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THE EVOLUTION AND FUTURE OF THE MEDICARE CHEMOTHERAPY CONCESSION

Jennifer Lynn Zachary

May 26, 2004

Submitted in anticipated fulfillment of the J.D. written work requirement at Harvard Law School

Supervised by Professor Peter Hutt

Abstract

Cancer is a life threatening disease that affects thousands of Americans each year. Chemotherapy is one of the most effective treatments for the disease, but its prohibitive cost makes it all but unavailable to those without health insurance. The Medicare program provides coverage for chemotherapy treatment to 40 million Americans 65 and older, those in the highest risk group for developing cancer. Last year the Medicare program spent over five billion dollars on chemotherapy treatment, with 75 percent of this money being paid to oncologists to reimburse them for the prescription drugs they administer to Medicare beneficiaries during chemotherapy treatment. Through a practice known as the “chemotherapy concession,” oncologists purchase prescription chemotherapy drugs from their manufacturers and wholesalers, administer the drugs to patients, and then bill Medicare for reimbursement. This payment from Medicare often far exceeds the actual cost of the drugs to the physicians who purchased them. Government audits have found that profit margins for doctors of 80 to 90 percent are not uncommon in these transactions.

Critics contend that this practice encourages doctors to over-prescribe chemotherapy and jeopardizes the continued coverage of chemotherapy treatment by the Medicare program. Oncologists have maintained, however, that these generous drug reimbursements are necessary to offset Medicare’s inadequate payments to them for the chemotherapy administration services they provide to Medicare beneficiaries in their offices. Medicare currently does not compensate oncologists for a wide range of essential services they offer their patients, such as psychological therapy, nutrition counseling, family support services, and pain management classes. For this reason, oncologists claimed that they would only support a reduction in Medicare’s prescription drug reimbursements if it was accompanied by a corresponding increase in Medicare’s payments to them for chemotherapy administration services.

A number of proposals for Medicare reform have been advanced over the course of the last decade. Many of these proposals called for Medicare to reimburse oncologists at market prices for the prescription drugs they purchased and administered to Medicare beneficiaries. Several proposals called for the Medicare program to adopt payment systems similar to those that have been successfully implemented by other public health insurance programs, such as Medicaid and the Veterans Health Administration.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 signed into law on December 8, 2003, radically reforms the way that Medicare pays for prescription chemotherapy drugs. The bill increases payments to oncologists for their services in administering chemotherapy to program beneficiaries, while at the same time reducing Medicare’s spending on prescription drugs. The Act has been widely criticized, however, for preserving a system wherein oncologists have an incentive to over-prescribe chemotherapy treatment to their patients because they make a profit on the chemotherapy drugs administer.

THE EVOLUTION AND FUTURE OF THE MEDICARE CHEMOTHERAPY CONCESSION

I. Introduction

Chemotherapy is a lifesaving treatment for cancer, but its prohibitive cost makes it unavailable to those without health insurance. The federal Medicare program provides insurance coverage for chemotherapy treatment to 40 million older Americans at an annual cost of over five billion dollars. Much of this money is paid to oncologists to reimburse them for the prescription drugs they administer to Medicare beneficiaries during chemotherapy treatment. Through a practice known as the “chemotherapy concession,” cancer doctors purchase these chemotherapy drugs from their manufacturers and wholesalers, administer the drugs to patients, and then bill Medicare for reimbursement. This payment from Medicare often far exceeds the actual cost of the drugs to the physicians who purchased them. Profit margins for doctors of 80 to 90 percent on prescription drug sales are not uncommon.

Critics contend that this practice threatens the future of Medicare’s chemotherapy coverage, “distorts clinical decisions, and cheats taxpayers.”[1] Oncologists have maintained that these excessive drug reimbursements are necessary to offset Medicare’s inadequate payments for the chemotherapy administration services they provide to Medicare beneficiaries in their offices. The Medicare Prescription Drug Improvement and Modernization Act of 2003, signed into law on December 8, 2003, radically reforms the way that Medicare compensates oncologists for the chemotherapy treatment they provide. Though successfully balancing competing policy objectives while simultaneously reducing Medicare prescription drug spending, the Act has been widely criticized for preserving the chemotherapy concession.

II. The Treatment of Cancer Through Chemotherapy

Though commonly thought of as a single condition, cancer is actually a term that describes over 200 different diseases affecting a wide range of body cells and tissues. Common to all of these cancers, however, are chromosomal mutations that cause an afflicted person’s previously healthy cells to suddenly grow and replicate out of control.[2] To effectively treat cancer doctors must halt the disease’s cycle of uncontrolled cellular growth and division. Chemotherapy is one of the most effective and widely used treatments for cancer. It works through the use of various anti-cancer agents, collectively called cytotoxic drugs. [3] These drugs target and destroy cancerous cells, thereby halting their cycle of cellular replication. Although cytotoxic drugs can be administered to patients in a variety of ways they are most commonly given orally, intravenously, or through injection. [4] Once administered, these chemotherapy drugs enter the bloodstream and are carried throughout the body to attack cancer cells wherever they are found.

