1 GAO-16-780R Physician-administered Drugs

August 1, 2016

The Honorable Sander M. Levin

Ranking Member

Committee on Ways and Means

House of Representatives

Physician-administered Drugs: Comparison of Payer Payment Methodologies

Dear Mr. Levin:

In 2014, Medicare spent over $24 billion on drugs covered under Part B, which are drugs that 

are typically administered by a physician in a physician’s office or hospital outpatient 

department.1 Medicare pays for most Part B drugs based on the average sales price (ASP) of 

the drug plus a fixed percentage.2

 Some stakeholders have raised questions regarding whether

the fixed percentage add-on to ASP may create incentives for providers to use more expensive 

drugs. However, other stakeholders have suggested that any incentive to use more expensive 

drugs to maximize subsequent reimbursement may be offset by providers’ expenses associated 

with acquiring such drugs. In March 2016, the Centers for Medicare & Medicaid Services (CMS) 

released a proposed rule that outlined the agency’s plan to test various models to improve how 

Medicare pays for Part B drugs and to support higher-quality care.3 Some members of 

Congress and other stakeholders have raised questions about some of the proposed models 

and expressed interest in approaches used by other payers for physician-administered drugs. 

 1

For more information on spending and utilization for Medicare Part B drugs, see GAO, Medicare Part B: CMS 

Should Take Additional Steps to Verify Accuracy of Data Used to Set Payment Rates for Drugs, GAO-16-594

(Washington, D.C.: July 1, 2016).

2

Medicare’s payment methodology for most physician-administered drugs is 106 percent of ASP—the average of 

manufacturers’ net sales price to all entities, with certain exceptions. However, because of budget cuts associated 

with sequestration, an automatic, across-the-board cancellation of budgetary resources implemented pursuant to the 

Budget Control Act of 2011, Part B drug payment rates to both physicians and hospitals have been approximately 

104 percent of ASP. 

3

81 Fed. Reg. 13230, 13258 (Mar. 11, 2016) (to be codified at 42 C.F.R. pt. 511). Under the proposal, the first phase 

would be implemented in late 2016 and would involve changing the 6 percent add-on to ASP to 2.5 percent plus a flat 

fee based on specified criteria that for 2016 would be $16.80 per drug per day. The second phase would be 

implemented no earlier than January 1, 2017, and would test value-based purchasing approaches, including 

reference pricing, indications-based pricing, outcomes-based risk sharing agreements with manufacturers, 

discounting or eliminating cost sharing, and clinical decision support tools. Approaches such as these are described 

in the enclosure.

441 G St. N.W.

Washington, DC 20548
2 GAO-16-780R Physician-administered Drugs

You asked us to compare Medicare’s payments for Part B drugs with those of other payers. In 

this report we provide information on the payment methodologies, drug utilization management

strategies, and cost containment approaches for physician-administered drugs that are used by 

Medicare, Medicaid, the Department of Veterans Affairs (VA), and private payers.4

To obtain information on payers’ policies related to physician-administered drugs, we identified

relevant laws and regulations, and reviewed reports, articles, and policy documents. We also 

spoke with agency officials from CMS and VA, as well as representatives of four state Medicaid 

agencies and two large private payers.

5 We selected the four states with the highest Medicaid 

spending for inclusion in our study—California, New York, Pennsylvania, and Texas. Information 

we present on Medicaid policies related to physician-administered drugs is not generalizable to 

all states. We selected the two private payers based on their large size and because they offer 

Medicare Advantage plans, Medicaid managed care plans, and private plans. The two private 

payers we spoke with may not be representative of all private payers, and therefore the related 

information we present is not generalizable to private payers. To illustrate how payment rates 

may vary across federal payers, we also reviewed published fee schedules and other 

supplemental data to compare Medicare and VA payment rates for 10 high-expenditure 

physician-administered drugs.6 We conducted this performance audit from May to August 2016

in accordance with generally accepted government auditing standards. Those standards require 

that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a 

reasonable basis for our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings and conclusions based 

on our audit objectives.

