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M E D I C A R E
I N J E C T A B L E D R U G S
W E B E X C L U S I V E
8 December 2004
Re-Naming And Re-Gaming:
Medicare’s Doomed Attempt To Reform
Reimbursement For Injectable Drugs
Legislation that mistakes
acronym reform for system reform is no reform at all.
By J.D. Kleinke
ABSTRACT:
Hastily crafted provisions in the Medicare Prescription
Drug, Improvement, and Modernization Act (MMA) of 2003, intended to reform
the government’s flawed method for reimbursing providers who administer
injectable drugs, will exacerbate existing economic and clinical problems instead
of resolving them. The new provisions recast Medicare’s traditional drug
reimbursement system; increase temptations for physicians to overuse injectable
drugs; and promise to aggravate the economic problems Congress attempted to
fix with the new law. Medicare can resolve these problems by reimbursing providers
for injectable drugs based on their actual acquisition cost rather than on
estimates embedded in a complex drug reimbursement system.
Since the advent of Medicare in the
1960s, the federal government has been struggling with the myriad inefficiencies,
misallocations, and other economic dysfunctions associated with the fee-for-service
(FFS) private health insurance system on which Medicare was modeled.1 Four
decades later, this is hardly noteworthy to anyone who has managed a public
or private health insurance program. That FFS reimbursement would encourage
providers to deliver more care than might be clinically appropriate was an
idea that emerged, with supporting data, back in the 1970s, codified as Roemer’s
Law and popularized in Paul Starr’s landmark book, The
Social Transformation of American Medicine.2 A
flood tide of research in the decades since has elevated Roemer’s
Law to health care’s equivalent of a Newtonian principle.3 Consistent
with this stubborn feature of FFS medicine is a corollary principle affecting
the supply chain of drugs and other medical technologies: Companies that supply
providers with these products will actively encourage their overuse; they will
also actively inflate the products’ prices, which are passed along to
their ultimate public and private purchasers.4
Since the advent of diagnosis-related groups (DRGs) in the 1980s, Medicare
has attempted to cope with the economic and clinical consequences of these
perverse incentives through the use of prospective payment strategies and price
benchmarks within classes of injectable drugs.5 Both
of these payment reform strategies have been unleashed in the Medicare Prescription
Drug, Improvement, and Modernization Act (MMA) of 2003. In the rush to pass
this dense, complicated, and highly politicized legislation—the bulk
of which is intended to improve Medicare beneficiaries’ access to routine
prescription drugs—Congress added provisions designed to correct chronic
pricing and utilization problems associated with the way Medicare reimburses
providers for administering costly, clinically complex injectable drugs in
outpatient settings.6 Congress was well
advised to address these problems, as they affect an estimated $6.5 billion
in annual Medicare spending.7 Notwithstanding
the mind-boggling complexity involved in attempting to reform this reimbursement
system, evident in the profusion of arcane technical questions and provider
anguish inspired by its inclusion in MMA, it made some sense to include such
reform in the new law. A large number of injectable drugs will migrate from
traditional Part B coverage to the new Part D coverage, commonly referred to
as “the new Medicare drug benefit.”8
Congress was also well advised to use MMA to reform Medicare’s payment
system for injectable drugs when it had this rarest of political opportunities.
This system has been broken for decades, and it constitutes one of the more
bizarre shell games in a Medicare payment system characterized by the same.
Reimbursement by the Centers for Medicare and Medicaid Services (CMS) for injectable
drugs involves what has long been understood by the CMS, providers, and the
drug industry as an arbitrary but necessary cross-subsidy: Physicians in certain
specialties (predominantly oncology, rheumatology, endocrinology, and nephrology)
are reimbursed for their evaluation and management of patients at rates that
do not cover their incomes and practice expenses; these shortfalls are recovered
by the margin between what these providers are reimbursed for the injectable
drugs they administer to patients and what they actually pay to purchase those
drugs.9 The resulting “spread” is
calculated as the difference between what is reported as the average wholesale
price (AWP) of a drug and the practice’s actual acquisition cost.