Cytotoxic drugs have chemical properties that cause them to be readily taken up by those cells in the body that are dividing most rapidly. In patients receiving chemotherapy most of the cells that replicate quickly are cancerous. Unfortunately, some healthy cells that divide frequently as a part of their normal cellular functioning also absorb the cytotoxic drugs and are harmed by them. The healthy cells most likely affected by chemotherapy treatment are the fast growing ones in the bone marrow, digestive tract, reproductive system, and hair follicles. Cells of vital organs such as the heart, kidneys, bladder, lungs, and nervous system may also be harmed.[5] While normal cells will usually repair themselves after chemotherapy administration has stopped, this temporary damage to the body’s healthy cells is the source of most chemotherapy-related side effects.[6] The frequency and severity of side effects experienced by chemotherapy patients can be limited by interspersing appropriately timed rest periods into a patient’s cancer treatment regimen. During these rest periods no cytotoxic drugs are administered and the damaged, normal cells are permitted to recover.

Chemotherapy can be effective when used alone as a treatment for cancer, but it is more commonly employed in conjunction with other more localized cancer treatments. It may be given to shrink tumors before surgery or radiation in order to make these procedures more successful. [7] Chemotherapy is also commonly administered to patients after they have already undergone surgery or radiation, in an effort to destroy all remaining cancer cells so that the disease will not return.[8]

There are presently over 100 different kinds of cytotoxic drugs, with many new therapeutic agents being discovered each year. [9] These drugs are often more effective when two or more of them are administered together, as is frequently done through a treatment regime called combination chemotherapy.[10] Determining which cytotoxic drug or combination of drugs to administer at a given time, whether alone or in addition to surgery or radiation treatment, is essential to designing an effective course of chemotherapy treatment. Introducing rest periods at appropriate times is also necessary in order to minimize side effects. This fashioning of each patient’s individualized chemotherapy treatment regimen is an involved and exacting process that requires many hours of a highly skilled oncologist’s time. [11]

A. The Development of Chemotherapy Treatment

The basic techniques used in chemotherapy treatment were first pioneered in the 1940s.[12] Medics observed that soldiers who had been exposed to mustard gas during World War II had abnormally low white blood cell counts. White blood cells, like cancer cells, undergo rapid cellular division as a part of their normal cellular life cycle. Researchers hypothesized that the mustard gas might damage cancer cells in the same way that it had killed the white blood cells.[13] Mustard gas was administered to cancer patients, by injection rather than through inhalation of the irritating gas, and remarkable improvements in the patients’ conditions were observed. Unfortunately these improvements proved to be only temporary, but the experiments prompted researchers to look for other agents that may have similar, but lasting effects in cancer patients.

Acceptable cytotoxic drugs were not developed until the 1970s, at which time chemotherapy began to be used widely as a treatment for cancer.[14] During these early years of chemotherapy administration, the effects of the treatment were sometimes thought to be worse than those of the disease. [15] There were only a few cytotoxic drugs available and all were quite toxic. They produced side effects that were so severe that patients receiving chemotherapy had to remain in the hospital for the duration of their treatment so that they could be carefully monitored.[16] In the mid-1980s a number of less toxic cytotoxic drugs were developed.[17] Equally important was the simultaneous development of several highly effective anti-nausea drugs. These medical discoveries, along with the significant financial savings realized by performing the treatment outside of the hospital, permitted chemotherapy treatment to transition to an outpatient setting in the late 1980s and early 1990s. Now it is estimated that at least 80 percent of adult chemotherapy patients receive their treatment in hospital outpatient facilities, independent cancer treatment clinics, and oncologists’ offices. [18]

B. The Administration of Chemotherapy in an Outpatient Setting

Early forms of outpatient chemotherapy were quite simple, but over the past fifteen years office-based chemotherapy has grown to be a “complex and time consuming process.”[19] While oncologists must design and oversee the implementation of each patient’s chemotherapy treatment regimen, the actual administration of the cytotoxic drugs is mostly performed by nurses specially trained in oncology and chemotherapy delivery. The administration of chemotherapy is an involved procedure that requires a great deal of preparation time long before the patient even arrives at the oncologist’s office. The drugs to be administered must have been ordered weeks in advance and then prepared that day for use in the patient. They are generally shipped in powdered form and must be mixed with an appropriate solution before they can be injected or infused into a patient. Because the drugs are toxic compounds this mixing must be done carefully, usually under a biological safety hood. Chemotherapy administration also requires a number of medical supplies. These too must be ordered in advance and then prepared for use with the patient.

