Report to Congressional Committees

United States General Accounting Office

GAO

September 2001 MEDICARE

Payments for Covered

Outpatient Drugs

Exceed Providers’

Cost

GAO-01-1118
Page i GAO-01-1118 Medicare Drug Payments

Letter 1

Results in Brief 4

Background 6

Physicians Can Obtain Drugs Covered Under Part B for

Significantly Less Than Medicare Payments 11

Medicare Drug Payments Also Substantially Higher Than Costs for

Pharmacy Supplier-Billed Drugs 16

Private Payers Negotiate Prices, Other Public Payers Rely on

Market-Based Benchmarks to Establish Payments for Drugs 21

Conclusions 24

Recommendations for Executive Action 26

Agency Comments 26

Appendix I Scope and Methodology 28

Appendix II Comments From the Centers for Medicare and

Medicaid Services 30

Tables

Table 1: Medicare Part B Drugs by Share of Total Medicare Drug

Spending, 1999 7

Table 2: Medicare Part B Drugs by Share of Total Medicare Units,

1999 8

Table 3: Medicare Part B Drug Spending and Volume by Place of

Service, 1999 9

Table 4: Widely Available Discounts From AWP for MedicareCovered Drugs Billed Primarily by Physicians, 2001 12

Table 5: Discounts From AWP Obtained by Physicians Who Billed

Medicare for a Low Volume of Selected Drugs, Compared

to Widely Available Discounts, 2001 14

Table 6: Discounts From AWP for Medicare-Covered Drugs Billed

Primarily by DME Pharmacy Suppliers, 2001 18

Contents
Page ii GAO-01-1118 Medicare Drug Payments

Abbreviation

AMP Average Manufacturer Price

AWP Average Wholesale Price

BBRA Balanced Budget Refinements Act of 1999

BESS Part B Extract and Summary System

BIPA Medicare, Medicaid, and SCHIP Benefits Improvement and

Protection Act of 2000

CMS Centers for Medicare and Medicaid Services

DME Durable Medical Equipment

DOD Department of Defense

DOJ Department of Justice

ESRD End-Stage Renal Disease

FSS Federal Supply Schedule

GPO Group Purchasing Organization

HCFA Health Care Financing Administration

HCPCS HCFA Common Procedure Coding System

HHS Health and Human Services

NDC National Drug Code

OBRA Omnibus Budget Reconciliation Act

OIG Office of the Inspector General

PBM Pharmacy Benefits Manager

PHS Public Health Service

VA Department of Veterans’ Affairs

WAC Wholesale Acquisition Cost
Page 1 GAO-01-1118 Medicare Drug Payments

September 21, 2001

Congressional Committees

While Medicare does not have a comprehensive outpatient drug benefit,

certain drugs and biologicals1

 are covered under part B of the program.2 In

general, drugs are covered if they cannot be self-administered and are

related to a physician’s services, such as cancer chemotherapy, or are

provided in conjunction with covered durable medical equipment (DME),

such as inhalation drugs used with a nebulizer.3

 In addition, Medicare

covers selected immunizations and certain drugs that can be selfadministered, such as blood clotting factors and some oral drugs used in

association with cancer treatment and immunosuppressive therapy.

Medicare spending for these drugs totaled almost $4 billion in 1999.4

Recent reports by the Department of Health and Human Services’ (HHS)

Office of Inspector General (OIG), the Department of Justice (DOJ), and

the House Committee on Commerce found that in some cases Medicare’s

payments for part B-covered drugs were significantly higher than

physicians’ and other providers’ actual costs of acquiring these products.

They found that the average wholesale prices (AWP)–the “list prices” or

“sticker prices” set by drug manufacturers and used by Medicare to

calculate payment rates–were not representative of the actual costs of

these drugs to providers. The Health Care Financing Administration

(HCFA)5

 initiated steps to reduce Medicare payment for some drugs. The

agency issued a program memorandum in September 2000 that authorized

 1

For the remainder of this report, we will refer to part B-covered drugs and biological

products, such as clotting factors used to treat hemophilia, as “drugs.”

2

Medicare part B or Supplementary Medical Insurance provides coverage for certain

physician, outpatient hospital, laboratory, and other services to beneficiaries who pay

monthly premiums.

3

A nebulizer is a device driven by a compressed air machine. It allows the patient to take

medicine in the form of a mist (wet aerosol). It consists of a cup, a mouthpiece attached to

a T-shaped part or a mask, and thin, plastic tubing to connect to the compressed air

machine.

4

The Medicare program payment is 80 percent of the total payment, or $3.2 billion;

beneficiaries are responsible for the remaining 20 percent.

5

HCFA was renamed the Centers for Medicare and Medicaid Services in June 2001; we

continue to refer to the agency as HCFA when discussing actions it took under that name.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-01-1118 Medicare Drug Payments

the use of prices obtained in DOJ’s investigations of providers’ drug

acquisition costs to set Medicare payment rates for a subset of covered

drugs, which would have lowered Medicare payment for these products.

However, HCFA retracted the original program memorandum in

November 2000.

While physicians—particularly oncologists—and other health care

providers such as pharmacy suppliers acknowledge that they can purchase

drugs for prices lower than Medicare payments, they contend that they

need drug payments in excess of their actual costs to compensate for

inadequate or nonexistent Medicare payments for administering the drugs.

Specifically, oncologists argue that Medicare’s physician payment system

does not adequately reimburse them for their costs of administering

chemotherapy. Further, they suggest that some providers, particularly

those who purchase drugs in low volume, may not have access to low drug

prices, because the lowest prices reflect volume discounts and other

factors. They assert that beneficiary access could be impaired if Medicare

drug payments are reduced.

In a forthcoming report mandated by the Balanced Budget Refinements

Act of 1999 (BBRA), 6

 we examine the adequacy of Medicare’s physician

payments to oncologists.7

 We conclude that the basic methodology HCFA

used to establish the fees is sound. We found that payments to oncologists

are 8 percent higher than they would have been if the prior charge-based

method had been maintained. We also determined that oncologists’

payments relative to their estimated practice expenses are close to the

average for all specialties. However, we identify modifications to the basic

method that substantially lowered payments for certain services, including

most chemotherapy administration. In our report, we make

recommendations to improve Medicare’s physician payment system.

The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection

Act of 2000 (BIPA),8

 required that we determine whether Medicare is

reimbursing physicians and other providers adequately for covered drugs

and related services. It also stipulated that the Medicare program make no

 6

P.L. 106-113, Appendix F, Sec. 213(a), 113 Stat. 1150, 1501A-350.

7

See our forthcoming report Medicare Physician Fee Schedule: Practice Expense Payments

to Oncologists Indicate Need for Overall Refinements (GAO-02-53, October 2001).

8

P.L. 106-554, Appendix F, Sec. 429, 114 Stat. 2763, 2763A-522.
Page 3 GAO-01-1118 Medicare Drug Payments

reductions to drug payments until we complete our work. As agreed with

the committees of jurisdiction, our analysis addressed the following

questions: (1) What are physicians’ costs of providing drugs relative to

applicable Medicare payments? (2) What are other providers’ costs of

providing drugs relative to applicable Medicare payments? (3) What are

the methods that public and private payers use to establish payments for

providing these drugs? This legislation also directed that we take into

account the results of the study of oncology physician payments mandated

by BBRA in evaluating drug acquisition costs relative to their Medicare

payments.