Because the magnitude of this spread between a benchmark figure and an empirical
reality determines, in effect, the amount of a physician’s income net
of practice expenses, this payment system has inspired a multitude of well-documented
inefficiencies and occasional outright abuses. Most obvious are the twin temptations
for physicians to overuse injectable drugs in general and to prescribe higher-cost
drugs in particular. Nearly as obvious are the temptations for drug companies
to raise their prices higher than normal markets would bear and, when they
market those drugs to physicians, to include messages, both overt and covert,
regarding the clinical and financial advantages of using more-costly drugs.
Less obvious is the temptation for those companies to overstate, as grossly
as possible, the data used to generate the AWP benchmarks, thus increasing
the spread and financial gains for their provider customers. All three of these
hypotheses have been explored and documented by numerous researchers.10 Several
studies have found not only that AWP fails to reflect prices used in actual
transactions in the drug supply chain, but that the measure fails even as a
proxy for relative actual prices.11
These studies confirm what many industry observers have sensed all along: The
AWP-based pricing methodology represents a sort of science fiction. It reimburses
providers based on what economists refer to as “benchmark” or “notional” prices,
rather than on empirical or actual paid amounts. Unfortunately, this science
fiction is a key feature in a complicated reimbursement system required to
keep several high-cost and medically important physician specialties in business,
at least according to pronouncements by their political lobbies whenever this
system is threatened with reform.12 Consequently,
the deeply flawed reimbursement system that gave rise to our current problems
with injectable drug use, pricing distortions, and data gamesmanship has been
understood and accepted by policymakers, if begrudgingly, as inevitable in
the context of a Medicare system struggling perennially to cope with broader
political pressures, doomsday pronouncements of trust-fund insolvency, and
more widespread financial abuses. Prior to the historic moment ushered in by
MMA, the inefficiencies associated with using a rigged pricing system for injectable
drugs have been tolerated as problem stepchildren within Medicare’s
large and dysfunctional family.
The Economic ‘Fix’
Last year, when the vagaries of national politics forced Congress to address
the broader problem of seniors’ access to drugs in general, MMA offered
Congress an unprecedented opportunity to address the chronic payment problems
associated with reimbursement for injectable drugs. Unfortunately, the legislation
is long on complexity and short on specifics, raising the ire of numerous nonpartisan
observers.13 Although the law’s
provisions regarding reimbursement for injectable drugs will have far-reaching
medical implications for hundreds of thousands of Americans with disabling,
life-threatening, or end-stage diseases, they were debated and finalized by
an exhausted congressional conference committee working under the twin pressures
of budget-neutrality and an impossible procedural deadline.14 As
a result, the provisions are purposefully vague, technically incomplete, and
in places willfully evasive. Unable to reach consensus on how specifically
to reengineer the actual payment system for injectable drugs, the committee “reformed” the
system in the following two ways.
(1) For oncology and most other specialties involving a high volume of office-administered
drugs, Medicare will increase the aggregate amount paid for clinical services
delivered to these patients by increasing each of several moving parts involved
in the FFS reimbursement system. Medicare will offset these phased increases
by reducing payments for injectable drugs, although not through a simple reduction
in rates that lobbyists could identify and attack, but through a wholesale
conversion of the payment system itself, changing reimbursement from dollar
amounts pegged to AWP to dollar amounts pegged to average selling price (ASP).
What has been a reimbursement formula of AWP minus N percent (with widely different
percentages for different drugs, all fixed by statute and lobbied furiously
every year by providers and drug companies) is now in the process of being
reformed to a formula of ASP plus 6 percent. As the 6 percent is, for now at
least, fixed, all eyes are on how the CMS will actually determine ASP.
