Medicare Overpays for Drugs, U.S. Inquiry Finds

The Medicare system and millions of its beneficiaries could save more than $1 billion a year on prescription drugs if Medicare used the same price schedule as the Veterans Affairs Department, according to a government investigation.

A study of 34 drugs showed that Medicare pays anywhere from 15% to a whopping 1,600% more than the VA for the identical compounds. The report recommended that Congress change the law to allow Medicare to use some of the VA methods, such as discounts for volume purchases.

“Drug industry charges to Medicare are a scandal,” said Rep. Pete Stark (D-Hayward), who requested the investigation by the Health and Human Services Department’s inspector general. A copy of the report was made available to The Times on Wednesday.

The findings could be of particular interest to the federal Medicare Commission, created by Congress to find ways to bring the program’s costs under control, when it holds its next meeting Wednesday. Drug prices are among the fastest-growing components of health spending.

The $1.03 billion Medicare could have saved by using VA purchasing methods represented almost half of the $2.07 billion paid last year for the 34 drugs discussed in the report.

The VA, which runs a network of hospitals, buys directly from manufacturers or wholesalers and uses several methods to hold down costs, notably getting discounts for volume purchases.

Medicare, by contrast, simply reimburses doctors, hospitals or other suppliers for the pharmaceuticals used by beneficiaries. For many drugs, Medicare pays 95% of the average wholesale price as reported in industry publications.

There is no discount for volume purchases, although Medicare is a huge buyer. And individual doctors and hospitals can get discounts without making the savings available to Medicare.

Wednesday’s report is the latest in a series of studies by the inspector general’s office showing that “actual wholesale prices available to physicians and suppliers are often significantly lower than” the payments by Medicare, the IG’s office noted.

Medicare does not cover pharmaceutical products for general use. Instead, it pays for use of drugs in special high-cost circumstances, such as chemotherapy and pain medications in cancer cases, and drugs used in connection with kidney dialysis and organ transplants. Medicare also pays for flu vaccines and hepatitis B vaccines.

Medicare, the $214-billion-a-year federal health program for those older than 64 and the disabled of all ages, covers 38 million people. Large numbers of these beneficiaries buy private insurance policies, known as Medi-gap coverage, to help pay for some of the costs not included in Medicare. Policies with prescription drugs included are among the most costly.

Medicare’s payments for each of the 34 drugs studied were “greater than the VA acquisition cost,” according to the IG study.

For example, the VA paid a median price of $5.68 for a dose of pneumococcal vaccine, used to prevent pneumonia, compared with the $12.48 paid by the Health Care Financing Administration, which runs Medicare.

The biggest price discrepancy was for leuvorcorin calcium, a drug used in treating cancer patients who have had chemotherapy. The VA paid $1.18 for it, Medicare $20.45.

Responding to the report, the drug industry said patients could be hurt if Medicare adopts a more stringent price schedule. “There could be very restricted access to medicines,” said Alixe Glen, vice president of public affairs for the Pharmaceutical Research and Manufacturers of America.

Lower prices could lead to limited lists of drugs for doctors to choose from in treating Medicare patients, she said.

Glen also warned: “When you restrict a physician’s ability to prescribe what a patient needs, you inevitably drive up other costs.”

The IG’s office suggested that the Medicare program could save money through several steps, such as insisting on bigger discounts or calling for competitive bidding.

Congress should take action to “reform” Medicare’s system of payment for drugs, said the report, issued by Inspector General June Gibbs Brown.

The chief Medicare administrator, Nancy-Ann Min DeParle, said that the report’s findings are “extremely disturbing.” She indicated that the Clinton administration favors a change in the law to allow Medicare to reduce its payments for drugs.