To answer these questions, we interviewed officials at the Centers for

Medicare and Medicaid Services (CMS), the Department of Veterans

Affairs (VA), HHS OIG, and DOJ. We also interviewed and solicited

information about drug acquisition costs and costs related to drug

administration from professional associations representing physicians and

nonphysician providers, such as DME or pharmacy suppliers. We used

pricing data from pharmaceutical wholesalers, group purchasing

organizations (GPO), specialty pharmacies, DME pharmacy suppliers, and

physicians, including several physicians we identified as billing for low

volumes of Medicare-covered drugs. We attempted to obtain pricing

information directly from additional major wholesalers and group

purchasing organizations, but these entities did not provide the

information we requested by the time we finalized this report. We

interviewed representatives from large managed care organizations

regarding the methods they used to purchase or pay for pharmaceuticals,

as well as the purchase prices they were able to obtain. We also

interviewed staff members at the companies that publish the major price

reporting compendia on average wholesale prices for drugs.

We conducted quantitative analyses using data from HCFA and other

sources. We used 1999 drug claims data from HCFA to determine which

covered drugs accounted for the most spending and volume. For detailed

analysis, we selected the 20 drugs with the highest total Medicare

expenditures and the 20 drugs with the highest volume; the results of our

analysis indicated that 35 different drugs accounted for 82 percent of total

Medicare drug spending and 95 percent of total drug units.9

 We obtained

prices for 31 of the 35 individual drugs. We did our work in accordance

with generally accepted government auditing standards from January

 9

Volume for a drug is measured in terms of the number of Medicare-allowed services.
Page 4 GAO-01-1118 Medicare Drug Payments

through August 2001. A detailed discussion of our scope and methodology

is in appendix I.

Physicians are able to obtain Medicare-covered drugs at prices

significantly below current Medicare payments, which are set at 95

percent of AWP. Wholesalers’ and GPOs’ prices that would be generally

available to physicians were considerably less than AWPs used to establish

the Medicare payment for these drugs. The difference between these

prices and AWP for physician-administered drugs in our sample varied by

drug. For most physician-administered drugs, the average discount from

AWP ranged from 13 percent to 34 percent; two physician-administered

drugs had discounts of 65 percent and 86 percent. Our survey of

physicians who billed Medicare for low volumes of drugs used in cancer

treatment indicated they received discounts that were as large as or larger

than widely available discounts for 11 of the 16 products for which they

were able to provide price information. Physicians are reimbursed under

the physician fee schedule for the costs of administering chemotherapy

drugs, which account for most of Medicare’s drug spending. HCFA

deviated from the basic methodology for determining practice expense

payments for certain services, including chemotherapy administration by

nonphysicians, which reduced Medicare’s practice expense payment for

most chemotherapy administration services. However, even with this

alternative methodology, oncologists’ average practice expense payments

in 2001 are 8 percent higher than what they would have been had chargebased payments continued.

Other suppliers are also able to purchase drugs at prices that are

considerably less than the AWP used to establish the applicable Medicare

payment. Pharmacy suppliers were the predominant billers for 10 of the

high-expenditure and high-volume Medicare-covered drugs we analyzed.

In general, these suppliers provide two types of drugs—drugs

administered through DME and covered oral drugs, such as certain

immunosuppressives. Widely available prices in 2001 reflected average

discounts of 78 percent from the AWP for ipratropium bromide and 85

percent for albuterol, two DME-delivered inhalation therapy drugs that

account for most of Medicare payments to pharmacy suppliers. Medicare

pays a monthly fee to pharmacy suppliers for dispensing these and certain

other respiratory therapy drugs. Also, suppliers generally receive a

payment from Medicare for DME and supplies. Although there has been no

recent analysis of the adequacy of Medicare’s DME payments, there are

indications that the payments may be above current market rates.

Wholesaler and GPO prices for two of the high-volume oral drugs averaged

Results in Brief
Page 5 GAO-01-1118 Medicare Drug Payments

14 percent and 77 percent below AWP. Medicare makes no separate

payments for costs associated with supplying or administering oral drugs.

Private and other public payers use differing payment methods for drugs

and their administration. Private health plans use their drug-purchase and

patient volume to negotiate favorable prices for drugs and the physician

and supplier services related to supplying or delivering the drugs. Other

public payers also use their purchasing volume along with information

about actual transaction prices from private payers to lower their drug

payments. VA and certain other government agencies use the Federal

Supply Schedule (FSS) prices for drugs. 10 State Medicaid programs

reimburse for drugs using formulas based on standard price lists but

subsequently receive rebates from the manufacturers calculated using the

average manufacturer price (AMP), to substantially lower their net prices

for drugs.11 Both the FSS and the AMP are derived from actual market

transaction data reported by drug manufacturers. In limited instances, VA

also uses competitive bidding approaches to obtain lower drug prices, an

approach that Medicare has used in limited demonstration projects.

We recommend that the Administrator of CMS take steps to begin

reimbursing providers for part B-covered drugs and related services at

levels reflecting providers’ acquisition costs using information about

actual market transaction prices. We recommend that the CMS

Administrator evaluate expanding competitive bidding approaches to

setting payment levels. We also recommend that the CMS Administrator

closely monitor beneficiary access to covered drugs in light of any changes

to reimbursement.

 10FSS prices are available to any federal agency that directly procures pharmaceuticals,

including VA medical centers, the Department of Defense (DOD), the Bureau of Prisons,

the Public Health Service (PHS), and other designated entities such as the District of

Columbia, U.S. territorial governments, the Indian Health Service, and some state veterans

homes. Manufacturers must also sell brand-name drugs listed on the FSS to four federal

drug purchasers—VA, DOD, PHS, and the Coast Guard—at a price at least 24 percent lower

than the nonfederal average manufacturer price, a ceiling price that is lower than the FSS

price for many drugs.

11State Medicaid programs generally pay pharmacies a dispensing fee for each prescription

and physicians a fee for administering the drugs.
Page 6 GAO-01-1118 Medicare Drug Payments

Although Medicare reimburses providers for roughly 450 unique drugs

under part B, a small number of products accounted for the majority of

Medicare spending and volume.12 In 1999, the 20 highest expenditure drugs

accounted for 75 percent of total Medicare drug spending and the 20

highest volume drugs accounted for 93 percent of total units.13 (See tables

1 and 2.) Combined, these two groups of drugs yielded 35 unique drugs,

accounting for 82 percent of total drug spending and 95 percent of total

drug units.14

 12Each covered drug is identified by an alphanumeric code under the HCFA Common

Procedure Coding System (HCPCS), which specifies the drug name, method of

administration, and dosage.

13Our analysis of drug acquisition costs excluded four high-volume and high-expenditure

drugs. Specifically, we excluded a code for “not otherwise classified antineoplastic drugs,”

two antihemophilia clotting factors, and a radiopharmaceutical. We could not collect

acquisition cost data on “not otherwise classified antineoplastic drugs” because it does not

refer to a specific product. The clotting factors, which are typically billed by non-physician

suppliers, were not included for two reasons. First, we were unable to obtain adequate

pricing information for these products, a problem also encountered by HHS OIG in its prior

work on drug reimbursement. Second, these products differ significantly from other

pharmaceutical products discussed in this report. Their source material is collected from

human donors; their manufacturing, storage, and distribution processes differ from other

products; and they are administered to a very small patient population. The excluded

radiopharmaceutical, Technetium TC Sestamibi, is used by cardiologists in certain

diagnostic imaging procedures. Since Medicare only began requiring data on AWPs to

reimburse for radiopharmaceutical products in 2001, these data are currently being

developed.

14Units are defined as the number of claims for each drug times the number of units

specified by its HCPCS label.