In summary, the general payment methodologies for physician-administered drugs varied 

across the payers we examined. Compared to Medicare, other federal payers generally paid 

rates that were the same or lower. For example, for 10 high-expenditure drugs, VA paid rates 

that were no more than 68 percent of Medicare’s rate. In contrast, according to officials we 

interviewed from the two private payers, their payment rates were often higher than Medicare’s 

rate. Payers’ drug utilization management and cost-containment approaches for physicianadministered drugs also varied. For example, certain payers may be able to leverage 

purchasing power to negotiate lower payment rates. The enclosure presents tables with

additional information that addresses our objective.

We provided The Department of Health and Human Services and VA a copy of this draft report 

for review and comment. The Departments provided technical comments, which we

incorporated as appropriate.

- - - - -

 4

For this report, payment rates represent payer costs for physician-administered drugs and include postpayment 

rebates from drug manufacturers and discounts from distribution vendors. 

 

5

We contacted the Department of Defense for inclusion in this study, but we did not receive a response within our 

time frames. 

6

These 10 drugs are the Medicare Part B drugs paid based on ASP that we previously found to have the highest 

Medicare expenditures during 2014 (see GAO-16-594). We limited our comparison of Medicare’s payment rates to 

VA’s rates because, unlike the other payers, VA’s payment methodology does not allow for a qualitative comparison 

of potential payment rate differences.
3 GAO-16-780R Physician-administered Drugs

As agreed with your office, unless you publicly announce the contents of this report earlier, we 

plan no further distribution until 30 days from the report date. At that time, we will send copies to 

the Administrator of CMS, the Secretary of Veterans Affairs, and other interested parties. In 

addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions regarding this report, please contact me at (202) 512-

7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and 

Public Affairs may be found on the last page of this report. GAO staff who made major 

contributions to this report are Gregory Giusto, Assistant Director; Alison Binkowski; George 

Bogart; Alexander Cattran; Michael Erhardt; Elizabeth T. Morrison; and Aubrey Naffis. Other 

contributors include Brandon Nakawaki and Dharani Ranganathan.

Sincerely yours,

James Cosgrove 

Director, Health Care

Enclosure
Enclosure 

4 GAO-16-780R Payment Methodologies for Physician-administered Drugs

Information about Payers’ Drug Payment Methodologies, Utilization Management, and 

Cost-containment Approaches

Within this enclosure, table 1 summarizes payers’ payment methodologies for physicianadministered drugs, table 2 summarizes payers’ drug utilization management approaches, and 

table 3 summarizes payers’ cost-containment approaches.

Table 1: Comparison of Payers’ General Payment Methodologies for Physician-administered 

Drugs

Medicare feefor-service 

(FFS)

Medicaid FFSa Veterans Affairs (VA) VA’s Veterans 

Choice 

programb

Two large

private payersc 

Payment 

rate 

Reimburse 

providers at 

106% of average 

sales price 

(ASP).d

Reimburse providers 

at their acquisition 

cost, as defined by 

the state. States often 

define acquisition 

costs at Medicare’s 

rate—106% of ASP.

Drug manufacturers 

provide postpayment

rebates to states that 

lower states’ net drug 

costs.

e

Purchase drugs based 

on rates negotiated 

with manufacturers or 

rates based on 

statutory price 

ceilings.f

Drugs are purchased 

from manufacturers via 

a contracted 

distribution vendor that 

further discounts the 

drugs.g

Reimburse 

providers at 

negotiated rates 

that, in general,

cannot exceed,

and are usually

equal to, 

Medicare’s 

rate—106% of 

ASP.

Medicare’s rate—

106 % of ASP—

may be used as a 

benchmark for 

negotiation. 

According to the 

payers, rates are 

often above 106% 

of ASP.

Drug 

manufacturers 

may provide 

postpayment 

rebates to payers,

which lowers 

payers’ net drug 

costs.

Costs 

covered by 

payment rate

Not specified 

when provided in 

physician offices; 

covers providers’ 

ingredient 

acquisition and 

overhead costs 

when provided in 

hospital 

outpatient 

departments. 