Once a patient arrives at the office she will undergo a physical exam and have an extensive discussion with either her oncologist, or more likely her nurse, regarding any symptoms she is experiencing related to her disease. She will also be asked to describe the side effects she suffered following her last round of chemotherapy treatment. The patient will then be given a number of pretreatment medications to prepare her body for the receipt of the cytotoxic drugs. Among these are antiemetics, which quell nausea, and a saline infusion to help maintain adequate hydration during the treatment.

In the office setting the cytotoxic drugs are usually administered through one of three methods: push, infusion, and continuous infusion.[20] A “push” is essentially a shot, whereby the drug is injected into the patient from a syringe over a relatively short period of time. A drug administered by infusion is drained from a bag into a patient’s vein over a longer period of time, typically anywhere from 20 minutes to several hours. The most involved of the procedures is the continuous infusion, wherein the drug is infused into a patient with the use of an external pump. The infusion pump is filled and started in the oncologist’s office and then the patient goes home and the pump delivers the drug over a several day period. All of the administration methods currently employed in office-based chemotherapy are quite complicated and require the efforts of skilled oncology nurses. In even the most seemingly simple of the techniques, the push, the cytotoxic drugs must be carefully injected into the patient’s bloodstream, or the specific target tissue, in order to be effective and minimize side effects.

A patient must be closely monitored by the nursing staff during the administration of the cytotoxic drugs to ensure that he is not reacting adversely to his treatment. Even when the administration goes as planned; chemotherapy commonly leads to unpleasant side effects, most commonly nausea and vomiting. If the needle of catheter delivering the cytotoxic drugs is inserted incorrectly or slips from its original position, the drug can escape the vein and extravasate into the surrounding tissue, causing the patient to experience a painful burning sensation.[21] The administration of the necessary anti-nausea drugs, saline solution, and cytotoxic drug solutions can produce fluid volume overload in some patients, a serious condition that lowers blood pressure and can lead to congestive heart failure.[22] The potential also exists for chemotherapy treatment to result in other severe side effects, such as high fever or even anaphylactic shock, an extreme allergic response to chemotherapy agents that can lead to death in only a few minutes.[23]

Once the administration of the cytotoxic drugs is complete, the patient is usually given more anti-nausea drugs, steroids, and a prolonged infusion of saline.[24] The patient’s vital signs are also taken to ensure that he is not experiencing any dangerous side effects. Before the patient leaves the office he will review with a nurse the necessary recuperative steps he should take to maximize the effectiveness of his therapy and reduce the severity of potential side effects.

III. Payment for Chemotherapy Treatment

Chemotherapy is one of the most widely used treatments for cancer and with continuing medical advances it “is likely to be even more important in the coming years.”[25] Chemotherapy is also very expensive. The administration of the treatment requires the efforts of trained oncologists and specialized nurses. The cytotoxic drugs and the anti-nausea agents are costly. Therefore, the thousands of unfortunate Americans who are diagnosed with cancer each year must have financial assistance to be able to afford their lifesaving chemotherapy treatments.

A. Health Insurance Coverage in the United States

Medical services in the United States are paid for in one of three ways: individually out-of-pocket, through private insurance, and with the help of publicly funded programs. According to the most recent census, 13 percent of the population is uninsured.[26] These approximately 41 million people must presumably pay out of pocket, to the extent that they are financially able, when they are in need of cancer care. The majority of Americans, about 62 percent, have access to private health insurance that is provided to them by their employers or purchased by them individually. The remaining quarter of the population, about 80 million people, relies upon various public programs for health insurance coverage. A modest fraction of these people are current military personnel, their families, and veterans who receive their medical services through the Departments of Defense and Veterans Affairs. Another small percentage of people obtain medical coverage through federal and state programs targeted at specific groups, such as workers injured on-the-job, Native Americans, pregnant women, school-aged children, and other special populations.

The vast majority of Americans receiving publicly-subsidized health insurance obtain their coverage through either the Medicaid or Medicare programs. Enacted in 1965 as Titles XVIII and XIX of the Social Security Act, these programs revolutionized the American health insurance system. The Medicaid program, administered by the states but jointly funded by the federal government, provides insurance coverage to 32 million low-income Americans. [27] The federal Medicare program extends health care coverage to most Americans aged 65 and over. The program is presently estimated to serve about 40 million beneficiaries, though the number is growing rapidly. [28] Both programs are administered by the Center for Medicare and Medicaid Services (CMS), a division of the Department of Health and Human Services.[29]

