Alternative strategies for Medicare payment of outpatient prescription drugs--Part B and beyond

Abstract

Reimbursement options for pharmaceuticals reimbursed under Medicare Part B (physician-dispensed drugs) are changing and the new comprehensive Part D Medicare outpatient drug benefit brings further changes. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA) replaces traditional policy, of reimbursing Part B drugs at 95% of average wholesale price (AWP, a list price), with a percentage markup over the manufacturer's average selling price; in 2005 an indirect competitive procurement option will be introduced. In our view, although AWP-based reimbursement has been fraught with problems in the past, these could be fixed by constraining growth in AWP and periodically adjusting the discount off AWP. With these revisions, an AWP-based rule would preserve incentives for competitive discounting and deliver savings to Medicare. By contrast, basing Medicare reimbursement on a manufacturer's average selling price undermines incentives for discounting and, like any cost-based reimbursement rule, may result in higher prices to both public and private purchasers. Indirect competitive procurement for drugs alone, using specialty pharmacies, pharmacy benefit managers, or prescription drug plans, is unlikely to constrain costs to acceptable levels unless contractors retain flexibility to use standard benefit management tools. Folding Part B and Part D into comprehensive contracting with health plans for full health services is likely to offer the most efficient approach to managing the drug benefit.