Background
Page 7 GAO-01-1118 Medicare Drug Payments

Table 1: Medicare Part B Drugs by Share of Total Medicare Drug Spending, 1999

Drug name

Share of total Medicare drug

spending (percentage)

Leuprolide acetate (for depot suspension) 15.1

Epoetin alpha for non-ESRD use 9.5

Goserelin acetate implant 7.9

Ipratropium bromide, unit dose form 6.4

Albuterol, unit dose form 6.3

Paclitaxel 6.2

Carboplatin 2.9

Pamidronate disodium 2.8

Irinotecan 2.0

Gemcitabine HCl 1.9

Rituximab 1.8

Filgrastim (G-CSF) 480 mcg 1.7

Leucovorin calcium 1.6

Docetaxel 1.5

Factor VIII (antihemophilic factor, recombinant) 1.3

Technetium TC Sestamibi 1.2

Hylan G-F 20 1.2

Filgrastim (G-CSF) 300 mcg 1.2

Not otherwise classified antineoplastic drugs 1.2

Dolasetron mesylate, injection 1.2

Subtotal, 20 highest-expenditure drugs and

biologicals

74.9

All other Medicare-covered drugs and biologicals 25.1

Total 100.0

Source: GAO analysis of data from the Medicare Part B Extract and Summary System (BESS).
Page 8 GAO-01-1118 Medicare Drug Payments

Table 2: Medicare Part B Drugs by Share of Total Medicare Units, 1999

Drug name Share of total units (percentage)

Albuterol, unit dose form 65.8

Ipratropium bromide, unit dose form 8.2

Epoetin alpha for non-ESRD use 3.4

Dolasetron mesylate, injection 3.3

Albuterol, concentrated form 2.6

Mycophenolate mofetil, oral 1.7

Cromolyn sodium, unit dose form 1.2

Heparin sodium 1.0

Cyclosporine, oral 0.9

Ondansetron HCl, injection 0.8

Tacrolimus, oral 0.7

Prednisone, oral 0.6

Acetylcysteine, unit dose form 0.5

Botulinum toxin, type A 0.5

Imiglucerase 0.4

Factor VIII (antihemophilic factor, human) 0.4

Dexamethasone sodium phosphate 0.4

Leucovorin calcium 0.3

Saline solution, sterile 0.3

Granisetron HCl, injection 0.3

Subtotal, 20 highest-volume drugs and biologicals 93.3

All other Medicare-covered drugs and biologicals 6.7

Total 100.0

Note: Units are defined as the number of Medicare-allowed services. Each drug has a standard unit

dosage specified by the HCPCS code.

Source: GAO analysis of data from BESS.

The drugs provided by physicians account for the largest share of

Medicare expenditures for drugs under part B, while billing volume is

dominated by the drugs provided by pharmacy suppliers. Drugs provided

in the physician office setting accounted for over 75 percent of Medicare

spending for drugs in 1999. (See table 3.) Three specialties,

hematology/oncology, medical oncology, and urology, bill Medicare

primarily for drugs used in the treatment of cancer and represented 80

percent of total Medicare payments to physicians for drugs. By contrast,

pharmacy suppliers accounted for over 80 percent of Medicare drug billing

volume and less than 20 percent of corresponding payments. Two

inhalation therapy drugs dominated these home-administered products,

accounting for 88 percent of Medicare volume in the home setting. When

the drug is delivered in a physician’s office, Medicare makes a separate
Page 9 GAO-01-1118 Medicare Drug Payments

additional payment through the physician fee schedule for the physician or

his or her staff administering a drug. When the drug is administered via

DME in the home, Medicare pays separately for DME, the drug, and

associated supplies as well as a monthly dispensing fee for providing

nebulizer drugs.

Table 3: Medicare Part B Drug Spending and Volume by Place of Service, 1999

Place of service Total spending

Share of total

spending

(percentage) Total units

Share of total

units

(percentage)

Physician office $3,021,662,605 76.2 142,247,564 14.9

Home 727,559,447 18.3 759,461,862 79.7

Othera 218,297,305 5.5 51,770,956 5.4

Total $3,967,519,357 100.0 953,480,382 100.0

a

”Other” includes, for example, immunization centers, end-stage renal disease treatment facilities, and

independent laboratories.

Note: Medicare’s payment is 80 percent of the allowed amount and the beneficiaries’ share is 20

percent, after they have fulfilled their annual deductible requirements. Units are defined as the

number of Medicare-allowed services, as specified by the HCPCS code.

Source: GAO analysis of data from BESS.

Medicare bases its reimbursement to physicians and other providers of

drugs on AWP, which is often described as a “list price,” “sticker price,” or

“suggested retail price,” reflecting the fact that AWP is not necessarily the

price paid by a purchaser or a consistently low or “wholesale” price. AWPs

are published for each drug identified by a National Drug Code (NDC).15

Manufacturers periodically report AWPs for NDCs to publishers of drug

pricing data, such as the Medical Economics Company, Inc., which

publishes the Red Book, or First Data Bank, which compiles the National

Drug Data File. Publishers of AWPs and other drug prices stated that they

list the prices as reported to them by the manufacturers. There is no

required frequency for manufacturers to report AWPs, but publishers said

they attempt to update AWPs at least annually. Medicare carriers, the

contractors responsible for paying part B claims, use published AWPs to

 15NDCs are the universal product identifiers for drugs for human use; the Food and Drug

Administration assigns the first part of the NDC, which identifies the firm that

manufactures, repackages, or distributes a drug. Each NDC is specific to a chemical entity,

dosage form, manufacturer, strength, and package size. For example, a drug made by one

manufacturer, in one form and strength, but in three package sizes, would have three

NDCs.

Medicare Payments for

Drugs Are Based on

Published AWPs
Page 10 GAO-01-1118 Medicare Drug Payments

determine the Medicare-allowed amount, or payment level, which is 95

percent of AWP for each HCPCS-coded drug. Because one HCPCS code

may have multiple NDCs that match the HCPCS-coded product’s

definition, the carriers may determine the Medicare payment by analyzing

multiple NDCs. 16

Pharmaceutical sales and distribution networks can involve multiple

entities and purchasing arrangements that affect the actual acquisition

price of the drug for the end purchaser that supplies it to a Medicare

beneficiary. Physicians and pharmacies can purchase the kinds of drugs

covered under Medicare part B from general or specialty pharmaceutical

wholesalers or they can have direct purchase agreements with

manufacturers. Purchasers may belong to GPOs that pool the purchasing

of multiple entities and negotiate prices with wholesalers or

manufacturers. GPOs may negotiate different prices for a drug for

different end users, such as physicians, pharmacies, or hospitals.

Determining physicians’ or other providers’ actual acquisition cost of

drugs is complicated by certain practices in the pharmaceutical

marketplace that may result in transaction prices paid at the time of sale

that do not reflect the final net cost to the purchaser. For example,

manufacturers or wholesalers may offer purchasers rebates based on the

volume of products purchased. In addition, manufacturers may establish

“chargeback” arrangements for end purchasers, under which the

purchaser negotiates a price with the manufacturer that is lower than the

price the wholesaler charges for the product. The wholesaler sells the

product to the purchaser for the lower price negotiated with the

manufacturer, and then asks the manufacturer to pay back the difference

between the wholesaler’s price and the negotiated price.

 16For single-source drugs (drugs whose manufacturer is the sole source for a given

product), Medicare’s payment is 95 percent of the drug’s AWP. For multisource drugs

(drugs with generic equivalents or drugs for which there are two or more competing brandname products), the payment allowance is 95 percent of the lower of (1) the median AWP

of all generic forms of the drug or (2) the lowest brand-name product AWP. Within these

guidelines, each carrier contracting with Medicare to process claims has discretion to

determine which NDCs should be used to calculate the payment rate for each HCPCS code.

