Medicare Part B Reimbursement of Prescription Drugs . Medicare Part B Reimbursement of Drugs prior to the Medicare Modernization Act


The Medicare Part B drug payment system is used by Medicare to reimburse health care providers for the average costs of the drugs they administer when providing outpatient services to Medicare beneficiaries. Reimbursement to individual providers is based on a formula computed from national sales data, not on the price paid by a specific provider. This reimbursement formula has changed over time. Following enactment of the Balanced Budget Act of 1997, the Health Care Financing Administration, now the Centers for Medicare and Medicaid Services (CMS), required Medicare carriers, which process Medicare claims, to base their reimbursement for a covered drug on its average wholesale price (AWP) as published in RED BOOKTM  or similar drug pricing publications used by the pharmaceutical industry. Specifically, for covered drugs available only from a brand source, reimbursement was calculated as 95 percent of the drug's AWP. For covered drugs available from brand and generic sources, reimbursement was the lesser amount of 95 percent of the median AWP for generic sources or 95 percent of the AWP for the brand source.1

Beginning in 1997, several organizations, including the U.S. Department of Health and Human Services (HHS) Office of Inspector General,2, 3, 4, 5 the Medicare Payment Advisory Commission (MedPAC), 6   the U.S. Government Accountability Office, 7 and the Congressional Research Service,8 identified two main problems with this reimbursement system. First, the Balanced Budget Act of 1997 did not define AWP, and most analysts found that the figures used were inflated relative to actual prices paid, lacked uniform reporting criteria, and could not be verified. The lack of standardization also resulted in local Medicare carriers using different AWPs for the same drug code, even though the drug payment system was a national formula that did not provide for differential reimbursement based on geography. Second, because of rebates and other discounts, the published AWPs used by Medicare carriers to calculate reimbursement were substantially higher than the actual acquisition prices available to providers who billed for these drugs. While Medicare paid 95 percent of the AWP, most of these drugs were available to providers for 66 percent to 87 percent of the AWP, with some drugs available for considerably less. 6   As a result, Medicare paid providers roughly a billion dollars more than acquisition costs annually for Part B drugs, and Medicare beneficiaries, who were responsible for a 20 percent copayment, paid hundreds of millions of dollars more annually than if payment rates reflected actual acquisition costs. 2, 3

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