Providers’ ingredient 

acquisition costs.

Program’s ingredient 

acquisition costs.

Not specified. Providers’ 

ingredient 

acquisition costs 

and, in some 

cases, overhead 

costs.

Beneficiary 

cost-sharing 

requirements

20% 

coinsurance, 

after any 

deductible is met. 

None None None Copayment or 

coinsurance that 

varies by plan. 

Beneficiaries are 

eligible for 

manufacturer 

coupon discounts 

for specific 

drugs.

h

Source: GAO analysis of information from the Centers for Medicare & Medicaid Services, VA, and two large private payers.| GAO-16-780R

Notes: This table summarizes payers’ general payment methodology for physician-administered drugs provided in either physicians’ 

offices or hospital outpatient departments. Information in this table is based on documents and interviews with agency and private 

payer officials. This table does not address separate payments for the administration of the drug or related physician services. Each 

payer may have exceptions that are not addressed in this table. 

a

Information is from CMS and the four state Medicaid programs we examined, but is not generalizable to all states.

b

VA’s Veterans Choice program allows eligible beneficiaries to receive care from contracted, non-VA providers on a FFS basis. 

c

Information is not generalizable to all private payers. 
Enclosure 

5 GAO-16-780R Payment Methodologies for Physician-administered Drugs

d

Low-cost and certain other drugs provided in hospital outpatient departments are not paid for separately. ASP is the average of 

manufacturers’ net sales price to all entities, with certain exceptions, and is updated quarterly by CMS. Because of budget cuts 

associated with sequestration, an automatic, across-the-board cancellation of budgetary resources implemented pursuant to the 

Budget Control Act of 2011, Part B drug payment rates to both physicians and hospitals have been approximately 104 percent of 

ASP. Additionally, under the first phase of implementation of its proposed rule, for 2016, CMS proposes to change the 6 percent 

add-on to ASP to 2.5 percent plus a flat fee based on specified criteria. 81 Fed. Reg. 13230, 13258 (Mar. 11, 2016) (pertinent 

provision to be codified at 42 C.F.R. § 511.300). CMS has determined that, for 2016, the flat fee would be $16.80 per drug per day. 

e

The basic rebate for brand name drugs is the greater of the difference between the average manufacturer price (AMP) and the best 

price for the drug, or 23.1 percent of AMP; manufacturers must also provide an additional rebate for drugs with prices that increased 

faster than inflation. For generic drugs, the rebate is 13 percent of AMP. States may also negotiate additional supplemental rebates.

For more information on Medicaid prescription drug rebates, see GAO, Prescription Drugs: Comparison of DOD, Medicaid, and 

Medicare Part D Retail Reimbursement Prices, GAO-14-578 (Washington, D.C.: June 30, 2014). 

f

VA can purchase physician-administered drugs under federal pricing arrangements, including Federal Supply Schedule prices and 

Big 4 prices. Federal Supply Schedule prices are available to all direct federal purchasers, and prices for physician-administered

drugs must be no more than the prices manufacturers charge their most-favored nonfederal customers. Big 4 prices are available to 

the four largest federal purchasers—VA, Department of Defense, the Public Health Service, and the U.S. Coast Guard—and prices

for covered, branded drugs, must be at least 24 percent lower than the non-federal AMP. For more information on VA’s drug 

purchasing, see GAO, Prescription Drugs: Comparison of DOD and VA Direct Purchase Prices, GAO-13-358 (Washington, D.C.: 

Apr. 19, 2013).

g

VA contracts with a distribution vendor that provides a fixed percentage discount of about 9 percent off purchased drugs. We 

compared VA’s payment rates for 10 high-expenditure drugs to Medicare’s rates and found that VA’s rates ranged from 55 to 68 

percent of Medicare’s rates. The physician-administered drugs we compared were the 10 Part B drugs paid based on ASP that had 

the highest Medicare expenditures in 2014 (see GAO, Medicare Part B: CMS Should Take Additional Steps to Verify Accuracy of 