This can lead to variation in payment amounts among carriers for the same HCPCS-coded

drug. By October 1, 2002, all payers, including Medicare, will be required to process and

pay drug claims by NDC, rather than HCPCS code, in compliance with the administrative

simplification provisions of the Health Insurance Portability and Accountability Act of 1996

(P.L. 104-191). 65 Fed. Reg. 50312, 50370 (to be codified at 42 C.F.R. 162.1002(c)).

Drug Supply Chain

Involves Multiple Parties

and Arrangements That

Influence the Net Cost to

the End Purchaser
Page 11 GAO-01-1118 Medicare Drug Payments

Physicians are able to obtain drugs at prices significantly below current

Medicare reimbursements. The widely available prices available from

wholesalers and GPOs for physician-administered drugs we examined

were considerably less than AWPs used to establish the Medicare

payment. For most of the high-expenditure or high-volume physicianadministered drugs we studied and for which we obtained price data, the

average widely available discounts from AWP ranged from 13 percent to

34 percent; but two drugs exhibited considerably larger discounts.

Physicians we identified as low-volume billers for oncology drugs can also

purchase drugs for considerably less than Medicare’s payment. In addition

to reimbursement for drugs, physicians are paid separately for services

associated with drug administration under the Medicare physician fee

schedule. In a separate forthcoming report, we find that Medicare’s basic

method for calculating these payments is sound, but it deviated from this

method in calculating payments for certain services, including

chemotherapy administration.17 We also find that oncologists’ payments

relative to their estimated practice expenses are close to the average for

all specialties. In that report, we make recommendations to improve

Medicare physician payments for all services.

Among the 31 drugs we analyzed, which accounted for the majority of

Medicare spending and volume, 21 were provided almost exclusively by

physicians. Physicians providing drugs to treat cancer—the specialties of

hematology/oncology, medical oncology, and urology—account for most

Medicare claims for 19 of these drugs.18 Oncologists and groups

representing oncologists told us that oncologists can purchase Medicarecovered drugs for less than the Medicare payment amount. Price lists from

wholesalers and GPOs show that widely available prices were

considerably less than AWPs used to establish the Medicare payment for

18 of these physician-administered cancer drugs, with price information

unavailable for one other. (See table 4.) For 16 of the cancer drugs, the

average discount from AWP ranged from 13 percent to 34 percent, and two

drugs exhibited considerably larger discounts. Prices were available for

only one of the two noncancer drugs generally provided by physicians, and

 17See our forthcoming report Medicare Physician Fee Schedule: Practice Expense

Payments to Oncologists Indicate Need for Overall Refinements (GAO-02-53, October

2001).

18Of the other high-volume/high-expenditure drugs we analyzed, orthopedic surgeons and

neurologists were each the primary billers for a single product.

Physicians Can

Obtain Drugs Covered

Under Part B for

Significantly Less

Than Medicare

Payments

Physicians’ Drug

Acquisition Costs Are

Generally Lower Than

AWP-Based Medicare

Payment
Page 12 GAO-01-1118 Medicare Drug Payments

its average discount from AWP was 18 percent. Certain purchasers may

have access to even greater discounts for certain products than the widely

available discounts we report here.

Table 4: Widely Available Discounts From AWP for Medicare-Covered Drugs Billed

Primarily by Physicians, 2001

Drug name

Specialty most

frequently

billing for drug

Average

AWPa

Average widely

available

discount from

AWP

(percentage)b

Leuprolide acetate (for depot

suspension)

urology $618.93 17.6

Rituximab oncologyc $478.47 19.2

Goserelin acetate implant urology $469.99 21.9

Docetaxel oncology $313.51 22.0

Filgrastim (G-CSF) 480 mcg oncology $300.40 18.0d

Pamidronate disodium oncology $279.86 16.8

Hylan G-F 20 orthopedic

surgery

$225.13 17.7d

Filgrastim (G-CSF) 300mcg oncology $193.62 18.4d

Paclitaxel oncology $180.57 19.0

Irinotecan oncology $141.32 22.9

Carboplatin oncology $120.48 20.3

Gemcitabine HCl oncology $112.34 21.3

Dolasetron mesylate, injection oncology $45.02 65.0d

Granisetron HCl, injection oncology $19.52 29.3

Leucovorin calcium oncology $18.44 85.6

Epoetin alpha for non-ESRD use oncology $12.91 15.2

Ondansetron HCl, injection oncology $6.41 12.8

Botulinum toxin type A neurology $4.86 n/ae

Imiglucerase oncology $3.95 n/ae

Dexamethasone sodium

phosphate

oncology $1.44 14.2

Heparin sodium oncology $0.43 34.4

a

”Average AWP” is the average of AWP of each NDC for that product adjusted to the HCPCS-defined

dosage.

b

”Average widely available discount from AWP” for each drug was calculated by (1) determining the

average widely available price(s) for each NDC for that drug, (2) determining the percentage

difference between the average widely available price(s) and the AWP for each NDC for that drug,

and (3) averaging the percentage differences for all NDCs for that drug.

c

”Oncology” specialty includes hematology/oncology and medical oncology.
Page 13 GAO-01-1118 Medicare Drug Payments

d

”Average widely available discount from AWP” in 2001 for this drug is based on a price or prices from

a single wholesaler. For these four drugs, we had 2000 data from two or more sources. Those data

showed that the average widely available discount from AWP in 2000 was 18.8 percent for Filgrastim

(G-CSF) 480 mcg, 17.6 percent for Hylan G-F 20, 19.0 percent for Filgrastim (G-CSF) 300mcg, and

42.2 percent for Dolasetron mesylate, injection.

e

We were unable to obtain wholesaler or GPO prices for these products.

Source: GAO analysis of data from BESS, the Medical Economics Drug Topics Red Book CD-ROM

vol. 21, and wholesaler and GPO price lists.

While physician practices that purchase large volumes of drugs may have

access to larger discounts and rebates, low-volume providers can also

purchase drugs for markedly less than AWP, and often at additional

discounts below widely available prices. 19 (See table 5.) Our survey of

physicians who billed Medicare for low volumes of cancer drugs indicated

they received discounts that were as large as or larger than widely

available discounts for 11 of the 16 products for which they were able to

provide price information, although these discounts may not be as high as

those obtained by higher-volume purchasers. These practices reported a

variety of arrangements for obtaining these drugs, including contracts with

manufacturers, wholesalers, or GPOs.

 19For example, physicians and other purchasers can obtain lower prices if they make

prompt payments.
Page 14 GAO-01-1118 Medicare Drug Payments

Table 5: Discounts From AWP Obtained by Physicians Who Billed Medicare for a

Low Volume of Selected Drugs, Compared to Widely Available Discounts, 2001

Drug name

Low volume billers’

average discount

from AWP

(percentage)

Average widely

available discount

from AWPa

(percentage)

Leuprolide acetate (for depot suspension) 32.8 17.6

Rituximab 15.7 19.2

Goserelin acetate implant 22.3b 21.9

Docetaxel 22.0 22.0

Filgrastim (G-CSF) (480 mcg) 22.4 18.0c

Pamidronate disodium 18.0 16.8

Filgrastim (G-CSF) (300 mcg) 21.7 18.4c

Paclitaxel 25.8 19.0

Irinotecan 27.1 22.9

Carboplatin 20.0b 20.3

Gemcitabine HCl 16.1 21.3

Dolasetron mesylate, injection 62.0 65.0c

Granisetron HCl, injection 28.1 29.3

Leucovorin calcium 90.4 85.6

Epoetin alpha for non-ESRD use 22.1 15.2

Ondansetron HCl, injection 26.4 12.8

 a”Average widely available discount from AWP” for each drug was calculated by (1) determining the

average widely available price(s) for each NDC for that drug, (2) determining the percentage

difference between the average widely available price(s) and the AWP for each NDC for that drug,

and (3) averaging the percentage differences for all NDCs for that drug.

b

”Low-volume billers’ average discount from AWP” for this drug is based on a price from a single

physician.

c

”Average widely available discount from AWP” for this drug is based on a price or prices from a

single wholesaler.

