Much of the controversy surrounding the passage of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) focused on the creation of a broad-based Medicare prescription drug benefit. The MMA, however, is wide-ranging. In addition to establishing a prescription drug benefit, the MMA makes a number of significant changes to the Medicare program. Included among these changes are a number of payment reforms directed at combating "waste, fraud and abuse." This article will take a closer look at the changes most likely to affect pharmaceutical and medical device manufacturers. These are the changes to the average wholesale price (AWP) reimbursement system for Part B covered drugs, changes to reimbursement for durable medical equipment (DME), and the pilot program for so-called "recovery audits."
AWP Reform
The Medicare Part B Program historically has provided coverage for a relatively small number of pharmaceutical products, including drugs administered incident to a physician’s service, certain chemotherapy drugs, certain vaccines, immunosuppressive products following organ transplantation and drugs used in conjunction with covered DME. These drugs will continue to be covered under the Medicare Part B Program rather than under the newly created Part D Drug Benefit.
Prior to passage of the MMA, Medicare reimbursed physicians and suppliers for Part B covered drugs at 95 percent AWP as published in certain compendia, such as the Red Book. The AWP-based payment methodology has been sharply criticized as being subject to manipulation by drug manufacturers. Several high-profile fraud investigations and settlements have involved accusations that manufacturers artificially inflated AWP as a method of inducing physicians to purchase their products. The manufacturer would offer a physician deep discounts off of the published AWP. The physicians then could bill Medicare at 95 percent of AWP and retain the "spread" as profit.
In order to address this perceived shortcoming, the MMA contains several reforms to the AWP payment system. First, the MMA requires that the Secretary of the U.S. Department of Health and Human Services (Secretary) adjust the physician fee schedule payments for certain drug administration services, including chemotherapy administration, and non-chemotherapeutic or diagnostic infusions and injections. These provisions, which will increase physician reimbursement for the administration of Part B covered drugs, are intended to address physicians’ complaints that they need the profit from the purchase and sale of drugs to counterbalance the inadequate reimbursement for physicians’ services associated with administering the drugs.
In conjunction with this increase in physician reimbursement, the MMA significantly decreases reimbursement for the drugs themselves. Effective January 1, 2004, the reimbursement for most Part B covered drugs was reduced from 95 percent of AWP to 85 percent of AWP. Exceptions to the reduction in reimbursement include blood clotting factors; new drugs not available for payment as of April 1, 2003; certain vaccines, drugs or biologicals furnished in connection with renal dialysis; and infusion drugs furnished through an item of DME. These drugs will continue to be reimbursed at 95 percent of AWP.
For 2004, the MMA requires that the Secretary adjust the AWP percentage either upward or downward from 85 percent based on an August 2003 report published by the General Accounting Office (GAO) and U.S Department of Health and Human Services Office of Inspector General (HHS OIG) examining the real costs of Part B drugs. For drugs listed in the report, reimbursement will be the percent of AWP listed in the report but in no event lower than 80 percent of AWP. There does not, however, appear to be any limit on upward departures based on the report.
Beginning in January 2005, the MMA imposes more sweeping reimbursement reforms. With limited exceptions, Part B covered drugs will be reimbursed under either an average sales price methodology (ASP) or under a competitive acquisition program (CAP) similar to some specialty pharmacy programs currently sponsored by private third-party payers. Briefly, for single source drugs, the payment will equal 106 percent of the lesser of
(i) the wholesale acquisition cost (WAC) of the product; or
(ii) the ASP of the product.
For multiple source drugs, the amount of payment will be 106 percent of the volume-weighted ASP of all drugs represented by a multiple source drug billing code.
The MMA defines ASP as the manufacturer’s sales to all purchasers (other than certain exempt purchasers), divided by the total number of non-exempt units of the drug sold. The ASP calculation must take into account volume discounts, prompt payment discounts, cash discounts, free goods contingent on any purchase requirement, charge backs and rebates (other than Medicaid rebates). The ASP methodology provides for further discretionary adjustments in light of "widely available market price" (WAMP) data.
WAMP is defined as the price that a prudent physician or supplier would pay for the drug or biological, taking into account discounts and other price concessions routinely available to such physicians and suppliers. If the OIG finds that the ASP exceeds WAMP by the specified percentage, that OIG must inform the Secretary, and the Secretary must substitute a payment amount equal to the lesser of the WAMP or 103 percent of the average manufacturer’s price (AMP) calculated under the Medicaid prescription drug rebate statute.
Under the CAP alternative, the Secretary will establish geographic competitive acquisition areas and will award contracts to entities (such as specialty pharmacies and distributors) for the acquisition and payment of certain Part B drugs and biologicals. Physicians will have the option of obtaining drugs from a CAP contractor rather than buying them and billing for them under the new ASP methodology. Under the CAP system, the outside contractor will submit claims to Medicare for Part B covered drugs and will collect the patient cost-sharing amounts for products administered to Part B beneficiaries.
The goal of these new and rather complex reimbursement methodologies is to bring Medicare reimbursement for Part B covered drugs more closely in line with actual market prices based on verifiable sales data. In this fashion, Congress hopes to minimize, if not eliminate, the impetus and opportunity for fraud and abuse thought to have been inherent in the old AWP system. It remains to be seen whether the ASP and CAP reimbursement systems will accomplish Congress’ goal.
