The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) intended to reduce overpayments for drugs administered in physician offices and hospital outpatient settings by basing the reimbursement formula on a more readily verifiable and market-based price measure. The reimbursement changes, which took full effect in January 2005, tied reimbursement more closely to health care providers' acquisition costs by paying for a drug's average sales price (ASP) plus a 6 percent margin to cover overhead costs for drugs administered in physician offices9 or plus an annually updated margin (currently 6 percent) for separately payable drugs administered in hospital outpatient settings.10
By law, a drug's ASP is defined as the volume-weighted average manufacturer sales price net of all rebates, discounts, and other price concessions to U.S. purchasers, excluding sales that are exempt from Medicaid "best price" calculations and sales to other federal purchasers.11 Manufacturers are required to provide CMS with the quarterly sales price and volume of sales for each covered drug by National Drug Code (NDC) within 30 days of the end of the quarter. Because multiple manufacturers may produce the same drug, CMS crosswalks NDCs for the same drug using the Healthcare Common Procedure Coding System (HCPCS). CMS then calculates a volume-weighted ASP for each HCPCS code, which becomes the basis for the reimbursement rate for the following quarter. Given the time needed to submit and process sales data, the current reimbursement rate always reflects a drug's ASP from two quarters prior. Figure 1 shows the timeline for establishing Medicare Part B reimbursement rates.
Following the MMA change, most private payers adopted the Medicare Part B drug payment system. Since providers do not buy drugs separately for differently insured patients, the Medicare database of ASPs was the basis for private payer reimbursements, although some private payers paid higher or lower surcharges (compared to the 6 percent) than Medicare paid.12, 13 More recently, however, one of the nation's largest private payers eliminated this payment mechanism altogether and began bundling payments for a total course of chemotherapy, with the goal of separating oncologist' income from their drug selection. 14 Under this payment arrangement, chemotherapy drugs are treated like all other medical supplies and products - the provider receives no special reimbursement for their cost.
Figure 1. Timeline for Setting of Medicare Part B Reimbursement Rates