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You might think Medicare gets a good deal on chemotherapy drugs, but it often pays as much as 100 times what the drugs cost.
By SARA FRITZ, Times Washington Bureau Chief
© St. Petersburg Times, published July 14, 2002
WASHINGTON -- For years, federal investigators have been churning out reports showing that physicians are overcharging Medicare for the chemotherapy drugs used to treat cancer patients.
Doctors who pay only $7.75 for a single dose of Vincasar, for example, are reimbursed at a rate of $700 under Medicare. The government covers $560, and the Medicare patient pays $140.
Both the Clinton and Bush administrations have tried unsuccessfully to trim the Medicare overpayments, which are estimated to cost American taxpayers $2-billion a year.
"There must be no room for waste, fraud and abuse in Medicare," President Clinton declared emphatically in one of his many such appeals to Congress.
Congress, under intense pressure from oncologists and drug manufacturers, usually rejects such entreaties.
In 1997, legislators thumbed their noses at Clinton by formally tying the reimbursements to a controversial drug industry benchmark known as "average wholesale price." Despite its name, AWP is not the average price paid by wholesale purchasers. Instead, it serves as a kind of "sticker price" used by the drug companies to open price negotiations, and it far exceeds what doctors actually pay for the drugs.
Bruce Vladeck, who headed the agency that oversees Medicare under Clinton, says this long history of overpayments points up the biggest unspoken risk involved in Congress' current efforts to create a full prescription drug benefit for seniors under Medicare: As unlikely as it seems, no one in government has been able to determine the actual market price of drugs.
"It's clear that for many drugs, there is no real market price," said Vladeck, now the interim chairman of the geriatrics department at Mount Sinai School of Medicine. "These prices can be manipulated. You have to be careful about the pricing rules, or the government is going to get ripped off."
As cancer survivors will attest, chemotherapy is both unpleasant and expensive.
Toxic drugs are administered to the patient through a syringe for anywhere from 20 minutes to several hours. The procedure is handled by a specially trained nurse, who monitors the patient for side effects such as nausea or vomiting.
According to the American Society of Clinical Oncology, the standard treatment for a Medicare patient with metastatic breast cancer -- six courses of a combination therapy of Taxol and Herceptin -- can cost about $24,000. Treatment for a patient with advanced nonsmall cell lung cancer with Gemzar and Platinol is around $15,000.
Medicare has long had the power to set reimbursement rates for doctors and hospitals, but the pharmaceutical industry has convinced Congress that price controls on its products would stifle drug innovation. That is why drugs are handled in a different way.
When Medicare patients regularly received chemotherapy as hospital inpatients, the reimbursement cost of these drugs was not an issue. Hospitals got a set reimbursement for inpatient treatments that was meant to cover all costs including beds, staff, drugs, food and medical supplies. That eliminated the problem of having to estimate how much to pay for any single item, such as drugs.
In the 1980s, when patients began receiving chemotherapy as outpatients instead of checking into a hospital for it, Medicare officials faced a dilemma. The government did not pay for outpatient drug treatments, but chemotherapy was too expensive for most seniors to finance themselves. Cancer patients succeeded in persuading the government to foot the bill.
Thus began a continuing political struggle to determine how to reimburse doctors for outpatient drug treatments.
Oncology doctors already were receiving reimbursement for their services, but it was hard to figure out how much to add for drugs because the pharmaceutical companies were giving oncologists a wide variety of undisclosed discounts.
Initially, Medicare officials decided that oncologists would be paid according to AWP, a price listed in the Red Book, an industry guide published by the Medical Economics Co. By the time federal authorities realized how drastically AWP overstated the true wholesale price, it had already become the benchmark for reimbursement.
The drug manufacturers soon discovered they could sell more of their drugs by simply inflating the AWP figure. The higher these companies set AWP, the bigger the profit they could offer to doctors and hospitals who used their products to treat Medicare patients.
Under Vladeck, government officials began to recognize the problem in the early 1990s when they saw a dramatic increase in the number of Medicare claims for Luperon, which is used to treat prostate cancer. They eventually found that TAP Pharmaceutical Products Inc. was routinely providing free samples to physicians, who then charged Medicare for the drugs using a highly inflated AWP.
The TAP case was uncovered about the same time Bayer Corp. was found guilty of setting unusually high AWPs for several drugs used to treat hemophilia and immune deficiency diseasesto defraud Medicaid. TAP wound up paying $875-million in the largest health care fraud settlement in history; Bayer settled for $14-million.
The two settlements have spawned a variety of pending legal actions against drug manufacturers by states, unions and consumer groups.
"It is simply unacceptable for Medicare to continue paying for drugs in an outdated, noncompetitive way that costs beneficiaries and the program far more than it should," says Tom Scully, current director of the Centers for Medicare and Medicaid Services.
"Simply unacceptable" is the same phrase Clinton used in a radio address in December 1997 to describe the problem. "Sometimes the waste and abuses aren't even illegal," Clinton continued. "They're embedded in the practices of the system."
For at least a decade, Americans have heard government officials pledge to trim Medicare reimbursements for outpatient drugs. Under some of the failed proposals put forth by the Clinton and Bush administrations, doctors would have been reimbursed at a rate of 85 percent of AWP, at 83 percent of AWP, at the prices listed in the company sales catalogs, at the actual cost of acquiring the drug and at an estimated wholesale price below AWP.