Notes: Out of our sample of 108 physicians, 14 provided us with acquisition cost data for 16 of the 18

cancer treatment drugs we examined. An additional 37 physicians belonged to large, hospital-based

or national chain oncology practices that likely had access to widely available drug price discounts.

Fifty-six physicians could not be contacted or refused to participate. One physician in the sample did

not purchase drugs.

Source: GAO telephone survey of a sample of physicians who billed Medicare for a low volume of

cancer drugs in 1999 and AWPs listed in a contemporaneous wholesaler catalog.

In addition to the AWP-based payment for the drug, physicians receive a

payment based on Medicare’s physician fee schedule for administering the

drug. The physician fee schedule consists of three components: one to

account for physician time and effort to provide the service, one for the

expenses of operating the physician practice (including payments

reflecting the costs of nonphysician personnel involved in the delivery of

services), and one for malpractice expenses. The practice expense

Medicare Pays Physicians

for Drug Administration

Through the Physician Fee

Schedule
Page 15 GAO-01-1118 Medicare Drug Payments

component was developed with the best available physician-reported data

on the actual costs of running their practices. These costs were then

allocated to individual services that are provided and billed for, such as

office visits and medical procedures.

Oncologists have expressed concerns that certain costs necessary to

administer drugs are not fully reimbursed by the practice expense

component of Medicare’s physician fee schedule payment. Their

representatives told us that certain costs were not reflected in the data

originally used to set physician fee schedule payments for drug

administration, as changes have occurred in how services are delivered

over time. Oncology representatives also indicate concern about the

representativeness of the data used to construct the fee schedule. They

believe the sample of physician practices that supplied the practice

expense data may have been biased by including too many hospital-based

oncologists or surgical oncologists, which would understate the practice

expenses for chemotherapy services. In addition, the number of oncology

practices in the sample is small, increasing the risk that the sample

information is not representative.20

We have reported previously that the basic methodology for determining

physicians’ practice expense payments is reasonable. 21 In a separate

forthcoming report, we examine the adequacy of these payments for

oncologists. We find that HCFA deviated from the basic methodology for

determining practice expense payments for certain services, including

chemotherapy administration by nonphysicians. The use of the alternative

methodology resulted in a significant reduction in chemotherapy

administration service payments compared to what payments would have

been had they been calculated under the basic methodology. However,

even with this alternative methodology, oncologists’ average practice

expense payments in 2001 are 8 percent higher than what they would have

been had charge-based payments continued. Further, under the current

practice expense methodology, oncologists’ payments relative to their

estimated practice expenses are close to the average payment for all

 20In another study, also mandated by the Medicare, Medicaid, and SCHIP Benefits

Improvement and Protection Act of 2000 (see P.L. 106-554, Appendix F., Sec. 411, 114 Stat.

2763, 2763A-508), we are examining methods CMS may use to collect and employ more

current information to modify the physician fee schedule to reflect potential changes in

service delivery or costs and more representative data on practice expenses.

21See Medicare Physician Payments: Need to Refine Practice Expense Values During

Transition and Long Term (GAO/HEHS-99-30, February 24, 1999).
Page 16 GAO-01-1118 Medicare Drug Payments

specialties. In the separate report, we make recommendations to improve

the appropriateness of Medicare physician fee schedule payments for all

services.22

Pharmacy suppliers can also obtain drugs such as those administered

through the DME benefit at prices far lower than Medicare payment levels.

Pharmacy suppliers were the predominant billers for 10 of the drugs in our

sample of high-expenditure and high-volume drugs; these drugs included

inhalation therapy drugs administered through DME and oral

immunosuppressive drugs. Pharmacy suppliers may also administer

infusion drugs, such as chemotherapy drugs in the home setting.23 For the

inhalation therapy drugs, wholesaler and GPO prices that would be

generally available to these suppliers for drugs administered through DME

were considerably less than AWPs used to establish the Medicare

payment. Wholesaler or GPO price discount information for two of the

oral immunosuppressive drugs in our sample was not available, but retail

prices for these products from Internet pharmacies were generally below

Medicare payment levels. Medicare makes an additional payment for

dispensing drugs used in inhalation therapy, but not for drugs used in

infusion treatments. Further, Medicare makes a separate payment to DME

suppliers for the rental or purchase of the equipment needed to administer

the drug, such as nebulizers or infusion pumps, in addition to the payment

to the pharmacy supplier for the drug itself. There has been no recent

analysis of Medicare’s payments relative to the costs for DME used to

administer drugs.

 22See our forthcoming report Medicare Physician Fee Schedule: Practice Expense

Payments to Oncologists Indicate Need for Overall Refinements (GAO-02-53, October

2001).

23Like inhalation therapy, infusion therapy, such as therapy for heart failure, can be

provided in the home setting using an infusion pump. Infusion therapy involves injection of

drugs over time, most often intravenously; Medicare covers infusion pumps and necessary

drugs and supplies when it is medically necessary to administer the drug with a durable

infusion pump that regulates the rate of infusion. Infusion drugs provided by pharmacy

suppliers did not appear as high-volume or high-expenditure products and make up a small

percentage of pharmacy suppliers’ aggregate Medicare billing. The 10 drugs on our list

provided primarily by pharmacy suppliers accounted for 91 percent of their Medicare

payments and 98 percent of their Medicare volume in 1999.

Medicare Drug

Payments Also

Substantially Higher

Than Costs for

Pharmacy SupplierBilled Drugs
Page 17 GAO-01-1118 Medicare Drug Payments

Pharmacy suppliers were the dominant billers for 10 of the highest

expenditure or volume drugs paid for under Medicare part B. Among these

10 drugs were five inhalation therapy drugs and four oral

immunosuppressive drugs.24 Prices available from wholesalers and GPOs

were much less than the AWPs used to establish the Medicare payment for

the inhalation therapy drugs. (See table 6.) The average discount from

AWP in 2001 ranged from 69 percent to 85 percent. These results were

consistent with prior studies of the acquisition costs of similar drugs.25

Widely available wholesale or GPO prices for two of the oral

immunosuppressive drugs involved average discounts from AWP of 14

percent and 77 percent. Although we were unable to obtain 2001 price

discount information for two other oral immunosuppressive drugs, a

review of prices available from Internet pharmacies found that retail

prices available for these products were 13 percent and 8 percent below

AWP.

 24Sterile saline is the tenth.

25HHS OIG, Medicare Reimbursement of Albuterol (OEI-03-00-00311), June 2000, and

Medicare Reimbursement of Prescription Drugs (OEI-03-00-00310), January 2001.