(2) For drugs involved in the treatment of end-stage renal disease (ESRD, affecting
270,000 Medicare beneficiaries who require regular dialysis), MMA increases
the case rate by 1.6 percent.15 (A “case
rate” is the dialysis version of a DRG payment, a lump sum paid to a
provider for a specific patient encounter.) The law specifically migrates a
number of drugs used in dialysis from separate reimbursement into the case
rate; this makes a great deal of sense and follows the practice of folding
reimbursement for drugs into other prospective payment systems (for example,
DRGs again). But MMA also specifically excludes from the dialysis case rate
a number of drugs that Medicare will continue to reimburse separately. Included
in this list is the most clinically standard drug used in dialysis, erythropoietin
(Epogen, Amgen). This also makes some sense, as erythropoietin—at $62
per dose and an average of one dose per visit—can cost half again the
cost of the visit itself, even after the case rate increase.16 Despite
the medical necessity, high relative cost, and general financial predictability
of the use of erythropoietin and several other separately reimbursable dialysis
drugs, MMA does not, as one would expect, rely on the law’s refashioned
ASP-based payment system used for other injectables. Specifically, it does
not shift from the current AWP minus N percent formula to the new ASP plus
6 percent formula; rather, it converts the current system of AWP minus N percent
to one based on what MMA calls simply “acquisition cost” (AC).
What is this actual number? Is it the specific, empirical, verifiable cost
of a transaction between a provider or whoever supplies the drug? Or is it
an average, a benchmark, as has been the case with AWP and will be with ASP?
The law does not say. Its drafters ran out of time, as the 415-page bill was
hurried to the floor of the House and passed, at sunrise after a three-hour
roll call, by five votes.17
In Congress’s last-minute rush to fix chronic, complicated problems associated
with Medicare reimbursement for injectable drugs, MMA proves, if nothing else,
that acronym reform as system reform is not restricted to the health insurance
industry. In these two new-fashioned provider payment systems—one for
dialysis providers and the other for oncology and all other injectables—what
is the difference in how Medicare will reimburse for most injectable drugs?
One scarcely renamed acronym, an enigma of a new acronym, and several vague
rules about the submission of pricing data. How will these new acronyms be
calculated? MMA specifies the data that drug manufacturers will have to submit
to support the calculation of ASP, and it includes stiff penalties for falsifying
these data, pegging them to the dreaded False Claims Act. These specifications
and their menacing enforcement provisions do indeed represent a reform over
the absurdity that has come to define the calculation of AWP. By contrast,
MMA does a horrendous job at specifying what AC for dialysis providers might
be.
Public meetings have attempted to clarify specific provisions of the law—in
particular, data submission standards. But the very nature of the questions
raised by participants in these meetings—predominantly provider lobbyists
expressing the usual mea culpas over patient access and nervous attorneys for
drug companies bracing for the next round of public and political vilification
against the industry—indicate that the buyers and sellers of injectable
drugs are preparing to cope with the new-fashioned system the same way they
coped with the old-fashioned one: bedeviling the details, gaming the data used
to calculate averages and other norms under the payment levels, and seeking
clarifications of language to accommodate real-world business exceptions that
will come to eclipse the rules.
All of this could have been avoided with the simplest of solutions: Medicare
should reimburse providers for injectable drugs based on real numbers, not
normative calculations. The continued use of a benchmark rather than real price
merely guarantees the continued gaming of the system by providers and drug
companies to maximize use, increase costs, and subvert optimal patient care.