B. Medicare Coverage for a Limited Number of Prescription Drugs

Until the program’s recent amendment, Medicare’s coverage did not extend to the vast majority of prescription drugs. There was a limited exception to this rule for about 450 pharmaceuticals that are covered through Medicare Part B Supplemental Medical Insurance. [30] Through this program, Medicare beneficiaries who pay monthly premiums can obtain insurance coverage for certain physician, hospital outpatient, and laboratory services. If “incident to” one of these covered services a patient is administered a prescription drug, Medicare Part B covers 80 percent of the cost of the drug, with the beneficiary paying the remaining 20 percent. [31] With only a few exceptions, these covered drugs are of the type that must be delivered by injection or infusion and cannot be self-administered by patients. [32] As these limitations would suggest, many of the medications administered during office-based chemotherapy qualify for Medicare Part B reimbursement. Among these are hormone therapies injected into prostate cancer patients, cytotoxic drugs infused into chemotherapy patients, and a wide array of anti-emetic drugs used to alleviate chemotherapy-induced nausea.[33]

Despite the fact that Medicare Part B provides coverage for only about 450 unique drugs, the spending on these drugs has been “substantial,” totaling a staggering $8.4 billion in 2002.[34] This figure represents more than 3 percent of Medicare’s total spending for the year. [35] Much of this money is spent on about 35 high-volume, high-cost drugs, many of which are administered in physicians’ offices to patients undergoing chemotherapy and other cancer treatments.[36] The massive expense of the Medicare Part B program has made it the focus of widespread scrutiny. The billing practices of oncologists and urologists have also been the subject of close examination, as payments to physicians in these cancer-related specialties account for nearly 80 percent of Medicare’s spending on prescription drugs.[37]

Older people have the highest rates of cancer occurrence because the risk of developing cancer increases dramatically with age. [38] Medicare provides health insurance to most Americans aged 65 years and older and the Medicare Part B program offers them coverage for the cost of their chemotherapy treatment. Thus, the Medicare program currently funds a significant amount of cancer care in the United States. As the death rate falls and the population of senior citizens continues to grow, researchers at the National Cancer Institute predict that “the number of Americans with cancer will double by 2050,” and Medicare spending on cancer treatment is “expected to increase dramatically.”[39]

IV. Medicare Reimbursement of Physician-Administered Chemotherapy Drugs

Oncologists who provide chemotherapy to Medicare beneficiaries in their offices receive compensation from Medicare through two different payment systems. For the services provided in actually administering the chemotherapy treatment, an oncologist receives a payment based on the Medicare physician fee schedule. The payment from this CMS maintained price list is intended to compensate the physician for the time, supplies, and staff used in the procedure.[40] Medicare also compensates oncologists for the cost of the prescription drugs they administer to patients during chemotherapy treatment. While theoretically intended to be reimbursement, the Medicare payment is often more than the oncologist’s cost for the drugs. Whether this payment is excessive, and if so the best way to reform the Medicare prescription drug payment system, has been the source of tremendous controversy over the past decade.

A. Medicare Prescription Drug Reimbursement Based on AWP

Reimbursement payments to physicians for prescription drugs under the Medicare Part B program are based on the drugs’ Average Wholesale Price (AWP). AWPs are available for every drug identified by a National Drug Code (NDC) number. The NDC number is an 11-digit product identifier given to each drug by the FDA that identifies the drug’s manufacturer or distributor, its chemical structure, its strength, and its package size.[41] Drug AWPs are available from two sources, the Drug TopicsRed Book: Pharmacy’s Fundamental Reference and the First DataBank Blue Book: Essential Directory of Pharmaceuticals . [42]

The AWP is “often described as a list price, sticker price, or suggested retail price.” [43] The figure was intended to represent the average price at which wholesalers sold drugs to physicians, but it is now widely understood that the AWP is neither average nor wholesale and is often significantly higher than the price paid by the typical physician purchaser. [44] This discrepancy between published AWPs and the actual sales prices of drugs is of critical significance to the Medicare program because its reimbursement rate for physician-administered drugs is set as a fixed percentage of published AWP. [45]

1. Manufacturer-Reported AWPs Do Not Reflect Market Prices

There are several possible explanations for this discrepancy between a drug’s market price and its AWP. One obvious reason is the fact that published AWP are not intended to accurately reflect the prices at which prescription drugs may be obtained by physicians. The publishers of the AWP compendia, the Red Book and the Blue Book , have long stressed that the AWPs they publish are meant to approximate the price of prescription drugs for retail pharmacists only, not the prices commonly available to physicians. [46] Even if the AWPs were a good indicator of the market prices for physicians, these figures would quickly become outdated, as published AWPs are revised only on an annual basis and sometimes even less frequently.[47]

Another explanation for the AWPs’ unreliability is the fact that drug manufacturers determine for themselves an estimated AWP for their drugs and report that figure directly to the books’ publishers.[48] No government statute or regulation requires manufacturers to base their estimates of AWP on empirical market place data. [49] Thus, if a manufacturer so desired, it could submit and cause to be published an entirely arbitrary AWP that bears no relationship to the price the manufacturer actually charges for the drug. Many critics of the current system of prescription drug reimbursement have alleged that the Medicare system creates strong financial incentives for manufacturers to report inflated AWPs.