It is interesting to note that responsibility for evaluating WAMP under the ASP system is delegated to the OIG, rather than to HHS or to CMS. OIG can determine WAMP based on third-party data without consulting manufacturers. Further, the MMA imposes no standards regarding survey methods. WAMP calculations are not subject to judicial review. The MMA, therefore, vests the OIG with seemingly unfettered ability to set reimbursement rates through the calculation of WAMP.
Durable Medical Equipment Reimbursement Reform
In an effort to eliminate perceived fraud in the DME industry, the MMA makes a number of significant changes in both the payment for and delivery of DME. It reduces DME reimbursement through new payment mechanisms. At the same time, the MMA imposes new DME supplier quality standards.
As an initial matter, the MMA freezes Medicare payment amounts for DME for the years 2004 through 2008. Thereafter, the rates are increased by the percentage increased in the Consumer Price Index for Urban Consumers (CPI-U).
Class III devices are exempt from this provision. Instead, payment for these items will be updated by the increase in the CPI-U for 2004 through 2006. Thereafter, the percentage change for Class III medical devices is to be determined by the Secretary after taking into account recommendations by the GAO.
In the most significant change, the MMA requires the Secretary to implement competitive acquisition programs for DME. Suppliers will bid on the opportunity to supply covered items within a designated competitive acquisition area. Suppliers will be reimbursed according to the accepted bid, rather than under the Medicare fee schedule. The CAP for DME includes all DME and supplies used in conjunction with DME, enteral nutrients, equipment and supplies, and off-the-shelf orthotics. Inhalation drugs, parenteral nutrients, equipment and supplies, and Class III devices are exempt from the CAP.
Competitive acquisition will be phased in over time. By 2007, the CAP for DME must be introduced to 10 of the largest metropolitan statistical areas. By 2009, the CAP for DME must be implemented in the top 80 MSAs. Beyond 2009, the Secretary may phase in additional CAPs for DME.
The CAP bidding process is subject to numerous requirements. Significantly, the Secretary may waive federal acquisition regulations as needed to efficiently implement the CAP. In order to be awarded a contract, the bidding suppliers must meet the new quality standards for DME suppliers discussed below, as well as financial standards to be specified by the Secretary.
In addition to the CAP and rate freezes, the Act requires the Secretary to reduce payments in 2005 for certain DME, the Medicare reimbursement rates for which the OIG previously has identified as being excessive compared to payments under other government programs. In particular, the MMA mandates reduction in the reimbursement rates for oxygen and oxygen equipment; standard wheelchairs, including standard power wheelchairs; nebulizers; lancets and testing strips used for diabetes management; hospital beds; and air mattresses. Reimbursement for these items will be reduced by the percentage difference between the Medicare payment in 2002 and the median price for the same item under the Federal Employees Health Benefits Program.
In addition to changes in reimbursement rates, the Act imposes new DME supplier quality standards and clinical conditions for coverage. The Secretary must establish and implement new supplier quality standards, which will be applied by recognized independent accreditation organizations. The MMA requires the Secretary to designate the accreditation organizations within one year of implementing the quality standards. The new standards must be no less stringent than current standards and must include consumer service standards.
On the clinical side, the MMA requires the Secretary to establish clinical standards as a condition of Medicare reimbursement for items of DME "for which the Secretary determines there has been a proliferation of use, consistent findings of charges for covered items that are not delivered, or consistent findings of falsification of documentation to provide for payment" under Medicare. The new clinical standards must identify classes of items that require a face-to-face examination of the beneficiary by a qualified professional. Such a face-to-face examination and prescription is specifically required for payment of motorized or power wheelchairs.
Recovery Audit
The Act requires the Secretary to implement a demonstration project utilizing third-party contractors to conduct audits, identify overpayments and underpayments, and recoup overpayments. Recovery audit contractors may be engaged on a contingent basis. The three-year demonstration must cover at least two states with high per capita utilization of Medicare services. Fiscal intermediaries, carriers, and Medicare administrative contractors are not eligible to participate as recovery audit contractors.
The impetus for the demonstration project is not entirely clear. However, it appears to be based on the belief that third-party contractors will provide more efficient and less expensive audit and recoupment services than the OIG or the current fiscal intermediaries and Part B carriers. Recovery of an overpayment by a recovery audit contractor will not bar investigation or prosecution of allegations of fraud and abuse arising from the overpayment.
Conclusion
Although grouped under the heading of Combating Waste, Fraud and Abuse, the provisions of the MMA addressed to these concerns focus almost entirely on reducing reimbursement rates for items and services viewed to have been susceptible to fraud and abuse. Except for the demonstration project for recovery audits and the implementation of DME supplier quality standards, the MMA implements no new fraud control mechanisms. One might question whether reducing reimbursement rates is an effective method for combating waste, fraud, and abuse, especially when those reductions are based on new, complex formulae. It also remains to be seen whether tasking the OIG with implementing the WAMP calculations is an effective deterrent to manipulation of ASP.
Regardless of how these questions eventually are answered, manufacturers and distributors of pharmaceuticals and medical devices will need to pay close attention to the MMA and the changes it implements over time.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.
