Bustin' a CAP: The Competative Acquisition Program

Nov 01, 2005

The new Competitive Acquisition Program (CAP) for Medicare Part B drugs aims to align market forces with the distribution of drugs and biologics that doctors administer in their offices. But the nascent bureaucracy may be unable to overcome a big downside for vendors, despite real advantages for physicians, manufacturers, and especially the government.

Obviously there is a great deal to gain, particularly for the Centers for Medicare and Medicaid Services (CMS). Instead of reimbursing thousands of individual physicians for drugs, CMS intends to contract with two to five national vendors who deliver drugs to doctors and bill the government. Physicians, whose buy-and-bill reimbursement requires them to sink their own money into patient medications and then wait 40 to 60 days for Medicare reimbursement, can cut their capital cost of doing business. These benefits are significant, when one considers that the the average community oncologist spends about $2 million per year on drugs.

CAP vendors must be willing to absorb this capital cost, as well as the vast bookkeeping chores of Medicare paperwork, in exchange for a national contract to distribute Medicare Part B drugs. Presuming that doctors sign on to the voluntary plan, CAP vendors become exclusive distribution channels for three years at a time.

Medicare patients get cheaper drugs and greater access to expensive injectable treatments and biologics, not least because vendors must be able to deliver most drugs to doctors on very short notice—often 24 hours. In addition, relieved of the capital costs of drug procurement by CAP, doctors may be more likely to prescribe Part B medications instead of referring patients to an outpatient hospital for those drugs, which may be an upside for pharma as well.

All of these changes are fueled by market forces. But the benefits accrue only if each party's rational pursuit of self-interest benefits the goals of all. But instead of a smooth-running engine, the complicated, interlocking relationships prescribed by CMS resemble a vast Rube Goldberg machine, whose every part must dovetail with the next if the gratuitously complicated apparatus is to perform its simple chore. And in fact, the gears do not seem to mesh. The sluggish responses of one key CAP constituency, the vendors, brought the cumbersome mechanism to a halt before it was launched. Vendors argue that national contracts do not compensate them for the cost of capitalizing and running the program: The six-percent mark-up required by CMS is just too tight for easy profitability.

Some vendors plan to participate anyway for strategic or defensive reasons, but others will remain on the sidelines. AmerisourceBergen Specialty Group, for example, the largest oncology distributor in the nation, notified CMS this past summer—two days before final bids were due—that it would not bid. On the same day, August 3, CMS suspended the bidding process. Even so, CMS plans to issue a Final Rule for CAP before the end of this year, and to launch the system next summer.

Conflicts between doctors and vendors may emerge when the system is launched, but for now it is important to understand vendors' complaints, and to see where market forces have stalled the machinery instead of helping it hum along in the service of all. The problems lie with the Goldberg structure of the new system, which, in many important ways, discourages rather than supports the participation of pharma, the established drug distributors, and many physicians who prescribe Part B drugs. Market forces were supposed to bring efficiency and order to the Medicare distribution and billing process. But in fact, the pursuit of economic self-interest—the bedrock of a market-driven system—may prevent stakeholders from working together. The new system is meant to create cooperation, but in reality, it pits vendors against the government, and will almost certainly pull doctors and pharma manufacturers into the fray.

CAP Defined

The Medicare Prescription Drug Improvement and Modernization Act (MMA) of 2003 is best known for the Medicare Part D prescription drug benefit, with its doughnut holes and the dizzying array of plans to fill or ignore them. But the MMA also changes how CMS pays for Part B drugs and biologics, which are therapies that doctors administer in their offices. Under the old system, doctors purchased these drugs from pharma companies or distributors, and were reimbursed at a percentage of the average wholesale price (AWP), which was essentially a manufacturers' sticker price that could be easily discounted and, until recently, was seldom challenged by payers.