Some manufacturers report a drug’s wholesale acquisition cost (WAC) instead of submitting an AWP to the compendia publishers which further distorts published AWP. The WAC represents the price at which wholesalers can buy the drug from its manufacturer.[50] Because this price is lower than the price for retail purchasers, the publisher adds 20 to 25 percent to the WAC to determine the published AWP. The exact percentage that the publishers add varies according to a number of discretionary criteria, including the manufacturer and the particular line of drugs. The two publishers frequently differ on their estimates of the percentage add on, leading the drug price compendia to report different AWPs for the same drugs.[51]

2. Purchase Arrangements Reduce Market Prices Below Published AWP

In addition to this arbitrary reporting of the AWP by manufacturers and publishers, the discrepancy between a drug’s market price and its AWP is exacerbated by buying arrangements that nearly all physicians have which allow them to receive drugs at prices below published AWP.[52] Physicians can purchase drugs through specialty oncology pharmacies and receive substantial discounts. They can also join together and form group purchasing organizations (GPOs) to negotiate directly with wholesalers and manufacturers to obtain lower prices based on their pooled buying power. Additionally, many manufacturers offer rebates to physicians when they buy large volumes of drugs. Sometimes these rebates are not reflected in the sale price of the drugs at the time of the transaction because they are awarded at the end of the year based on a physician’s total purchases.[53]

Physicians may also enter into “chargeback’ arrangements whereby they realize significant savings over AWP prices. [54] In a typical chargeback transaction a physician negotiates a greatly discounted price for a drug with its manufacturer and then apprises a wholesaler of the negotiated price. The wholesaler sells the drug to the physician at this price and then “charges back” to the manufacturer the difference between the negotiated price and the wholesaler’s normal price for the drug. These chargeback arrangements are quite popular because they operate within normal wholesale distribution channels, but permit manufacturers to retain control over their drug prices through direct negotiations with end-users.

3. Generic Drug Prices Deviate Significantly from Published AWP

This difference between AWP and the price a drug actually sells for is referred to as the drug’s “spread.” Different drugs have varying spreads but there are some general patterns.[55] The spread is the narrowest for non-generic “single source drugs” which are typically still on patent and unique in their therapeutic class. [56] There is little incentive for manufacturers and wholesalers to offer significant discounts on these drugs so their prices tend to be steady. Spreads for single source drugs have been estimated to vary only slightly, about 12 at 18 percent above published AWP.[57] Drugs with the widest spreads tend to be either generic “multiple source drugs” or single source drugs for which there are several competitive products.[58] The single source drugs in this category are unique drugs that have competing drugs with similar therapeutic effects, but that are chemically different. The published AWPs for these drugs tend to remain high and stable but competition in the marketplace tends to drive down their actual sales prices. Spreads for drugs in this category have been estimated to vary between 9 and 82 percent.[59]

B. Attempted Reform of Medicare’s Prescription Drug Payment System

In recent years prescription drug prices have been the focus of a great deal of attention, as expenditures for these drugs have grown almost twice as fast as payments for other health care services in the United States.[60] Medicare expenditures on prescription drugs have increased 27 percent in each of the last three years, climbing from $3.3 billion in 1998 to $8.4 billion in 2002.[61] Medicare Part B program enrollment during this same period only increased by 1.4 percent each year, strongly suggesting that increases in price, not increases in utilization, were the primary reason for the significant increase in Medicare spending on prescription drugs.[62] Not surprisingly, these ballooning prescription drug expenditures have spawned a host of proposals to reform the way that the Medicare program reimburses physicians for the drugs they administer to their patients. Any changes adopted would necessarily have a profound impact on cancer treatment because the prescription drugs administered during chemotherapy “are central to the treatment of cancer” and half of all cancer patients are covered by Medicare.[63]