Pharmacy Suppliers’ Drug

Acquisition Costs Are

Generally Lower Than

AWP-Based Medicare

Payment
Page 18 GAO-01-1118 Medicare Drug Payments

Table 6: Discounts From AWP for Medicare-Covered Drugs Billed Primarily by DME

Pharmacy Suppliers, 2001

Drug name

Mode of

administration Average AWPa

Average widely

available discount

from AWP

(percentage)b

Ipratropium bromide, unit

dose form

inhalation $3.52 78.0c

Acetylcysteine, unit dose

form

inhalation $0.67 71.8d

Albuterol, unit dose form inhalation $0.50 85.0

Cromolyn sodium, unit

dose form

inhalation $0.38 69.1

Albuterol, concentrate inhalation $0.15 n/ae

Tacrolimus oral $3.10 n/ae

Mycophenolate mofetil oral $2.53 14.2 d

Cyclosporine oral $1.55 n/ae

Prednisone oral $0.15 76.7c

Saline solution, sterile

intravenous,

other $0.71 n/ae

a

”Average AWP” is the average of the AWP of each NDC for that product adjusted to the HCPCSdefined dosage.

b

”Average widely available discount from AWP” for each drug was calculated by (1) determining the

average widely available price(s) for each NDC for that drug, (2) determining the percentage

difference between the average widely available price(s) and the AWP for each NDC for that drug,

and (3) averaging the percentage differences for all NDCs for that drug.

c

”Average discount from AWP” in 2001 for this drug is based on a price from a single wholesaler. For

Ipratropium bromide, unit dose form, we had 2000 data from three sources. Those data showed that

the average widely available discount from AWP in 2000 was 66.7 percent. For Prednisone we also

had 2000 data from only one source.

d

Average discounts from AWP were not available for 2001; average discounts are from 2000.

e

Wholesaler or GPO prices for these products were not available.

Source: GAO analysis of data from BESS, the Medical Economics Drug Topics Red Book CD-ROM

vol. 21, and wholesaler and GPO price lists.

Medicare’s coverage of most drugs provided by pharmacy suppliers is

established through the DME benefit; Medicare also covers selected

immunizations and certain drugs that can be self-administered, such as

blood clotting factors and some oral drugs used in association with cancer

treatment and immunosuppressive therapy. The DME benefit covers

equipment, such as nebulizers used to administer inhalation therapy drugs

for treating respiratory conditions or infusion pumps used to administer

Medicare’s Payments to

Pharmacy Suppliers for

Dispensing Drugs Vary by

Class of Drug
Page 19 GAO-01-1118 Medicare Drug Payments

intravenous drugs, and the supplies and drugs used with it. Medicare also

covers and makes a separate payment for drugs and supplies used in

conjunction with covered DME. 26 Medicare uses a fee schedule to pay for

most DME. DME fees, which are state specific, are based on historical

average supplier charges that are adjusted for inflation over time and are

subject to national minimum and maximum payment limits. Medicare pays

for certain DME on a monthly basis, subject to a maximum number of

months, depending upon whether the equipment is rented or purchased.27

Medicare pays a dispensing fee in conjunction with inhalation therapy

drugs used in nebulizers, which account for the majority of Medicare

volume and spending in the home setting. In 2000, these dispensing fees

amounted to over $15 million for 3 million billed dispensing services.28

Pharmacy suppliers in aggregate received the bulk of their Medicare

payments for dispensing the inhalation therapy drugs we analyzed. Unlike

many private payers and most state Medicaid programs, Medicare does not

pay a dispensing fee to pharmacists or other providers who supply oral

drugs. Finally, Medicare neither covers nor reimburses pharmacy

suppliers for the costs of clinical services related to providing infusion

therapy drugs. We did not analyze the costs of infusion therapy drugs

provided in the home setting because they do not account for a substantial

share of Medicare drug spending or volume. DME pharmacy suppliers

argued that they provide home infusion services to beneficiaries who are

too frail to travel to their physicians’ offices for care and need these

services in the home. However, such beneficiaries would likely qualify for

skilled nursing care under Medicare’s home health benefit—designed to

 26The DME benefit allows for coverage of DME itself plus “supplies,” including drugs that

“must be put directly into the equipment in order to achieve the therapeutic benefit of the

durable medical equipment or to assure the proper functioning of the equipment.” (See

Medicare Carriers Manual, Part 3, Chapter II—Coverage and Limitations, section 2100.5,

Rev. 1564/pp. 2-45.)

27Medicare will make a maximum of 15 monthly payments if the equipment is rented and 13

monthly payments if it is purchased. There are no limits, however, on how long Medicare

will pay for one category of nebulizers that requires frequent servicing as long as the

equipment is medically necessary.

28Pharmacy suppliers bill Medicare for each month of providing nebulizer drugs to a

beneficiary, regardless of the amount of the drug billed, using HCPCS code E0590. The

average dispensing fee is currently $5.00 per month of service.
Page 20 GAO-01-1118 Medicare Drug Payments

provide clinical care with adequate supervision—which could cover such

service costs. 29

Pharmacy suppliers and their representatives said that the profit on the

Medicare drug payment is needed to compensate them for their costs

related to inhalation and infusion therapy that are not explicitly covered

by Medicare. According to these suppliers, these costs include purchasing

drugs; all clinical, administrative, and other labor associated with

delivering the drugs; billing and collection; facility and employee

accreditation; licensing and certifications; and providing printed patient

education materials. They said they are currently able to provide these

services to Medicare beneficiaries because of their margin on the Medicare

drug payments. Suppliers of inhalation and infusion therapies that we

spoke with were unable to quantify the costs of these services specific to

the provision of drugs or to the different courses of therapy they provide

relative to Medicare’s total payment, and we did not identify any other

such relevant analysis. Suppliers and their representatives reported to us

that the suppliers’ acquisition cost of the drug is only a “nominal” portion

of the total cost of providing infusion and inhalation therapy to Medicare

patients. Specifically, they indicated that drugs represented roughly a

quarter of the total cost of inhalation therapy, and approximately 40

percent of the cost of infusion therapy, excluding the cost of DME.

In this work, we did not analyze suppliers’ costs of supplying DME relative

to Medicare’s payment to assess whether those payments also include a

profit. However, a prior GAO report indicated two underlying problems

with Medicare’s fees for DME that could lead to inappropriately high

payments.30 First, Medicare does not know what specific products it pays

for when its claims administration contractors process claims for DME.

DME products with similar functions or purposes are grouped together,

with Medicare paying the same amount for any product in the group.

These groups of DME products often represent a broad range of product

types, quality, and market prices, but claims only indicate a product’s

group and not the specific item. The second underlying problem with

 29Medicare’s home health care benefit enables certain beneficiaries with post-acute-care

needs and chronic conditions to receive care in their homes. For beneficiaries who qualify,

Medicare will pay for skilled nursing, therapy, and home health aide visits under the home

health benefit. See Medicare Home Health Care: Prospective Payment System Could

Reverse Recent Declines in Spending (GAO-HEHS-00-176, September 8, 2000).

30See Medicare: Need to Overhaul Costly Payment System for Medical Equipment and

Supplies (GAO/HEHS-98-102, May 12, 1998).
Page 21 GAO-01-1118 Medicare Drug Payments

Medicare’s DME payment system is that the fee schedule allowances for

DME are often out of line with current market prices. Until recently, the

process for adjusting DME payments was very cumbersome. Medicare

contractor representatives told us that they do not change the fee schedule

allowances to reflect market prices for DME; rather the fees are typically

only adjusted for inflation annually. As a result, payment levels may not

reflect changes in technology and other factors that could significantly

affect market prices.

Private and public payers use a variety of mechanisms to determine

payments for drugs and their administration. Although varied, these

mechanisms can generally be categorized as negotiated or contracted

prices and fee schedules based on reference or benchmark prices. Private

payers can negotiate with pharmacies, other suppliers, and manufacturers,

either directly or through agents, to secure discounted prices and rebates

that are often based on volume or market share. They or their agents also

may negotiate with providers and suppliers to establish payments for

services related to providing drugs. Some public programs, such as VA,

can purchase drugs at FSS prices, which are linked to market prices. State

Medicaid programs often use fee schedules based on AWP or wholesale

acquisition cost (WAC) to reimburse providers for outpatient drugs

provided under their prescription drug benefit, but receive statutorily

guaranteed manufacturers’ rebates on drugs that are derived from actual

transaction data. The rebates are based in part on AMP. In contrast to

Medicare’s payment for drugs, both the FSS and the AMP are determined

under a statutory methodology and are based on actual market prices that

can be verified. In some instances, VA and Medicare have also achieved

savings by setting prices through competition.