Judging by the laborious detail of MMA related to reforming payment for provider
clinical services, Congress clearly wants to ensure that reimbursement to providers
is sufficient to ensure the delivery of high-quality medical care to Medicare
beneficiaries. At the same time, it is equally clear that Congress wants to
minimize the profit “spread” between Medicare’s reimbursement
for an injectable drug and what providers actually pay for it. Unfortunately,
the use of a revamped but still benchmark-based calculation will most likely
have exactly the opposite effect. As MMA greatly narrows the actual profit
spread—as will most likely be the case under a shift from a grossly inflated
AWP minus N percent to an indeterminate ASP plus 6 percent—there will
be an obvious temptation to increase the use of injectable drugs. This guarantees
an exacerbation of the very problem Congress was attempting to fix. For inductive
proof, we need look no further than the furious contentions of provider groups
who have been claiming since MMA’s passage that the law’s trading
out of reduced spread for increased reimbursement for clinical services threatens
to reduce the availability of oncology services.18
These contentions trigger the most important questions raised by MMA’s
attempt to fix the way Medicare pays for oncology, rheumatology, endocrinology,
neurology, and other medical services critical to the health of America’s
elderly and disabled. Will increases in reimbursement for physician services
sufficiently offset the recasting of the drug reimbursement system? Will that
recasting even work? Again, the only unambiguous change in the drug reimbursement
system under MMA involves its acronyms.
A Cure For Cancer’s Reimbursement
Woes?
What is the likely fate of MMA’s attempt to redress the cross-subsidy
of clinical care with margins from injectable drugs for oncology and other
non-ESRD providers? Will the change from an AWP-based system to an ASP-based
system be any different? The transition to the new system will occur in three
phases, meant to soften the economic disruptions and service dislocations caused
by the payment system reform, as follows.
(1) In 2004 injectable drugs are being reimbursed at 85 percent of AWP, a reduction
of ten percentage points from the old system.19 These
losses are being offset by a one-year, transitional 32 percent increase in
payment for the actual infusion of these drugs.20 There
are several exceptions to this one-year change in payment rates, noteworthy
only for their belabored presence on a long CMS to-do list for what amounts
to only one reimbursement year.
(2) During 2005 the CMS will reduce the transitional payment rate increase
for the administration of injectable drugs from 32 percent to 3 percent.21 These
reductions will be offset by unspecified increases in payments to providers
for the administration of injectable drugs.22
(3) Also beginning in 2005 and going forward, Medicare will reimburse oncology
and other non-ESRD providers for injectable drugs at ASP plus 6 percent.
Although there is a labyrinth of other details as they relate to adjustments
in payment for services, the linchpin in this new reimbursement system is the
determination of ASP. As with AWP, manufacturers will be required to report
ASP data. Under the new system, however, these reports will be made directly
to the CMS, rather than to an independent publisher known as the Red
Book.23 The Red
Book, not to be confused with the popular homemaking periodical
that carries the same name but makes far more interesting reading, has been
notorious for publishing whatever pricing figures the drug companies report.
By contrast, data submitted for ASP calculations will be reported based on
actual sales, net of volume discounts, for each individual type of drug. Any
reporting of false ASP information would violate the False Claims Act and carry
a penalty of $10,000 per falsely reported number, per day, for every day the
false report goes unrectified. The CMS will calculate ASP quarterly. If adequate
data are not submitted to the CMS, the Office of the Secretary of Health and
Human Services (HHS) will have the discretion to base drug reimbursement rates
on another methodology of its own choosing, representing a broad latitude in
setting de facto reimbursement policy and potentially affecting, by administrative
order, hundreds of millions of dollars in Medicare spending.
It is unclear how these changes will affect the actual delivery of medical
care for cancer and other non-ESRD patients. Since the passage of MMA, there
have been hundreds of requests for clarification of pricing data standards
and calculations submitted to the CMS by drug companies, distributors, wholesalers,
retailers, and others involved in the drug supply chain. These requests are,
in and of themselves, highly illustrative: They involve myriad accounting factors
related to how drugs move through that chain, including volume discounts; rebates;
allowances and returns for expired drugs; credits and replacements for failed
therapies and other guarantees; inventory buildups and rundowns in advance
of price increases; price arbitrage used by secondary distributors; and a host
of other drug distribution and inventory management tools developed through
decades of practice.