Data Used to Set Payment Rates for Drugs, GAO-16-594 (Washington, D.C.: July 1, 2016)). VA’s payment rates for the 10 drugs 

were based on Big 4 prices and include the discount provided by the distribution vendor. 

h

Manufacturer use of coupon discounts to induce or reward the use of certain drugs is prohibited in federal health care programs. 
Enclosure 

6 GAO-16-780R Payment Methodologies for Physician-administered Drugs

Table 2: Comparison of Payers’ General Drug Utilization Management Approaches for Physicianadministered Drugs

Medicare fee-forservice (FFS)Medicaid 

FFSa Veterans Affairs (VA) 

VA’s Veterans 

Choice programb Two large private 

payersc 

Conditions of 

coverage or use

Limit coverage of 

certain drugs (closed 

formulary)

No No Maintains 

formulary and nonformulary drugs 

provided based on 

medical necessity

Maintains 

formulary and nonformulary drugs 

provided based on 

medical necessity

No

Require payer 

approval (prior 

authorization)

No Nod Not applicable Noe Yes, for certain 

drugs.

Require use of 

lower-cost drugs 

before more costly 

drugs (step therapy)

No No Yes, for certain 

drugs.f Yes, for certain drugs.f Yes

Quantity limits Nog Nod Yes, for certain 

drugs.f Yes, for certain drugs.f One of the payers uses for 

certain drugs.

Evidence-based 

treatment plans 

(clinical pathways)h

No No Yes, for certain 

drugs.f Yes, for certain drugs.f One payer provides 

rewards for 

oncology drugs 

provided under

clinical 

pathways.i

Provider clinical 

decision support

Giving providers 

evidence-based 

information and 

guidelines on 

appropriate drug use

Noj Nod Yes, for certain 

drugs.f Yes, for certain drugs.f One of the payers does.

Giving providers 

information on their 

drug prescribing and 

utilization patterns

Noj Nod Yes No One payer said 

no.

Source: GAO analysis of information from the Centers for Medicare & Medicaid Services, VA, and two private payers. | GAO-16-780R

Notes: This table summarizes payers’ general drug utilization management approaches for physician-administered drugs provided 

in either physicians’ offices or hospital outpatient departments. Information in this table is based on documents and interviews with 

agency and private payer officials. Each payer may have exceptions that are not addressed in this table. 

a

Information is from CMS and the four state Medicaid programs we examined, but is not generalizable to all states.

b

VA’s Veterans Choice program allows eligible beneficiaries to receive care from contracted, non-VA providers on a FFS basis. 

c

Information is not generalizable to all private payers. 

d

Pennsylvania’s Medicaid FFS program uses the same utilization management approaches for all outpatient covered drugs, 

regardless of whether they are physician-administered or provided through a pharmacy. These approaches include prior 

authorization, quantity limits, decision support tools, and drug utilization reviews.

e

VA’s Veterans Choice program requires beneficiaries to obtain approval for episodes of care outside of VA facilities, though they do 

not specifically need to obtain prior authorization for physician administered drugs. 

f

VA maintains clinical use guidelines for its practitioners to ensure safe and appropriate drug use, and to promote cost-effective 

prescribing practices. These guidelines apply criteria for drug use that may involve prior use of other therapies or drugs, adherence 

to treatment plans, and limits on drug use. 

g

Medicare limits excessive quantities of certain drugs through Medically Unlikely Edits.

h

Clinical pathways are guidelines for specific diagnoses that include the sequence and timing of interventions by providers. 

i

The Medicare Payment Advisory Commission has reported that the use of clinical pathways for physician-administered drugs is 

widely used in oncology care.

j

Under the second phase of implementation of its proposed rule, no earlier than 2017 CMS proposes to test value-based purchasing 

approaches, including clinical decision support tools, such as an online provider education tool and provider feedback on drug 
Enclosure 

