Medicare Part B has long paid for drugs that are given in a doctor’s office, such as drug treatments for cancer. Until 2005, the price that Medicare paid to doctors for these drugs was based on figures called “Average Wholesale Prices,” or AWP. In 2003, Congress created a new system for reimbursing doctors for these drugs, based on “Average Sales Prices” (“ASP”). ASP is “the weighted average of all of the sales of the drugs to all purchasers.” In 2005, Medicare began paying doctors 106% of the ASP for a drug given in the doctor’s office.

Why did Congress force Medicare to stop using AWP? It became increasingly clear that AWPs were often artificially inflated by drug companies to increase how much doctors earned by prescribing them, and thus to increase sales of those drugs. Several PAL coalition members are plaintiffs in a massive national class action lawsuit alleging that dozens of drug companies did just that. The case is In re Pharmaceutical Industry Average Wholesale Price Litigation, and is before Judge Patti B. Saris in the U.S. District Court for the District of Massachusetts. More on that case can be found here. Judge Saris recently issued a decision finding that Astra Zeneca, Bristol Myers Squibb and Warrick Pharmaceuticals had in fact illegally inflated and manipulated the AWPs of a number of drugs covered by Medicare Part B.

Industry and physician groups predicted that the amount Medicare would pay them for these drugs would be less than what doctors paid for them in the first place. The Office of the Inspector General (“OIG”) recently issued a Report finding that most physician practices that treat cancer patients generally purchase drugs at costs less than the Medicare reimbursement rates.

Despite the predictions of groups like the Community Oncology Alliance, American Society of Clinical Oncology and American Society of Hematologists, the report found that Medicare’s reimbursement rates were generally adequate for the purchase of cancer drugs. The study found that nine of the twelve physicians offices studied were able to buy most of the fifteen cancer drugs examined at or below the Medicare-established reimbursement rate.

One of the arguments that industry and physicians groups had made against the switch was that the rate that Medicare paid doctors for administering the drugs was not enough, and that any “excess” in the reimbursement for the drug itself helped even this imbalance out. So the report also looked at whether physicians’ offices had in place procedures to track how much it actually cost to administer the drugs. The study found that more than 91% of the physicians offices studied (11 out of 12) could not show how much it cost them to administer these drugs. The study pinned the problem on the fact that federal regulations do not require physician practices to track administrative costs. Without knowing how much it costs to administer such drugs, it’s impossible to determine if Medicare is paying doctors enough (or too little, or too much) for these services.

There’ve been anecdotes since this change about doctors not giving these drugs to patients in their offices because the doctors allegedly lose money when they do so, but rather, sending them to hospitals to have the drugs administered. It generally costs Medicare much more to have this done in hospitals rather than doctors’ offices. But unless doctors can demonstrate that they are not being adequately reimbursed for these procedures, their claims will fall on deaf ears.

In sum, the shift from AWP to ASP so far appears to be bringing Medicare’s payments to physicians for drugs administered in their offices in line with what it actually costs physicians to buy those drugs. Whether or not physicians are being paid enough by Medicare for administering those drugs is still an open question – but physicians need to actually document how much it costs to administer them if they want to argue for increased payments from Medicare, and not merely state they are not being paid enough.