The very nature of these questions belies the uncanny ability of scrappy, creative
health care companies to adapt around efforts to reform what should be a straightforward
set of transactions. These questions also reveal the durability of the temptations
confronting drug companies and the various primary and secondary distributors
that sit between them and providers: They have moved, can move, and will continue
to move market share by selling products through the supply chain at prices
below those mandated by federal fiat, regardless of how well the law is crafted
and its violations enforced. There will be enormous temptations to game the “new” system
of price benchmarks for the same reasons there were temptations to game the
old one. These questions—combined with menacing pronouncements by provider
groups about the inevitable reduction in physician availability—indicate
that indeed the past may be prologue, and legislation that mistakes acronym
reform for system reform is no reform at all.
End-Stage Renal Disease Endgame
MMA’s specific language is equally murky about the actual dollar amounts
paid to providers of clinical services for Medicare beneficiaries with ESRD.
Medicare now pays a case rate for a dialysis treatment visit, a rate that will
be increased under MMA by 1.6 percent in 2005. This represents only the third
rate increase since 1983, resulting in an aggregate 3.6 percent during the
past twenty-one years.24 Dialysis providers
have been able to withstand what amounts to enormous price compression relative
to general (and medical) inflation for two reasons: (1) The dialysis business
has consolidated from a fragmented cottage industry of local providers into
large, national corporations with economies of scale and sizable purchasing
power, and (2) they have been able to game the AWP-based drug reimbursement
system to a level of meaninglessness that must be the envy of other specialties
engaged in the same practice.25
Consistent with other injectable drug payment “reforms” included
in MMA, the law attempts to redress the traditional cross-subsidy of dialysis
services by offering up this 1.6 percent case rate increase in exchange for
a conversion of the AWP-based system to one based on what it terms “acquisition
cost” for “separately billable drugs.”26 Will
the case rate increase be sufficient to offset the financial reductions that
dialysis providers will experience after MMA’s recasting of the drug
reimbursement system? Once again, the devil is in the details; here, the details
revolve around how one defines acquisition cost. In
the grueling eleventh-hour battle royale over hundreds of complicated issues
embedded in MMA, the drafters of the dialysis payment reform provisions decided
by not deciding. A deadlock over what acquisition cost might
actually mean was deferred to the HHS Office of Inspector General (OIG). MMA
specifies that by the time the ESRD reimbursement system switches over on 1
January 2005, the OIG will determine what acquisition cost is;
how it will be calculated, updated, and communicated to the market; and how
its use as a benchmark will be audited among tens of thousands of transactions
among drug companies, distributors, and dialysis providers. If by 1 January
2005 the OIG has not determined a fixed acquisition cost for each particular
drug used in the treatment of dialysis, then the office of the HHS secretary
will determine an “appropriate” payment.27 In
either case, a federal agency setting price benchmarks for numerous injectable
drugs does not sound like a major improvement over the current drug reimbursement
system based on AWP.
Such are the risks for Congress’s attempt to reform dialysis reimbursement,
at least in the transitional year of 2005. Unfortunately, the situation does
not improve in the years to follow. Beginning in 2006, MMA authorizes the HHS
secretary to set payment for all separately billed ESRD drugs and other products
at either acquisition cost or ASP.28 As
with oncology and other specialties reimbursed for administering injectable
drugs, this represents the consummation of congressional intent in MMA: eliminate
profits earned by providers on dialysis-related drugs, thus freeing up funds
that Medicare can transfer, eventually, to its reimbursement for the actual
provision of dialysis services. To accomplish this goal, the CMS must studiously
avoid recreating the same problems inherent in the AWP-based system—problems
likely to be recreated, as just described, in the transitional year of 2005.