1. Parties to the Reform Effort

The administrators of the Medicare program, at the Center for Medicare and Medicaid Services, have actively pursued Medicare Part B reform for over a decade. Acting at the direction of various presidential administrations, the CMS has taken a number of steps toward reform, including commissioning numerous reports examining Medicare’s prescription drug payments, promulgating regulations regarding physician compensation for chemotherapy administration, partnering with the U.S. Department of Justice to investigate AWP inflation by drug manufacturers, and consulting with oncology specialty associations and patient advocacy groups regarding the future of the Medicare Part B prescription drug program. The reports requested by the CMS were prepared by the Office of Inspector General (OIG) of the Department of Health and Human Services (HHS). The OIG is an independent office within the HHS that reports directly to the Secretary. [64] To fulfill its mandate “to protect the integrity of the Department of Health and Human Services programs as well as the health and welfare of beneficiaries served by them” the OIG carries out a series of audits, investigations, and inspections.[65] In their reports the OIG identified a variety of problems with the Medicare prescription drug reimbursement system and recommended to the Secretary of HHS and the CMS that they undertake various “legislative, regulatory, and operational approaches to correct them.”[66]

Many of the proposals to alter the way that Medicare buys prescription drugs would require legislative intervention, so it is not surprising that Congress has also been active in the reform effort. Assorted House and Senate subcommittees have held hearings to determine if Medicare is been overpaying for the prescription drugs its purchases for its beneficiaries.[67] In addition to voluminous testimony, the efforts of these committees have resulted in a number of proposed bills for Medicare Part B reform. Congress has also directed its investigative arm, the General Accounting Office (GAO), to produce a series of exhaustive reviews of nearly every aspect of the Medicare Part B program. These GAO reports, along with the OIG’s investigations, are among the few sources of data available concerning the Medicare Part B’s interactions with its beneficiaries, participating physicians, and prescription drug sellers.

Various non-governmental organizations have also offered valuable input to the Medicare Part B reform effort. The most visible of these is the American Society of Clinical Oncologists (ASCO), a national organization “representing physicians and other healthcare professionals who specialize in the treatment of cancer . . . who work in academic medical centers, community based office practices, and other settings throughout the United States.”[68] Any changes in the way that Medicare reimburses prescription drugs will indubitably have a profound impact on oncologists and their cancer patients, a message which ASCO and its 17,000 members have repeatedly voiced through congressional testimony, physician surveys, position papers, and numerous press releases.[69] Prior to issuing their reports, the OIG and the GAO frequently consult with ASCO. CMS often receives input from ASCO before issuing a proposed rule, and must invariably respond to ASCO’s comments when promulgating Medicare regulations.

2. Historical Development of Medicare’s Prescription Drug Payment System

The formula used by Medicare to calculate prescription drug reimbursements has undergone significant changes over the life of the Medicare Part B program. In order to evaluate the modern reform proposals for the program it is helpful to explore the flaws of the previous approaches to Medicare prescription drug reimbursement that have since been discarded.

a. Medicaid Investigations Served as Impetus for Medicare Reform

The Medicare program’s reliance on the national AWP for reimbursement of prescription drugs has been “the subject of great criticism and scrutiny.”[70] The reliability of the AWP as a reflector of market prices available to physicians was first questioned in the mid-eighties by investigators examining prescription drug payments by the Medicaid program.[71] Prescription drug coverage is an optional service under the jointly administered federal/state Medicaid program, but the Medicaid programs in all fifty states and the District of Columbia have elected to provide this coverage.[72] Medicaid’s governing regulations do not provide a uniform procedure for prescription drug payment.[73] There is a limit on the total amount for which the federal government will reimburse each state, but the states are free to design and administer their own prescription drug programs.[74] Most states have elected to base their payment levels for prescription drugs on some percentage discount of the AWP.[75]

In 1984, a report released by the OIG called into question the appropriateness of Medicaid’s AWP-based payment regime. The OIG examined Medicaid payments to pharmacies for prescription drugs and found that the pharmacies were paying an average of 16 percent below the AWP for the drugs they provided to Medicaid beneficiaries.[76] The fact that the program “was paying near retail prices . . . while other large purchasers received discounts from drug manufacturers,” led the Congress to make dramatic changes in the way Medicaid purchased its prescription drugs.[77] After the enactment of the Omnibus Budget Reconciliation Act of 1990 (OBRA of 1990), pharmaceutical manufacturers who wished to participate in the Medicaid program were required to give annual rebates to state Medicaid programs based on the discounts that they offered to their large, “most favored” purchasers.[78] The Medicaid program has realized substantial savings through the use of manufacturer rebates for prescription drugs.[79]

Notwithstanding these manufacturer rebates, the state Medicaid programs continue to pay providers of prescription drugs, such as pharmacies, according to fee schedules that are based on the drugs’ AWP.[80] While most state Medicaid agencies use “a more deeply discounted AWP than does Medicare,” [81] recent investigations by OIG indicate that even these payments far exceed the actual acquisition costs of the drugs.[82] These lessons of Medicaid reform, that AWP fails to accurately reflect market prices and that reliance on the figure results in overpayments for prescription drugs, prompted similar investigations of prescription drug reimbursements under the Medicare Part B program.

