Washington Report: Bundled Together

February 1, 2007

Pharmaceutical Executive

Volume 0, Issue 0

Democrats want more transparency from pharma, and Republicans also are making noise about pricing. But government drug reimbursement is hard to get right and often creates perverse patient care incentives.

It's no secret that Democrats have pharma high on their hit list. The now-controlling congressional party promises to delve critically into industry profits and excess influence over White House policies. But even Republicans are making waves, over whether government drug-pricing policies also raise concerns about drug safety and treatment practices.

Jill Wechsler

In his final day as chairman of the powerful House Ways & Means Committee, former Rep. Bill Thomas (R-CA) held a hearing on Medicare payments for drugs to treat patients with kidney disease. Medicare spends $2 billion a year on Amgen's Epogen (epoetin or EPO), and Thomas charged at the December hearing that the government's payment formula encourages dialysis centers to overprescribe the drug to costly and possibly unsafe levels. Thomas noted that Medicare pays more than private purchasers or the Veterans Administration for EPO, and threatened that Congress would fix the situation if the Centers for Medicare and Medicaid Services (CMS) fails to respond quickly. Rep. Pete Stark (D-CA), now chairman of the Ways & Means Health subcommittee, agreed with Thomas, adding that with Medicare spending billions on EPO, "the government should get a better deal." But he doubted this would occur with a "cozy club" of interest groups overseeing EPO reimbursement.

Perverse Incentives

Rhetoric aside, the hearing is noteworthy because it raised many of the hot-button reimbursement issues making headlines. The EPO issue arises because Medicare permits dialysis clinics to purchase the drug separately, instead of as part of a composite rate for end-stage renal disease (ESRD) care. Because Medicare reimbursement for specific drugs often is higher than actual acquisition cost for the 13 categories of doctor-administered drugs covered by Part B, this buy-and-bill policy encourages providers to boost revenues through what Thomas called "out-of-control dosing."

The EPO payment policy also has generated safety concerns. Medical journals have presented evidence recently that too-high EPO dosing may lead to heart problems, and even death. Thomas complained that Medicare reimbursement does not mesh with FDA labeling that advises physicians to start with a low EPO dose and titrate up to an appropriate hemoglobin level. One explanation is that kidney specialists argue about recommended blood levels and how to get there, making it difficult for CMS to set a tight coverage policy.

Backing Bundling

A good way to fix this problem is to switch to a bundled reimbursement policy for dialysis services, said David Walker, head of the Government Accountability Office (GAO). Paying a set combined price for treatments and drugs would reduce incentives to provide more medication than clinically necessary, and would give clinicians more flexibility to use other therapies and techniques to boost patient hemoglobin levels. The Medicare Modernization Act (MMA) of 2003 requires CMS to develop a bundled payment policy for dialysis clinics, but the agency is way behind schedule in researching options and testing best methods.

Devising bundled rates, of course, is not that simple. Providers point out that any composite rate for dialysis services needs to risk adjust for differences in the cost of caring for sicker patients, and that regular updates are necessary to reflect drug cost increases and keep providers in the program. Amgen officials, who are happy with the current payment arrangement, emphasize that any shift to a bundled scheme needs appropriate case mix adjusters and quality safeguards.

Despite all the noise, it may be a while before there is any major change in EPO reimbursement. CMS promised to complete its overdue report on a fully bundled system by summer and to test the policy in a pilot program. Amgen wants a "rigorous review" of all the data before making any revisions, and even Democrats may agree to hold off until the report comes out.

More competition, however, might have an impact. Thomas suggested that Amgen's monopoly in the ESRD market keeps prices high. Epogen is the only product covered by Medicare for anemia treatment of ESRD patients, but Roche recently filed an application for a longer-acting anemia drug, Micera (CERA), that could enter the market next year.

ASP Agonies

In addition to the bundling debate, CMS has been struggling to establish a new pricing system for Part B drugs based on average sales price (ASP) instead of average wholesale price (AWP). There was a great scandal several years ago about drug companies "marketing the spread" between Medicare drug-reimbursement rates and provider costs. Investigators found that Medicare was paying a big premium for oncology drugs such as TAP's Lupron, which led to criminal charges and a hefty settlement in 2001. Other companies settled similar charges, and multiple AWP-pricing law suits are still going on (see "Endless Litigation").

Endless Litigation

These marketing practices prompted Congress to mandate ASP prices for Medicare in the MMA to ensure more accurate price reporting by manufacturers, but the change has been difficult to implement. The HHS Office of the Inspector General (OIG) has found many discrepancies between ASPs and average manufacturing prices (AMPs) as well as other industry price reports. And because the ASP rates are supposed to reduce Medicare direct drug payments, CMS has had to boost composite service rates to avoid big revenue cuts for providers. However, oncologists continue to complain that total reimbursement for cancer care is much too low and that it's difficult to report ASPs as required. CMS sought to reduce the burden by establishing a Competitive Acquisition Program to provide Part B medicines to physicians, but the complex program has attracted few providers.

Broader Issues

Meanwhile, other government health programs are struggling with policies for calculating drug prices and payment ceilings. Congress recently instructed CMS to adopt AMPs (instead of AWPs) for Medicaid drug reimbursement, and for CMS to provide states with AMP-based price information every month. The change is supposed to make Medicaid drug prices more transparent and save the government nearly $4 billion. But pharmacists complained that the new system also would slash their reimbursement, and claimed that initial CMS AMP calculations for multi-source drugs were full of errors. Moreover, OIG analysts found wide variation in how manufacturers report AMP data and rebates, particularly those involving pharmacy benefit managers. CMS decided to delay publishing new prices while seeking a more accurate reporting method.

The federal 340B program, which provides drugs at discounted prices to public health agencies serving low-income patients, also is plagued by drug pricing issues. Under this program, HHS requires some 700 pharma companies that participate in Medicaid to provide discounts on outpatient drugs to 12,000 "covered entities," including certain hospitals, clinics, and AIDS programs. To ensure that participating providers get appropriately low prices, HHS sets 340B ceiling prices, and OIG examines these calculations regularly to identify overpayments and discrepancies. But as with Medicare Part B, the program's low reimbursement rates create supply problems, such as recent shortages of intravenous immune globulin (IVIG) for seriously ill patients at many hospitals.

AIDS Drug Assistance Programs (ADAPs) funded by the Ryan White CARE Act also are supposed to get the best prices for medications, either through direct purchase or through the 340B program, but have problems achieving that goal. ADAPs spend nearly $1 billion a year on AIDS therapies for some 135,000 patients (about 25 percent of all Americans with AIDS). But GAO analysts reported in April 2006 that ADAPs are paying above the 340B ceiling price for many top-10 AIDS drugs.

The Ryan White program has been mired in controversy over whether it provides equitable support for AIDS treatment throughout the country, and Congress is under pressure to implement a major overhaul in the next three years. In the meantime, the legislators approved last-minute legislation in December boosting program funding and calling for HHS to establish a "minimum drug list" of antiretrovirals. The aim is to harmonize care among states and increase transparency of 340B prices, but some ADAP providers fear a drug list will force tough choices between broader drug coverage and the scope of patient care.

Jill Wechsler is Pharm Exec's Washington correspondent. She can be reached at jwechsler@advanstar.com