Medicare Compliance & Reimbursement

According to the Centers for Medicare & Medicaid Services, increasing practice expense reimbursements is irrevocably linked to decreasing drug payments, since the agency only has authority to do the former by using funds gained from the doing the latter.

Under the first alternative offered in the rule, drug reimbursements by Medicare contractors would be limited to the amounts the contractors pay private policyholders in "comparable" circumstances. CMS says implementing this option would save the government $4.1 billion, and beneficiaries $2.6 billion, over 10 years.

CMS' second option, similar to the Senate approach, would set payment for each covered drug at a discount off the AWP for that drug as of April 1, 2003. The discount would be 10 to 20 percent, reflecting what research from the General Accounting Office and the HHS Office of Inspector General suggests physicians generally pay. In subsequent years, rates would be adjusted by the medical inflation rate.

Under this option, for new drugs and drugs coming off patent, the first year's reimbursement would be determined by information from the manufacturer on the "expected widely available market price," with potential referral to the OIG as a disincentive for manufacturers to report inflated prices. In the second year, CMS could adjust the reimbursement to reflect actual price data; absent such an adjustment, and in all subsequent years, payment would be indexed to medical inflation.

The Senate bill would set reimbursement for single-source drugs at 85 percent of the April 1, 2003, AWP. New drugs would be paid at 100 percent of AWP in the first year, and payments would be adjusted for medical inflation. For multi-source drugs, payment would be set at the lesser of 85 percent of AWP and the price at which the drug is widely available in the market.

The Congressional Budget Office estimates that the Senate provision would reduce Medicare spending by $14 billion over ten years. CMS said its corresponding option would save the government $5.1 billion over ten years at a discount of AWP minus 10 percent, and $14.3 billion at a discount of AWP minus 20 percent. Beneficiaries would save $3.2 billion over ten years at the smaller discount, and $9.1 billion at the larger discount.

Under the rule's third option, CMS would define AWP to be "the widely available market price" and establish that price through market monitoring via data from GAO, OIG, and other sources. Reimbursement cuts would be limited to 15 percent a year.

Drugs for which market information was lacking would be reimbursed by a discount from the April 1, 2003, AWP, as in option 2, and the savings to the government and beneficiaries would depend on the level of discount. According to CMS, a 10 percent discount would provide $16.1 billion in savings for the government and $10.3 billion for beneficiaries, while a 20 percent discount would mean $19.4 billion in savings for the government and $12.3 billion for beneficiaries.

Finally, CMS' fourth option, paralleling the House's approach, would give physicians a choice between being reimbursed through a competitive bidding process or at 101 to 112 percent of "average sales price," i.e., a manufacturer's total sales for a drug divided by the number of units sold. Under the competitive bidding framework, entities would bid to supply drugs to physicians in one or more geographic areas, and those entities would deliver drugs to physicians and be responsible for billing Medicare.

For multi-source drugs, the House bill would pay physicians 112 percent of ASP in 2005 and 2006, and 100 percent of ASP in subsequent years. In 2005 and 2006, single-source drugs would be reimbursed at 112 percent of the lesser of ASP or the "wholesale acquisition cost," defined as "the manufacturer's list price for the drug to wholesalers or direct purchasers in the United States." In subsequent years, single-source drugs would be reimbursed at 100 percent of the lesser of AWP or WAC.

According to CBO, the House bill would save the government $13 billion over 10 years. The savings from CMS's corresponding option would depend on the mark-up over ASP that was chosen. According to the agency, at a one percent mark-up the government would save $27.6 billion ($13.5 billion excluding DME drugs) over 10 years and beneficiaries would save $17.6 billion ($8.6 billion excluding DME  drugs), while at a 12 percent mark-up the government would save $21.2 billion ($7.6 billion excluding DME) and beneficiaries would save $13.5 billion ($4.8 billion excluding DME).