b. Medicare Reimbursement Based on Physician Acquisition Cost

Prior to its use of the AWP as a benchmark for prescription drug costs, Medicare reimbursed physicians based on each individual physician’s reported acquisition costs for the prescription drugs administered to their patients.[83] To ensure that physicians were only reimbursed for prescription drug purchases that were reasonable, the insurance carriers contracted with Medicare were required, as part of their responsibility to pay Medicare claims appropriately, to limit prescription drug reimbursement payments to physicians to reasonable amounts.[84] In the late eighties, amid complaints from oncologists and others that this system was resulting in arbitrary payment levels, Congress prohibited the use of this carrier-controlled procedure to lower Medicare drug payments and required that CMS adhere to a more formal, “inherent reasonableness” process in adjusting physician reimbursement payments.[85] This new process, described as “slow and cumbersome” by the GAO, had to be administered by CMS, without the assistance of the Medicare carriers that actually processed the individual physician claims.[86]

c. Medicare Shifted to a Uniform Payment Schedule Based on AWP

In 1987, realizing that the potential existed for substantial savings in the Medicare Part B program, Congress and CMS began to investigate ways to reimburse physicians according to predetermined, program-wide payment amounts. These efforts culminated in provisions in the Omnibus Budget Reconciliation Act of 1989 (OBRA of 1989) that required all prescription drug reimbursement payments under the Medicare Part B program be based on a uniform fee schedule beginning in 1992.[87] CMS, in implementing this congressional mandate at the direction of the first Bush administration, naturally looked to AWP as a basis for the new Medicare Part B drug payment schedule, as AWP was already the accepted method for drug reimbursement under the Medicaid program. In its proposed rules establishing a payment schedule, CMS stated that it intended to base prescription drug payments on 85 percent of the AWP.[88] Investigations revealing Medicaid’s considerable overpayments using 100 percent of AWP certainly seemed to provide justification for CMS’s proposal to use a discounted AWP as a basis for Medicare reimbursement.[89] Nevertheless, CMS received numerous complaints, many of which came from members of the oncology community, alleging that a prescription drug payment rate based on 85 percent of AWP was “inappropriate.” [90]

The final rules promulgated by CMS for the Medicare Part B prescription drug schedule embodied a compromise agreement. A policy was established for Medicare to pay 100 percent of AWP or the Estimated Acquisition Cost (EAC), whichever was less.[91] It was anticipated that the EAC would be a more accurate estimate of the market price of a drug because the EAC would be determined by CMS only after a careful survey of actual invoices indicating the prices paid by physicians.[92] CMS had only determined EACs for a handful of drugs, however, when objections were lodged by oncologists that the EAC failed to fully compensate doctors who bought only small quantities of a given prescription drug.[93] It was claimed that the EACs set by CMS reflected price discounts given to doctors who ordered large volumes of the drug and that physicians who billed for only a low volume of a particular drug could not purchase the drug at EAC prices.[94] On account of these alleged statistical sampling problems with regard to volume billing, the EAC was never successfully implemented.[95] The result was that Medicare reimbursed physicians under the Part B program for prescription drugs only at the drugs’ full AWP, a figure that was widely believed to be an inaccurate estimate of market prices.

These problems were exacerbated by OBRA and its enabling regulations’ failure to define “AWP.” This omission has facilitated the present system wherein manufacturers self-report AWPs for their drugs to the drug compendia. In effect, this permits the manufacturers to set Medicare’s reimbursement payments for their own drugs.

d. Attempt to Base Drug Reimbursement on EAC Unsuccessful

By 1992, in accordance with the mandate of OBRA of 1989, the CMS had transitioned all prescription drug reimbursements to a uniform fee schedule. In November of that year, the first investigation suggesting that this new, AWP-based fee schedule was resulting in overpayments to physicians came in an OIG report entitled, Physicians’ Costs for Chemotherapy Drugs .[96] While the new fee schedule applied to all prescription drugs purchased by physicians and compensated by Medicare Part B, the OIG elected to study only chemotherapy drugs because these drugs comprised the largest percentage of total reimbursements under the program. The scope of the OIG’s investigation was quite narrow, as it focused its attention on 13 high-volume chemotherapy drugs and surveyed only a “small judgmental sample of physicians in New York state.”[97] The OIG announced that it had examined manufacturer invoices and found that the prices actually paid by this small group of oncologists were significantly below the full-AWP reimbursement payments that the physicians subsequently received from Medicare.[98]