How might the CMS inadvertently and permanently recreate for dialysis provision
the same pricing and utilization problems enshrined by the current AWP-based
drug reimbursement system? By establishing for ESRD drug reimbursement a benchmark-based
rather than an empirically based, hard-numbers system—the same way it
will be “reforming” reimbursement for oncologists and other specialists
by using a benchmark-based system of prices. At this point (late 2004) there
is no clear indication of what the CMS will do. The outcome of its actions
will hinge entirely on what is meant by the vague term acquisition
cost included in MMA’s language. Does this term mean “actual
acquisition cost”—that is, a directly reimbursable dollar amount
that can be verified as an actual transaction, the institutional equivalent
of “show me the receipt”? Or does it mean “average acquisition
cost,” which would represent the ESRD version of the ASP system for oncology
and other specialties? Many observers have suggested that the CMS will default
to the latter option, if only because it is the path of least resistance and
effort, based on the precedent set by the swapping of ASP for AWP for other
injectable drugs when true payment reform was long overdue.29
If the CMS does indeed default to a system based on average rather than actual
acquisition cost for ESRD drugs, it is certain that the dialysis reimbursement
system will not be reformed at all. The highly consolidated dialysis provider
industry will have the economic motivation, bargaining power, and inventory
control prowess to make certain that what it actually pays for drugs will net
out well below whatever are published as “average acquisition cost” benchmarks.
The inefficient utilization patterns established under the AWP-based system
will continue, if not worsen, for the same reasons the ASP plus 6 percent system
will worsen utilization for cancer and other nondialysis drugs. And nothing
will have changed except an acronym.
A Simple, If Labor-Intensive, Solution
In the coming months, as the CMS and other HHS agencies sit down to the unenviable
job of working their way through the thorny political thicket that is the new
Medicare law, the federal government has a historic opportunity to fix a problem
several decades in the making. The Medicare program has been struggling with
the misshapen clinical utilization patterns and other inefficiencies associated
with the underreimbursement of certain providers for clinical services and
overreimbursement of those same providers for costly and often dangerous drugs.
The CMS can fix this problem now, by acting decisively to institute payment
methodologies for all injectable drugs based on actual acquisition costs.
This can be accomplished by clearly defining acquisition
cost—and
thereby the amount that Medicare will reimburse—as the actual invoice
price paid by the provider, net of any rebates and other discounts. The only
feasible source for reporting the amounts paid are the entities who actually
paid them: the providers. Drug companies may represent a more consolidated
source for these data, but they remain several layers of distribution removed
from what providers actually end up paying for drugs. They also have a less-than-perfect
record of accurate price reporting, for obvious reasons.
By switching to a provider-based reporting system, the CMS could eliminate
other data-reporting problems associated with multiple drug distribution layers.
It could require that the aggregate savings retained by an individual provider
practice, oncology clinic, or dialysis facility for any rebates or discounts
be returned to Medicare. Such a system would not require constant surveillance
and data submission; rather, the CMS could reimburse providers based on its
own estimate of a drug’s actual acquisition cost during a fiscal year,
reconciling this at the end of a period via actual data reported by providers
to the CMS. In the case of ESRD, such a data-reporting system already exists
in the form of dialysis facility cost reporting. The drug cost data would piggyback
onto an existing data-reporting system and would require minimal additional
effort on the part of providers and the CMS.
The use of this genuinely new, empirically based system would allow the CMS
to reform a drug reimbursement system that Congress clearly identified as broken
when it passed MMA. The proposed system would neutralize the delivery of excessive,
suboptimal clinical care; safeguard patients against the overuse of injectable
drugs; and convert an important Medicare payment system to one based on the
medical care physicians deliver to patients, not the volume of drugs they can
mark up and inject into them.
The author acknowledges the contribution of Michelle DuBarry for her
assistance with the research for this paper.
NOTES
1. R. Ball, “Perspectives on Medicare: What Medicare’s
Architects Had in Mind,” Health Affairs 14,
no. 4 (1995): 62-72; and M. Davis and S. Burner, “Three Decades of Medicare:
What the Numbers Tell Us,” Health Affairs 14,
no. 4 (1995): 231–243.
2. P. Starr, The Social Transformation of American
Medicine (New York: Basic Books, 1982).