7 GAO-16-780R Payment Methodologies for Physician-administered Drugs

utilization. 81 Fed. Reg. 13230, 13244, 13258 (Mar. 11, 2016) (preamble, III.B.3.) (pertinent provision to be codified at 42 C.F.R. § 

511.305(b)(2)).
Enclosure 

8 GAO-16-780R Payment Methodologies for Physician-administered Drugs

Table 3: Comparison of Payers’ General Cost-containment Approaches for Physicianadministered Drugs

Medicare feefor-service 

(FFS)

Medicaid FFSa Veterans 

Affairs (VA)

VA’s Veterans 

Choice 

programb

Two large 

private 

payersc 

Leveraging purchasing power 

to negotiate lower rates

No d Yes, states may 

be able to 

negotiate

supplemental 

rebates from 

drug 

manufacturers.e

Yes, VA may 

be able to 

negotiate lower 

rates by

leveraging 

purchasing 

power and 

formulary 

coverage.

No. Yes, may be 

able to 

negotiate lower 

rates from 

providers or 

rebates from 

drug 

manufacturers.

Payment rate incentivizes least 

costly therapeutic alternative

Same payment for brands and 

generics, based on weighted 

average of sales prices

Yes Yes, for most 

states.

No Yes Yes

Same payment for group of 

therapeutically similar drugs 

(reference pricing)

Nof, g No No No No 

Payment for a drug varies 

based on effectiveness for given 

use (indication-based pricing)

Nog No No No No

Lower beneficiary cost sharing 

for cheaper or higher-value 

therapeutic alternatives

(discounted cost sharing)

Nog Not applicable Not applicable Not applicable No

Removing or decreasing 

incentives within payment rate 

formula that encourage use of 

more costly therapeutic 

alternatives

Noh No No No One of the 

payers uses for 

certain drugs.

Moving away from fee-forservice

Risk sharing with drug 

manufacturers based on 

outcomes (outcomes-based risk 

sharing)

Nog No No No No

Risk sharing with providers, 

including episode-based or 

bundled pricing

Yes, for some 

drugs and 

settings.

i

No No No Noj

Source: GAO analysis of information from the Centers for Medicare & Medicaid Services, VA, and two private payers. | GAO-16-780R

Notes: This table summarizes payers’ general cost containment approaches for physician-administered drugs provided in either 

physicians’ offices or hospital outpatient departments. Information in this table is based on documents and interviews with agency 

and private payer officials. Each payer may have exceptions that are not addressed in this table. 

a

Information is from CMS and the four state Medicaid programs we examined, but is not generalizable to all states.

b

VA’s Veterans Choice program allows eligible beneficiaries to receive care from contracted, non-VA providers on a FFS basis. 

c

Information is not generalizable to all private payers. 

d

Medicare has authority to implement a competitive acquisition program (CAP) for Part B drugs where physicians who choose to 

enroll receive Part B drugs from a Medicare-selected vendor at a predetermined, competitively set rate, rather than the physicians 

buying directly and billing Medicare for the drugs. Medicare operated a CAP from mid-2006 through 2008, but then suspended the 

program because of contractual issues, low physician enrollment, and because the vendor had limited leverage to negotiate 

discounts.

e

In exchange for Medicaid coverage of most of their drugs, manufacturers are required to participate in the Medicaid Drug Rebate 

Program. States may be able to obtain supplemental rebates in addition to the required rebates. Pennsylvania has a waiver that 

allows it to leverage its purchasing power to negotiate lower rates from selected specialty pharmacies.

f

Medicare implemented local least-costly alternative policies and a national functional equivalence policy between 1995 and 2010, 

prior to changes to CMS’s authority.
Enclosure 

9 GAO-16-780R Payment Methodologies for Physician-administered Drugs

g

Under the second phase of implementation of its proposed rule, no earlier than 2017, CMS proposes to test value-based 

purchasing approaches, including reference pricing, indications-based pricing, discounting or eliminating cost sharing, and 

outcomes-based risk sharing agreements with manufacturers. 81 Fed. Reg. 13230, 13258 (Mar. 11, 2016) (pertinent provisions to 

be codified at 42 C.F.R. § 305(b)(1)).

h

As not all therapeutically equivalent or comparable drugs are under the same billing code, some researchers and stakeholders 

have raised concerns that the current 106 percent of ASP payment methodology may incentivize use of the more expensive drugs.