Congress tried to put an end to the debate in 1997 by setting payments at 95 percent of AWP. While AWP had always been used as a benchmark, this was the first time it was written into law.
Both the General Accounting Office and the Department of Health and Human Services inspector general have since done many studies showing that 95 percent of AWP is too high. But they have never been able to propose an average price that would fairly compensate all oncologists.
The huge markup on Vincasar came to light in June when Minnesota Attorney General Mike Hatch filed suit against Pharmacia, the drug's manufacturer. The suit says that most doctors pay only $7.75 for the drug, even though the published AWP is $742.50.
Even inexpensive drugs cost Medicare more than they should.
Janet Rehnquist, Health and Human Services inspector general, estimates Medicare could have saved more than $178-million in 1999 if physicians had been paid the catalog price of 13 cents per milligram for albuterol sulfate (used to treat lung diseases) instead of 47 cents, which is 95 percent of AWP.
When Rehnquist studied 24 drugs commonly administered to Medicare outpatients, she found the government could have saved a total of $887-million in 2000 simply by reimbursing physicians at the wholesale catalog price instead of AWP. Her study did not include the newest, most expensive drugs such as Vincasar.
"Report after report concludes the same thing every time," noted Chris Jennings, a domestic adviser to Clinton who handled this issue at the White House. "It says we're way overpaying for these drugs. But members of Congress can't agree among themselves how to fix it, and it doesn't hurt that the oncologists are lobbying everyone."
Oncologists have been unusually successful in beating back efforts to revise Medicare's reimbursement formula for outpatient drugs.
The American Society of Clinical Oncology is a fast-growing, 16,600-member organization with influential doctors in every congressional district. It also gets generous funding from the pharmaceutical manufacturers. Its Web site lists 25 drug companies that have contributed at least $20,000 to the group in the form of unrestricted educational grants.
Numerous well-organized cancer survivor groups also assist the group in lobbying Congress.
Among the many members of Congress it counts among its friends is Rep. Nancy Johnson, R-Conn., chairwoman of the House Ways and Means health subcommittee, who has been instrumental in preserving the AWP-based reimbursement.
For her consistent support, Johnson received the National Cancer Medal of Honor in April from U.S. Oncology, a national network of community-based cancer centers. The group said, "Johnson shares a deep commitment to helping cancer patients and their families maintain access to the community-based cancer care they need."
Lobbyists for oncologists and cancer patients argue that any effort to trim the payments will force doctors to check their chemotherapy patients into hospitals, which are not equipped to handle such a load, or establish waiting lists for people seeking cancer treatments.
"It is acknowledged that Medicare overpays for cancer drugs, but also widely recognized that Medicare pays less than actual cost of administering those drugs," the Cancer Leadership Council, which includes the American Society of Clinical Oncology, said in a December letter to members of Congress. "If Congress is to address the problem of drug overpayments, it must simultaneously resolve the corresponding underpayment for practice expense."
Philip Johnson, pharmacology director for H. Lee Moffitt Cancer Center & Research Institute in Tampa, says proposals to trim the reimbursements are like "trying to buy a prime rib for the price of a cheeseburger.
"The government is setting up a scenario where the hospitals are going to look bad and the people won't get the treatment they need," he said.
Presidential politics has played a big role in preserving the current system.
In 2000, the Clinton administration backed away from a proposal to rein in the payments. Administration officials decided to retract the proposal after then-Texas Gov. George Bush, the Republican nominee, suggested the Democratic initiative would undermine health care for Medicare patients.
"The White House folks didn't want to go up against the oncologists," said Vladeck.
Only recently has the word "competition" entered into the debate over Medicare reimbursements for outpatient drugs.
Members of Congress now see competition as a possible way to limit drug prices without imposing actual price controls. The House-passed bill that would create a prescription drug benefit for all seniors calls for a mild form of competition between companies chosen to manage the pharmacy benefits.
For outpatient drugs, some members of Congress say Medicare should follow the example of the Veterans Administration, which awards contracts to the wholesaler that offers to sell a drug to the VA for the lowest price. Because Medicare covers more patients, they reason, it should get an even bigger discount than the VA.
According to Rehnquist's study of 24 drugs given to outpatients under Medicare, the government could have saved $1.6-billion in 2000 if it had paid for them according to the VA's price list. For half of these drugs, she said, Medicare pays more than double the VA price.
Medicare pays about $173.49 for 30 milligrams of Taxol, which is used to treat ovarian and breast cancer, while the VA pays only $107.59 -- a savings of 38 percent. Medicare pays 47 cents for a milligram of albuterol, and the VA pays 85 percent less at 7 cents.
But there is not enough support in Congress for this idea to be adopted.
The Ways and Means Committee is considering a compromise plan under which the government would solicit bids from pharmaceutical suppliers and then offer to pay the average of those prices. In other words, Medicare, unlike the VA, would not buy from the lowest bidder. The legislation apparently would offer no incentive to preclude the companies making wildly exaggerated bids to drive up the average.
Vladeck says the government will never be able to get control of Medicare costs until Congress gets over the idea that it is wrong to use the government's buying power to get discounts.
"It's idiotic not to use the market power of the federal government to get lower prices," he says. "We're just unwilling to admit that we're really controlling drug prices."