3. J. Robinson, “Theory and Practice in the Design of Physician
Payment Incentives,” Milbank Quarterly 79,
no. 2 (2001): 149–177.
4. J.E. Calfee, “Hearing on Seniors’ Access to Prescription-Drug
Benefits,” American Enterprise Institute for Public Policy Research,
15 February 2000, www.aei.org/news/newsID.17036/news_detail.asp (3 July 2004);
and J. Hoff, Medicare Private Contracting: Paternalism
or Autonomy (Washington:
AEI Press, 1998).
5. Strategies include DRGs for inpatient episodes, prospective payments
for outpatient episodes and home health services, and the “least costly
alternative” pricing system used for reimbursement for drugs within a
therapeutic class.
6. Medicare Prescription Drug, Improvement, and Modernization
Act of 2003 (MMA, P.L. 108-173), Section 303(b).
7. J.K. Iglehart, “The New Medicare Prescription-Drug Benefit—A
Pure Power Play,” New England Journal of Medicine 350,
no. 8 (2004): 826–833.
8. “New Medicare drug benefit” is used here to express
the colloquial interpretation of MMA, even though the majority of pages included
in MMA relate not to prescription drugs but to a panoply of other health policy
matters.
9. Iglehart, “The New Medicare Prescription-Drug Benefit.”
10. Regarding physicians’ prescribing patterns for injectable
drugs, see Y. Kumarasamy et al., “Optimizing Antibiotic Therapy—the
Aberdeen Experience,” Clinical Microbiology and Infection 9,
no. 5 (2003): 406–411; and L. Senn et al., “Improving Appropriateness
of Antibiotic Therapy: Randomized Trial of an Intervention to Foster Reassessment
of Prescription after Three Days,” Journal of Antimicrobial
Chemotherapy 53, no. 6 (2004): 1062–1067. Regarding the
tendency of physicians to prescribe higher-cost drugs in general, see J. Shapiro, “Prescriptions:
How Your Doctor Makes the Choice,” U.S. News and
World Report, 19 February 2001; and R.S. Parker and C.E. Pettijohn, “Ethical
Considerations in the Use of Direct-to-Consumer Advertising and Pharmaceutical
Promotions: The Impact on Pharmaceutical Sales and Physicians,” Journal
of Business Ethics 48, no. 3 (2003): 279–290. Regarding
drug market pricing inefficiencies, see J.P. Newhouse, “How Much Should
Medicare Pay for Drugs?” Health Affairs 23,
no. 1 (2004): 89–102; R.G. Frank, “Prescription Drug Prices: Why
Do Some Pay More than Others Do?” Health Affairs 20,
no. 2 (2001): 115–128; and Shapiro, “Prescriptions.” Regarding
marketing messages to providers, see Parker and Pettijohn, “Ethical Considerations”;
and M.M. Chren and C.S. Landefeld, “Physicians’ Behavior and Their
Interactions with Drug Companies: A Controlled Study of Physicians Who Requested
Additions to a Hospital Drug Formulary,” Journal
of the American Medical Association 271, no. 9 (1994):
684–689.
11. D. Gencarelli, “Average Wholesale Price for Prescription
Drugs: Is There a More Appropriate Pricing Mechanism?” Issue Brief no.
775 (Washington: National Health Policy Forum, June 2002); B. Martinez, “Drug-Price
Surge May Erode Savings from Medicare Card,” Wall
Street Journal, 24 March 2004; and M. Freudenheim, “Employers
to Form ‘Buyers Club’ Seeking Low Drug Prices,” New
York Times, 11 June 2004.
12. Prior to MMA’s passage, Congress attempted on several occasions
to change CMS reimbursement rates pegged to AWP. Each attempt was thwarted
by ferocious lobbying from physician specialty societies.
