Two inhalation therapy drugs accounted for 88 percent of the Medicare billing volume for pharmacy- supplied drugs administered in a patient’s residence. Medicare Payments for Drugs Are Based on Published AWPs

Medicare’s payment for part B-covered drugs is based on the product’s AWP, which is a price assigned by the product’s manufacturer and may be neither “average” nor “wholesale.” Instead, the AWP is often described as a “list price,” “sticker price,” or “suggested retail price.”
The term AWP is not defined in law or regulation, so the manufacturer is free to set an AWP at any level, regardless of the actual price paid by purchasers. In paying claims, Medicare carriers use published AWPs to determine Medicare’s payment amount, which is 95 percent of AWP.Thus, given the latitude manufacturers have in setting AWP, these payments may be unrelated to market prices that physicians and suppliers actually pay for the products. Medicare’s Payment for Part B-Covered Drugs Is Significantly Higher Than Prices Widely Available to Providers

For the part B-covered drugs accounting for the bulk of Medicare spending and claims, Medicare payments in 2001 were almost always considerably higher than wholesalers’ prices that were widely available to physicians and suppliers. Wide Disparities Exist Between Drug Acquisition Costs and Medicare Payments

Our study shows that there can be wide disparities between a drug’s estimated acquisition cost and Medicare’s payment for that drug. As with physician-billed drugs, Medicare’s payments for pharmacy supplier-billed drugs generally far exceeded the prices available to these suppliers. Policies to Pay for Related Delivery and Administration Services Vary by Provider

Medicare payment policies for administering or delivering a drug vary, depending on who provides the drug to the patient. No explicit payments are made to pharmacy suppliers for dispensing other drugs, but they may receive payments for equipment and supplies associated with DME-administered drugs. The implementation of this fee schedule, however, has been controversial. Oncologists, who represent the majority of physicians billing for drugs, argue that Medicare’s payments for administering chemotherapy are inappropriately low and that the excess Medicare drug payments are needed to offset their losses. Moreover, they increased payments on average for services involving physicians. Similar to the physicians who bill for part B drugs, pharmacy suppliers and their representatives contend that the margin on the Medicare drug payment is needed to compensate them for costs not covered by Medicare—that is, the clinical, administrative, and other labor costs associated with delivering the drug. Other Purchasers’ Practices Are Instructive for Reforming Medicare’s Method of Paying for Part B-Covered Drugs

Private insurers and federal agencies, such as VA, employ different approaches in paying for or purchasing drugs that may provide useful lessons for Medicare. In general, these payers make use of the leverage of their volume and competition to secure better prices.
Why GAO Did This Study

The pricing of Medicare's part B-covered prescription drugs--largely drugs that cannot be administered by patients themselves--has been under scrutiny for years. Most of the part B drugs with the highest Medicare payments and billing volume fall into three categories: those that are billed for by physicians and typically provided in a physician office setting, those that are billed for by pharmacy suppliers and administered through a durable medical equipment (DME) item, and those that are also billed by pharmacy suppliers but are patient-administered and covered explicitly by statute. Studies show that Medicare sometimes pays physicians and other providers significantly more than their actual costs for the drugs. In September 2000, the Health Care Financing Administration's (HCFA)--now the Centers for Medicare and Medicaid Services--took steps to reduce Medicare's payment for part B-covered drugs by authorizing Medicare carriers, the contractors that pay part B claims, to use prices obtained in the Justice Department investigations of providers' drug acquisition costs. HFCA retracted this authority in November 2000 after providers raised concerns.

What GAO Found

GAO found that Medicare's method for establishing drug payments is flawed. Medicare pays 95 percent of the average wholesale price (AWP), which, despite its name, may be neither an average nor what wholesalers charge. It is a price that manufacturers derive using their own criteria; there are no requirements or conventions that AWP reflect the price of any actual sale of drugs by a manufacturer. Manufacturers report AWPs to organizations that publish them in drug price compendia, and Medicare carriers that pay claims for part B drugs base providers' payments on the published AWPs. In 2001, widely available prices at which providers could purchase drugs were substantially below AWP, on which Medicare payments are based. For both physician-billed drugs and pharmacy supplier-billed drugs, Medicare payments often far exceeded widely available prices. Physicians and pharmacy suppliers contend that the excess payments for covered drugs are necessary to offset what they claim are inappropriately low or nonexistent Medicare payments for services related to these drugs. For delivery pharmacy supplier-billed drugs, Medicare's payment policies are uneven. Pharmacy suppliers billing Medicare receive a dispensing fee for one drug type--inhalation therapy drugs--but there are no similar payments for other DME-administered or oral drugs. Other payers and purchasers, such as health plans and the Department of Veterans Affairs, use different approaches to pay for or purchase drugs that may be instructive for Medicare. In general, they make use of the leverage from their volume and competition to secure better prices.