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Meddling with Medicare

eye on the news

Meddling with Medicare

A wrongheaded proposal could make it harder for sole practitioners and small family practices to stay in business. March 23, 2016

The Centers for Medicare and Medicaid Services (CMS) recently proposed changing the way Medicare Part B providers are compensated for administering drugs. CMS claims the new rule will lower costs by giving doctors an incentive to prescribe cheaper treatment. In fact, the proposal reveals the bureaucracy’s ignorance of medical practice. It will drive smaller practices out of business, increase health-care consolidation, raise costs, and make it harder for patients to receive the medicines they need.

In 2015, Medicare Part B paid $22 billion for drugs administered by infusion or injection in physicians’ offices or in hospital outpatient settings. Currently, doctors purchase and administer such drugs and are paid the drug’s average sales price (ASP), plus 6 percent. CMS claims that this arrangement leads physicians to prescribe more expensive medicines—6 percent of an expensive drug nets the physician more than 6 percent of a cheaper drug. Drug A, costing $1,000, produces $60 above cost, but Drug B, costing $50, only yields $3. CMS is proposing an experiment to decrease this “incentive” by cutting the markup in some geographic locations to 2.5 percent of ASP, plus a flat fee of $16.80.

Is there any evidence to support the notion that physicians choose to suspend their professional judgment about which treatment is best in order to gain extra payments from more expensive drugs? In a word, no.

A June 2015 report to Congress from the Medicare Payment Advisory Commission (MedPAC) found that “it is difficult to know the extent to which the percentage add-on to ASP is influencing drug prescribing patterns because few studies have looked at this issue.” Most physicians have neither the time nor the inclination to calculate which drug is more remunerative. Usually, they make a genuine effort to prescribe the medication that offers the best balance of effectiveness and side effects for their patient, regardless of the financial gain.

Diseases are not uniform—they come in different subgroups, severities, and forms. One drug is better for a subset of patients; another drug works better in different subset. And individual patients respond in idiosyncratic ways. A drug that is effective on average will be very effective in some patients and poorly effective in others. Patients have different preexisting conditions and co-morbidities, limiting use of recommended drugs.

The notion that physicians juggling these multiple factors would stop to consider the small extra payments for expensive drugs is not only offensive, it is wrong. CMS has it backward: physicians are far more concerned about getting stuck with the cost of expensive drugs than they are about profiting from them. Providers bear the opportunity cost of buying and storing drugs. When a patient cancels treatment, dies, or has a change in condition so that the drug shouldn’t be administered, doctors often get stuck with a drug stockpile that they can’t return or use for another patient. Moreover, under Medicare part B, patients are responsible for 20 percent of the payment and deductibles. If a patient doesn’t pay his share—more likely with expensive drugs—the doctor does.

The current 6 percent add-on doesn’t represent profit to providers. ASP is the average sales price realized by the manufacturer. But the average price that providers pay is generally higher than the ASP. Wholesalers get discounts that lower the prices manufacturers receive—and, hence, the ASP—but that are not passed on to physicians and hospitals. In addition, wholesaler mark-up (not included in the ASP because it doesn’t affect what manufacturers receive) increases what providers pay. Some states and localities charge sales tax that increases providers’ prices, but isn’t reflected in the ASP.

These problems are particularly acute for solo practitioners and small group practices. Hospitals, on the other hand, receive volume rebates and discounts. Nearly half of Medicare acute-care hospitals participate in the plan’s 340B Drug Pricing program that entitles them to buy drugs at least 22.5 percent below ASP while receiving the same Medicare payment that other providers receive. This results in huge, guaranteed profits. High-volume, hospital-based providers are also more likely to have an alternate use for a drug if a patient cancels or dies.

Smaller providers already send many patients needing expensive medications to hospital outpatient departments. Medicare Part B drug spending spiked 167 percent between 2007 and 2015, much of it the result of increased payments in the hospital outpatient setting. Spending on drugs in doctors’ offices only increased 75 percent.

The new payment methodology will drive many smaller providers out of business or into hospital employment. This consolidation will reduce competition and increase costs. Chemotherapy delivered in a hospital outpatient facility is 15 percent more expensive than chemotherapy administered in private offices. The average annual difference per patient is $6,500.

Patients with serious diseases will no longer be able to obtain care from their long-term, community-based providers, and will be forced into hospital clinics, regardless of convenience or preference. It’s bad enough that physicians are being unfairly maligned. Patients shouldn’t be made to suffer too.

Photo by Chris Hondros/Getty Images

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