Medicare: Payments for Covered Part B Prescription Drugs

Publication Date: June 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

Type:

Abstract:

Medicare does not cover most outpatient prescription drugs. However, a few categories of drugs, listed in the Medicare statute, are specifically paid for under the program. These include: immunosuppressive drugs following a transplant paid for by Medicare, certain oral cancer drugs, erythropoietin (EPO) for persons with chronic renal failure who are on dialysis, and drugs (which are not self-administered) which are administered "incident to" a physician's professional service.

Payment for covered outpatient prescription drugs is made under Medicare Part B. The Balanced Budget Act of 1997 (BBA 97) specified that the amount payable would equal 95% of the average wholesale price (AWP). As is the case for most other Part B services, Medicare pays 80% of the recognized amount, while the beneficiary is liable for the remaining 20% (known as coinsurance). The BBA 97 provision linking Medicare payment to 95% of AWP was intended to place some controls on Medicare payments. However, many observers contend that the current payment system fails to meet this objective. They state that in many cases Medicare is paying substantially in excess of the acquisition price for the drug; further the program is paying more than most other large purchasers. There is widespread agreement that the existing payment system needs to be reformed. Observers generally agree that Medicare payments should be brought more in line with market prices that providers actually pay to acquire the drugs. The key issue in designing a new drug payment system is what should serve as the basis for payment. Options include using actual sales price, estimated acquisition costs, actual acquisition cost, or a fee schedule.

An alternative approach would use competitive bidding. Under a competitive bidding plan, contract entities such as pharmacy benefit managers, wholesalers, and distributors would bid on a confidential and competitive basis to supply some or all of Medicare-covered drugs. The reimbursement amount would be the average of bids. Physicians and pharmacy suppliers would conduct their own negotiations with any of the bidders selected. Medicare would pay the average price; physicians or suppliers could keep any difference between this price and the price negotiated with the contractor. The competitive bidding approach is reportedly under consideration by the House Ways and Means Committee. It is likely that any AWP reform legislation would be included in a larger Medicare bill. The two House committees of jurisdiction (Ways and Means and Energy and Commerce) are currently developing a bill; it is expected that the House will consider the legislation early the summer of 2002. The Senate schedule is less clear. At this time it is difficult to predict what final form any legislation might take.

This report will be updated when legislative action occurs.