Large private health plans or their agents typically negotiate with

providers the terms and conditions of payments for drugs and their

delivery or administration. In general, private health plans may negotiate

with preferred or network providers to establish payments for physicianprovided drugs.31 Managed care plans reported that the terms of their

provider contracts vary considerably. Under some contracts, the plan may

 31Private health plans may designate a group of preferred or network providers to deliver

services to plan beneficiaries for specified payments. With some health plans, beneficiaries

may obtain services from another provider but may then be liable for the difference

between what that provider charges and what the plan pays.

Private Payers

Negotiate Prices,

Other Public Payers

Rely on Market-Based

Benchmarks to

Establish Payments

for Drugs

Private Sector Purchasers

Use Contracting and

Market Power to Purchase

Drugs
Page 22 GAO-01-1118 Medicare Drug Payments

pay the physician a specified fee for the drug and its administration. Under

others, the plan may pay participating physicians a capitated rate, placing

them at financial risk for costs of a range of services, including physiciansupplied drugs and their administration.

A large health-plan-owned pharmacy supplier reported a somewhat

different arrangement. It buys injectible drugs directly from manufacturers

and wholesalers and supplies them to the plan’s physicians. The plan

contracts to pay the physicians separately for administering the drugs. The

plan’s pharmacy benefits manager told us that the plan became a more

aggressive purchaser of physician-provided drugs when it appeared that

physicians were being overpaid for these products under an AWP-based

reimbursement system. For drugs administered through DME,

representatives of infusion and inhalation therapy providers indicated that

while some plans may pay an all-inclusive global fee for these therapies,

the most common arrangement is for private health plans to make per

diem payments for pharmacy services and delivery and separate payments

for the drug and nursing services, which, under certain conditions,

Medicare covers under the home health benefit.

Private health plans commonly contract with pharmacy benefits managers

(PBM) to manage their outpatient drugs dispensed through a retail or mail

order pharmacy. PBMs negotiate contracts with retail pharmacies, which

usually include discounted prices for the drugs and fees for dispensing the

drugs. PBMs may obtain rebates from drug manufacturers. These

discounts or rebates are often based on the volume of individual drugs

purchased and may be independent of the arrangements between plans

and the third parties supplying drugs to beneficiaries such as physicians or

pharmacies. Plans often use formularies, lists of preferred drugs that may

have lower beneficiary cost sharing, as a means of increasing use of

selected drugs.32

 32Formularies are lists of prescription drugs, grouped by therapeutic class, that health plans

or insurers prefer and may encourage physicians to prescribe and beneficiaries to use. A

particular product may be included on a formulary because of its medical value or because

a favorable price was negotiated with the manufacturer.
Page 23 GAO-01-1118 Medicare Drug Payments

The FSS for pharmaceuticals, administered by VA, is a list of products and

their prices available to federal entities that purchase prescription drugs.

Manufacturers must agree to supply drugs at these prices in order to have

their products covered and paid for by Medicaid programs. The FSS price

is intended to equal or better the price that the manufacturer offers its

most-favored nonfederal customer under comparable terms and

conditions. 33 To determine the most-favored customer price,

manufacturers provide VA information on price discounts and rebates

offered to domestic customers and the terms and conditions involved, 34

such as length of contract periods and ordering and delivery practices.35

The information used to determine the FSS price is reviewed by VA’s OIG.

Agencies using the FSS generally provide drugs directly to beneficiaries

through their own pharmacies and facilities.

Medicaid programs act as third-party payers, like Medicare, in reimbursing

physicians and pharmacies for drugs. Most Medicaid programs reimburse

pharmacies using formulas based on a percentage discount from AWP plus

a dispensing fee or a percentage markup over WAC plus a dispensing fee.36

WAC is the list price a wholesaler pays to a manufacturer, but it does not

include discounts that may affect the net price. WAC is not defined in law,

and like AWP is determined by the manufacturer. Medicaid programs

receive rebates based on net market prices. Under a provision of the

Social Security Act added by the Omnibus Budget Reconciliation Act of

1990 (OBRA), Medicaid programs receive a rebate from manufacturers

based on either AMP or the manufacturer’s “best price” to a private

purchaser.37 AMP is defined in federal law as the average price (including

cash discounts and other price reductions) paid to drug manufacturers by

 3348 C.F.R. Sec. 538.270.

3448 C.F.R. Sec. 538.270.

35Because the terms and conditions of commercial sales vary, there may be legitimate

reasons why the government does not always obtain the most-favored customer price.

Hence, under the General Services Administration regulations, VA may accept a higher

price if it determines that (1) the price offered to the government is fair and reasonable and

(2) awarding the contract is otherwise in the best interest of the government.

36Medicaid dispensing fees ranged from $2 to over $6 per prescription in 2000. PBMs at

private health plans can negotiate even lower dispensing fees that plans pay pharmacies

through their ability to restrict their pharmacy networks.

37Section 1927 of the Social Security Act, added by OBRA 1990, P.L. 101-508, Section 4401,

104 Stat. 1388, 1388-143(1990) (classified to 42 U.S.C. Sec. 1396r-8).

Other Public Programs Use

Market-Based Reference

Prices and Competition to

Establish Payments or

Rebates
Page 24 GAO-01-1118 Medicare Drug Payments

U.S. wholesalers for drugs distributed to the “retail class of trade.” 38 AMP

is thus a measure of actual transaction prices between wholesalers and

manufacturers. “Best price” is also defined in federal law as the lowest

price (including cash discounts and other price reductions) available from

the manufacturer to any U.S. wholesaler, retailer, provider, health

maintenance organization, nonprofit entity, or government entity, with

some exceptions. Manufacturers currently report AMPs and “best prices”

to CMS in order to participate in Medicaid. CMS can survey

manufacturers’ sales information to ensure that AMP and “best price”

computations are correct. However, the Social Security Act requires that

CMS maintain the confidentiality of this pricing information and it is

therefore not publicly available.

Public payers have made several attempts to use competition to obtain

more favorable prices for drugs. VA has used a competitive bidding

process to obtain national contracts for selected drugs at prices that are

even lower than FSS prices. VA identified drugs regarded as

therapeutically equivalent and sought contracts from manufacturers for

low prices in exchange for VA including only one drug of each type on its

national formulary. VA contract prices in 2000 averaged 33 percent lower

than corresponding FSS prices.

The Balanced Budget Act of 1997 authorized HCFA to conduct several

limited-scale demonstration projects to evaluate competitive bidding’s

applicability to the Medicare program. In one of these demonstration

projects currently under way in San Antonio, Texas, suppliers bid to

provide inhalation drugs, such as albuterol, to Medicare beneficiaries.

While Medicare normally allows any qualified provider to participate in the

program, under the demonstration only those 11 bidders that were

selected can participate. In exchange for restricting their choice of

providers, beneficiaries have no liability for differences between what

suppliers charge and what Medicare pays. Preliminary CMS information

suggests savings of approximately 26 percent on these inhalation drugs in

the San Antonio competitive bidding demonstration.

Medicare’s method for establishing drug payment levels is flawed. In tying

its payment to AWP, a price that may be neither an average nor what

wholesalers charge, Medicare has been paying much more than providers’

 38Section 1927(k)(1) of the Social Security Act (classified to 42 U.S.C. Sec. 1396r-8(k)(1)).

Conclusions
Page 25 GAO-01-1118 Medicare Drug Payments

likely acquisition costs. Medicare’s AWP-based methodology does not

incorporate information on actual transaction prices, such as that used by

VA in establishing FSS prices or the AMPs used to calculate Medicaid drug

rebates.