13. C. Roskey, “MMA Falls Short of Modernizing ‘Dinosaur’ ESRD
Payment System,” BNA Medicare Report 15,
no. 13 (2004); T.R. Oliver, P.R. Lee, and H.L. Lipton, “A Political History
of Medicare and Prescription Drug Coverage,” Milbank
Quarterly 28, no. 2 (2004): 283–354; M. Moon, “How
Beneficiaries Fare under the New Medicare Drug Bill,” Issue Brief (New
York: Commonwealth Fund, June 2004); and R.E. Hurley, B.C. Strunk, and J.M.
Grossman, “Preferred Provider Organizations and Medicare: Is There an
Advantage?” Issue Brief, April 2004, www.hschange.org/CONTENT/671 (3
July 2004).
14. Roskey, “MMA Falls Short.”
15. See M. Hawryluk, “Medicare Hopes to Boost Better Option for
Dialysis,” American Medical News, 17
May 2004, www.ama-assn.org/amednews/2004/05/17/gvsb0517.htm (5 July 2004);
and MMA Section 623(a).
16. Most ESRD patients undergo hemodialysis (the standard treatment
method) and receive one dose of erythropoietin as part of the procedure. See
D. Gellene, “Medicare Agency Questions Anemia Drug’s Cost, but
Increased Use Is Urged,” Los Angeles Times, 11
May 2004. See also National Kidney Foundation, “A to Z Health Guide,” 3
June 2004, www.kidney.org/atoz/atozItem.cfm?id=39 (20 July 2004).
17. R. Pear and R. Toner, “A Final Push in Congress: The Overview;
Sharply Split, House Passes Broad Medicare Overhaul; Forceful Lobbying by Bush,” New
York Times, 23 November 2003.
18. According to comments about MMA made by Joseph Bailes during the
2004 annual meeting of the American Society of Clinical Oncologists, 6 June
2004. See also the American College of Rheumatology’s appeal to CMS administrator
Mark McClellan, www.rheumatology.org/advocacy/federal/followup0504.pdf (20
July 2004); “Questions on Physician Reimbursement Formula,” Renal
Policy Express, May 2004; and Renal Physicians Association, “RPA
Urges Congressional Mandate for Demonstration Project to Assess Impact of Medicare
Fee Schedule Dialysis Proposals,” www.renalmd.org/publications/downloads/FinalMFSDEMONSTRATIONPROJECT.pdf (20 July 2004).
19. MMA, Section 303(b).
20. Ibid., Section 303(a).
21. Ibid.
22. Ibid., Section 303(d).
23. The Red Book is published annually
by Thomson PDR.
24. Roskey, “MMA Falls Short.”
25. The industry is dominated by four providers, Gambro, DaVita, Fresenius
Medical Care AG, and Renal Care Group, which in the aggregate control 62 percent
of the dialysis market, according to “Dialysis: Slipping Margins, Solid
Business,” Health Leaders, July 2001,
www.healthleaders.com/magazine/feature1.php?contentid=25901 (5 July 2004).
The remainder of the market is served by local, usually independent hospitals
and physician practices.
26. MMA, Section 623(d).
27. Ibid.
28. Ibid.
29. “Medicare Reform to Shake Up Oncologists, May Lead to New
Specialty Pharmacy Pacts,” Specialty Pharmacy News, January
2004, www.aishealth.com/DrugCosts/specialty/spnMedicareReform.html (8 July
2004).
J.D. Kleinke (jdk{at}jdkonline.com) is executive director of Omnimedix Institute,
a nonprofit health care research organization funded by foundations, corporations,
and private individuals; he is based in Portland, Oregon. He continues to provide
health care business strategy consulting and education services through Health
Strategies Network Inc., to health information technology companies, health
plans, hospitals, pharmaceutical companies, investment banks, and health care
foundations. He is a member of the board of directors of HealthGrades Inc.,
a publicly traded health information company based in Lakewood, Colorado.
DOI: 10.1377/hlthaff.w4.561
©2004 Project HOPE–The People-to-People Health Foundation, Inc.
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