U.S. Study to Assess Medicare Drug Prices

A federal health agency is planning a major investigation of drug pricing to determine whether Medicare is paying too much for prescription drugs used for chemotherapy, kidney dialysis, organ transplants and vaccines, officials said Monday.

Investigators will look at how Medicare pays for the drugs compared with the purchasing programs of other government agencies such as the Veterans Administration and Medicaid, the federal-state health program for the poor. The study also will compare Medicare spending with prices paid by doctors and hospitals.

Janet Rehnquist, inspector general for the Department of Health and Human Services, will direct the general study, along with separate inquiries into payments for the drug Epogen, used for dialysis patients, and inhalation drugs used by patients with respiratory illnesses.

The government is concerned that the average wholesale price on which payments are determined is “a greatly inflated number,” Ben St. John, a spokesman for the inspector general, said Monday.

The investigations are particularly significant now because Congress has in its budget resolution a proposal to spend $300 billion over 10 years to make prescription drugs available on a general basis to all 40 million beneficiaries of the giant health program.

Medicare drug coverage is generally limited to patients who are in the hospital and to those with serious medical conditions, including cancer patients getting chemotherapy as an outpatient or at home; patients needing dialysis; and those who take special drugs so their immune systems do not reject transplanted organs. Medicare also pays for vaccines.

If Congress created a general benefit, available to all Medicare recipients--those 65 and older and the disabled of all ages--government spending on the benefit would soar, perhaps far beyond the $30 billion a year in the plan being considered by Congress.

Because of the possibility, HHS officials and members of Congress are eager to find out whether the current pricing system is fair.

“We’ve got to do something soon to right this ship,” said Ken Johnson, a spokesman for the House Energy and Commerce Committee, which is working on Medicare reform legislation. “The average wholesale price is a joke in many respects. We’re talking about billions of wasted dollars.”

Medicare pays an amount equal to 95% of the average wholesale price when it buys drugs. But a recent hearing by the committee indicated that doctors are able to buy the drugs at prices far below the average wholesale price.

Medicare beneficiaries, nonetheless, are responsible for a 20% co-payment based on the average wholesale price. Patients often pay more in co-payments than the actual retail cost of the drug, according to the committee.

“We’re determined to bring an end to this,” Johnson said. “The system isn’t working. As more and more people realize they are getting fleeced, the anger is going to grow.”

The inspector general’s office has studied the issue in past years and has recommended changes, but Congress ignored their reform plans. Medicare statutes require the government to use the average wholesale price system for its purchases.

Doctors or clinics buy the drugs, provide them to Medicare beneficiaries and then submit a bill to the government. Medicare pays the 95% of the average wholesale price regardless of the actual price paid by the physician or the clinic.

In 1998, the HHS inspector general compared Medicare prices to those paid by the Veterans Administration and found that Medicare and its beneficiaries could have saved $1 billion by using the prices paid by the VA. Medicare “paid between 15% and 1,600% more than the VA” for the 34 drugs studied, George Grob, deputy inspector general, told the Energy and Commerce Committee last month. The method of payment “makes no sense at all,” Grob told the panel.

Another study issued this year by the inspector general indicated that Medicare could achieve major savings by using the VA price schedules or the actual wholesale prices available to doctors.

A spokesman for PhRMA, the pharmaceutical industry trade association, said the group doesn’t usually comment on the inspector general’s reports.