Our findings strongly suggest that Medicare should revise its drug payment

policies. Payments for the drugs themselves should closely parallel market

prices that providers pay to acquire drugs. The program needs to use

information on actual market prices net of rebates and discounts, similar

to information currently available to VA to establish the FSS and to HHS to

determine the Medicaid rebates. Although the widely available prices we

report here are often substantially below Medicare’s payment, certain

providers may be able to obtain even greater discounts. However, the

lowest prices, used in setting the FSS prices and Medicaid rebates, may

not be available to all Medicare providers for all Medicare-covered drugs.

To better ensure that beneficiary access is not compromised, in setting

payment levels it is important to be mindful that providers’ ability to

secure discounts likely varies.

Physicians and other providers acknowledge that payments for drugs are

higher than their costs, but contend that profits on the drugs compensate

for what they regard as underpayments for their administration. It should

be a principle of Medicare payment policy to pay for each service

appropriately and not to rely on potential overpayments for some services

to offset potential inadequate payments for complementary services.

Consequently, separate payments for administration and delivery should

be made, with those payments appropriately reflecting the variation

associated with how the drugs are provided. Hence, different methods of

determining drug delivery and administration payments may be necessary

for different types of drugs.

Some benefits of competition for securing selected drugs under certain

circumstances have been demonstrated by VA and by Medicare in the San

Antonio demonstration. Medicare’s experience is rather limited and

involves a very small number of drugs. Nevertheless, how the use of

competitive bidding might be expanded without compromising beneficiary

access is worth exploring.
Page 26 GAO-01-1118 Medicare Drug Payments

In order to improve the accuracy of Medicare payments for drugs and

related services, we are recommending that the Administrator of CMS take

the following actions.

• Establish Medicare payment levels for part-B prescription drugs and their

delivery and administration that are more closely related to their costs.

Payments for drugs should be set at levels that reflect actual market

transaction prices and the likely acquisition cost to providers. To

accomplish this, the Administrator should consider how information on

market transactions already available to HHS or VA may be used as a

benchmark for Medicare payment levels. If the Administrator determines

that legislative action would be required to use such information in setting

Medicare reimbursements, he should seek this action immediately.

• Examine the benefits and risks of expanding the current competitive

bidding demonstration projects for drugs covered under part B.

• Institute a process to monitor access to Medicare part B-covered drugs to

ensure that payment changes do not negatively affect access for particular

drugs, or groups of beneficiaries or in certain geographic areas.

CMS noted that our findings confirmed the results of studies by the HHS

OIG that indicated that Medicare payments for drugs are substantially

higher than their actual acquisition costs. CMS agreed that Medicare

should appropriately pay for both part B-covered drugs and the services

required to furnish them. CMS’s comments appear in their entirety as

appendix II.

We are sending copies of this report to the Administrator of CMS and

interested congressional committees. We will make copies available to

others on request.

If you or your staffs have any questions about this report, please call me at

(202) 512-7119 or James Mathews at (202) 512-9427. Major contributors to

this report were Ginny Hsieh, Dina Kirschenbaum, Kathryn Linehan, and

Theresa Thompson.

Laura A. Dummit

Director, Health Care—Medicare Payment Issues

Recommendations for

Executive Action

Agency Comments
Page 27 GAO-01-1118 Medicare Drug Payments

List of Congressional Committees

The Honorable Max Baucus

Chairman

The Honorable Charles E. Grassley, Jr.

Ranking Minority Member

Committee on Finance

United States Senate

The Honorable Bill Thomas

Chairman

The Honorable Charles B. Rangel

Ranking Minority Member

Committee on Ways and Means

House of Representatives

The Honorable W.J. “Billy” Tauzin

Chairman

The Honorable John D. Dingell

Ranking Minority Member

Committee on Energy and Commerce

House of Representatives
Appendix I: Scope and Methodology

Page 28 GAO-01-1118 Medicare Drug Payments

In conducting this study, we interviewed officials at CMS, VA, HHS OIG,

and DOJ. We also interviewed and solicited information about drug

acquisition costs and costs related to drug administration from

professional associations representing physicians and other providers with

a major stake in our evaluation. We requested price data on specific drugs

from major pharmaceutical wholesalers, oncology specialty wholesalers,

and GPOs, none of which responded to our request by the time we

finalized this report. We also requested price data from specialty

pharmacies, DME pharmacy suppliers, a national oncology clinic chain,

and physicians, including physicians we identified as billing for low

volumes of Medicare-covered drugs. We interviewed representatives from

large managed care organizations and their agents regarding the methods

they used to purchase or pay for pharmaceuticals as well as the purchase

prices they were able to obtain. We also interviewed staff at the companies

that publish major price reporting compendia that collect and report

average wholesale prices for drugs. We conducted quantitative analyses

using data from CMS and other sources. We did our work in accordance

with generally accepted government auditing standards from January

through September 2001.

To determine the drugs and biological products that accounted for the

most Medicare spending and volume, we used 1999 data from BESS. We

also used BESS data to determine spending and volume by part B carrier,

place of service, and specialty. All analyses using BESS data excluded data

on services supplied in Puerto Rico and the U.S. Virgin Islands and

payments made on behalf of the Railroad Retirement Board.

We excluded four HCPCS-coded products from our analysis because of

problems obtaining accurate pricing information or, in one case, because

the code was not specific enough to link to a given product. From the highvolume/high-expenditure HCPCS codes that were chosen for our study, we

evaluated pricing information for the NDCs that were used to determine

reimbursement rates for that HCPCS. We asked the Medicare part B

carriers with the highest allowed drug charges in each region and the DME

regional carriers to provide the NDCs they used to calculate

reimbursement for 31 HCPCS codes. Because carriers may use somewhat

different groups of NDCs, we included all of the NDCs in our analysis of

prices for each HCPCS we anlayzed.

We obtained widely available drug prices for selected HCPCS for 2000 and

2001 from several wholesalers’ and GPOs’ price lists, which we obtained

from a government agency and from providers. The AWPs were obtained

Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

Page 29 GAO-01-1118 Medicare Drug Payments

from the 2000 Drug Topics’ Red Book and the 2001 Drug Topics’ Red Book

CD-ROM by NDC for each year.

To identify physicians who billed for low volumes of multiple drugs, we

examined all Medicare part B drug claims from 1999 and identified 1,115

physicians who met our definition of a low-volume Medicare biller for

cancer drugs in 1999, and selected a random sample of 108 physicians. We

defined low-volume biller as a physician who billed for between the 10th

and 25th percentile of total allowed units for three or more of the

following drugs: Dexamethasone sodium phosphate, Leuprolide acetate,

Rituximab, Goserelin acetate, Docetaxel, Filgrastim (480 mcg),

Pamidronate disodium, Filgrastim (300 mcg), Paclitaxel, Irinotecan,

Carboplatin, Gemcitabine HCl, Dolasetron mesylate, Granisetron HCl,

Leucovorin calcium, Epoetin alpha for non-ESRD use, and Ondansetron

HCl. We then merged the claims file physician sample with the Unique

Physician Identification Number directory to get names and addresses of

providers. We received 74 prices for NDCs for 16 HCPCS-coded drugs

from 14 low-volume billers. An additional 37 physicians were hospitalbased, operated out of large practices, or worked for large nationally

owned chain oncology practices. We could not contact 36 physicians for

whom we could not find correct telephone numbers. Twenty practices

declined to provide us with information or did not provide information in

time to be included in this report. One practice indicated it did not

purchase drugs.
Appendix II: Comments From the Centers for

Medicare and Medicaid Services

Page 30 GAO-01-1118 Medicare Drug Payments

Appendix II: Comments From the Centers for

Medicare and Medicaid Services

(290024)
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