high-dollar 
products, causing the decade-long trend of increasing Part B expenditures for prescription 
drugs to reverse.  Building on OIGs existing work that identified weaknesses in the old 
system, we have responded to new mandates under the MMA by taking on a more 
extensive role in helping to ensure the appropriateness of Medicare payments under the 
new methodology.  As a result, OIG has already identified a few instances where the 
reported ASPs, and the resulting Medicare reimbursement amounts, may still be higher 
than certain other prices in the marketplace.  In addition, OIG has undertaken 
nonmandated audits and evaluations of issues that we have identified as important to 
ensuring the integrity of Medicare Part B drug payments, such as the methodology used 
by CMS to calculate Medicare reimbursement amounts, and the methodologies used by 
drug manufacturers to calculate ASPs.   
 
It appears that the new ASP methodology represents a marked improvement over the old 
AWP system.  However, like any new reimbursement system, we realize that its 
implementation must be continually monitored to ensure that payment levels are 
appropriate.  To this end, we are committed through our oversight work to provide CMS 
and Congress with timely information regarding ASPs and other drug reimbursement 
issues.  
 
This concludes my testimony, and I welcome your questions. 
 
House Committee on Ways & Means 
Subcommittee on Health:  Hearing July 13, 2006    Page 6