However, other stakeholders have suggested that any incentive to use more expensive drugs to maximize subsequent 

reimbursement may be offset by expenses associated with acquiring such drugs. To test whether an alternate approach would limit 

potential incentives to use higher priced drugs, under the first phase of implementation of its proposed rule, for 2016, CMS proposes 

to change the 6 percent add-on to ASP to 2.5 percent plus a flat fee based on specified criteria. 81 Fed. Reg. 13230, 13258 (Mar. 

11, 2016) (pertinent provision to be codified at 42 C.F.R. § 511.300). CMS has determined that, for 2016, the flat fee would be 

$16.80 per drug per day.

i

Medicare bundles payments for low-cost and certain other physician-administered drugs provided in hospital outpatient 

departments into the payments for related services. Medicare also bundles its payments for certain physician-administered drugs for 

end-stage renal disease.

j

Officials of one private payer said that the payer bundles payments for certain physician-administered drugs for end-stage renal

disease into the payments for related services.
10 GAO-16-780R Payment Methodologies for Physician-administered Drugs

Related GAO Products

Medicare Part B: CMS Should Take Additional Steps to Verify Accuracy of Data Used to Set Payment 

Rates for Drugs, GAO-16-594. Washington, D.C.: July 1, 2016. 

Prescription Drugs: Comparison of DOD, Medicaid, and Medicare Part D Retail Reimbursement Prices, 

GAO-14-578. Washington, D.C.: June 30, 2014.

Prescription Drugs: Comparison of DOD and VA Direct Purchase Prices, GAO-13-358. Washington, D.C.: 

April 19, 2013.

(100873)
This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
The Government Accountability Office, the audit, evaluation, and investigative 

arm of Congress, exists to support Congress in meeting its constitutional 

responsibilities and to help improve the performance and accountability of the 

federal government for the American people. GAO examines the use of public 

funds; evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through GAO’s website (http://www.gao.gov). Each weekday afternoon, GAO 

posts on its website newly released reports, testimony, and correspondence. To 

have GAO e-mail you a list of newly posted products, go to http://www.gao.gov

and select “E-mail Updates.”

The price of each GAO publication reflects GAO’s actual cost of production and 

distribution and depends on the number of pages in the publication and whether 

the publication is printed in color or black and white. Pricing and ordering 

information is posted on GAO’s website, http://www.gao.gov/ordering.htm. 

Place orders by calling (202) 512-6000, toll free (866) 801-7077, or 

TDD (202) 512-2537.

Orders may be paid for using American Express, Discover Card, MasterCard, 

Visa, check, or money order. Call for additional information.

Connect with GAO on Facebook, Flickr, Twitter, and YouTube.

Subscribe to our RSS Feeds or E-mail Updates. Listen to our Podcasts.

Visit GAO on the web at www.gao.gov.

Contact:

Website: http://www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Katherine Siggerud, Managing Director, siggerudk@gao.gov, (202) 512-4400, 

U.S. Government Accountability Office, 441 G Street NW, Room 7125, 

Washington, DC 20548

Chuck Young, Managing Director, youngc1@gao.gov, (202) 512-4800

U.S. Government Accountability Office, 441 G Street NW, Room 7149 

Washington, DC 20548

James-Christian Blockwood, Managing Director, spel@gao.gov, (202) 512-4707

U.S. Government Accountability Office, 441 G Street NW, Room 7814, 

Washington, DC 20548

GAO’s Mission

Obtaining Copies of 

GAO Reports and 

Testimony

Order by Phone

Connect with GAO

To Report Fraud, 

Waste, and Abuse in 

Federal Programs

Congressional 

Relations

Public Affairs

Strategic Planning and 

External Liaison

Please Print on Recycled Paper.