This results of this limited OIG study, combined with the fact that Medicare’s prescription drug expenditures had more than doubled in the two years following the implementation of the AWP-based fee schedule, prompted the Secretary of HHS to direct the OIG to undertake a more comprehensive investigation into the propriety of prescription drug reimbursements under Medicare Part B.[99] In its subsequent report released in 1996, Appropriateness of Medicare Prescription Drug Allowances , the OIG tentatively announced that “Medicare allowances for prescription drugs may not be appropriate.”[100] The report examined reimbursement rates for 17 of the highest volume and largest expense prescription drugs in the Medicare Part B program, many of which are used in the treatment of cancer. The OIG determined how much Medicare had spent for these drugs in 1994, and then calculated how much the same quantity of these drugs would have cost had they been purchased by the Medicaid program. It found that if Medicare had in place a rebate agreement program like that of Medicaid, it would have saved $211 million, or 15 percent of its total spending on prescription drugs in 1994.[101] And, if Medicare had used a discounted AWP to reimburse physicians for prescription drugs, as is done by most of the state Medicaid programs, it could have saved an additional $144 million.[102] Based on these findings the OIG recommended that CMS “reexamine its Medicare drug reimbursement methodologies, with a goal of reducing payments as appropriate” perhaps through the use of a discounted AWP or a rebate program.

The Clinton Administration accepted the OIG’s recommendation and attempted to limit Medicare Part B’s excessive prescription drug payments by proposing legislation that would have based drug reimbursements under the fee schedule on each individual physician’s “actual acquisition cost.”[103] The Medicare payment amount for a particular drug administered by a physician would have been based on the lowest price that the physician had paid for that drug in the previous six-month period.[104] The legislation would have further limited payments to individual physicians to no more than the median national acquisition cost.

This proposal was vociferously opposed by ASCO and other physician groups who complained that this payment scheme would not reimburse physicians their “true acquisition cost” for the drugs they purchased for their patients.[105] The concerns of these professional organizations appear to have been well founded. Unlike the cost-based reimbursement system employed by Medicare before the program switched to AWP, this actual acquisition cost proposal would have only compensated individual physicians at the lowest price they had paid for a drug in the previous six-month period. The market prices of prescription drugs sometimes oscillate wildly over the course only a couple of months, meaning that by the end of the six-month period some physicians could have had to pay much higher prices for drugs while only being compensated by Medicare for a fraction of their actual cost. This problem would have been particularly acute for oncologists, as many cytotoxic drugs have a limited shelf life and cannot be preordered when prices are low and then stored for subsequent use with patients. The additional limitation imposed by the proposed legislation, that reimbursement payments to physicians could be no more than the median national acquisition cost, would also have ignored well recognized geographic variations in price. Physicians practicing in locations where high shipping costs and limited competition had driven up prices would not be reimbursed for the full cost of the drugs they administered to their patients.

The actual acquisition cost proposal was also criticized by oncologists because they believed that it would impose burdensome accounting requirements on them.[106] In order to determine the lowest price a physician had paid for a prescription drug in the previous six month period, the plan would have required physicians to individually document the cost of every purchase for each of the drugs they bought. Failure to precisely comply with these recordkeeping requirements, whether intentional or accidental, would likely have resulted in legal liability for Medicare fraud.

ASCO’s warnings, that the actual acquisition cost proposal would result in inadequate payments to oncologists and force them to turn away Medicare beneficiaries in need of chemotherapy treatment, alerted patient advocacy groups who then mobilized in opposition to the legislation. Concerned that cancer patients could be denied needed treatment because of the uncertain affects of the new reimbursement system, Congress failed to enact the proposed legislation.[107]

e. Medicare Drug Payment Reduced to 95 Percent of AWP

The Clinton administration responded to this defeat by abandoning attempts to base prescription drug reimbursement on market acquisition prices and instead called for reimbursement rates to be lowered from 100 percent of AWP to 83 percent of AWP.[108] Again physician groups cautioned that this dramatic decrease in prescription drug compensation payments could disrupt chemotherapy treatment for Medicare beneficiaries. This time Congress responded by adopting a compromise agreement, embodied in the Balanced Budget Act of 1997 (BBA), which lowered the reimbursement rate for prescription drugs to 95 percent of AWP.[109]

Like the legislation before it, the BBA failed to define AWP or establish requirements to guide manufacturers when submitting their AWP estimates to the publishers of the drug price compendia.[110] A House Budget Committee report accompanying the BBA identified this legislative omission as a possible invitation for manipulation and stated that “the committee will monitor AWPs to ensure that this provision does not simply result in a 5% increase in AWPs.”[111] The Committee also acknowledged its concern that the five percent reduction embodied in the new legislation might alone not be enough to ameliorate the Medicare Part B overpayment problem.[112] The Committee’s report cited to data that had been recently released by the OIG indicating that Medicare’s reimbursement prices “for the top 10 oncology drugs range[d] from 20 percent to nearly 1000 percent more than the acquisition costs” paid by oncologists.[113]

This OIG data was formally released in a December 1997 report entitled, Excessive Medicare Payments for Prescription Drugs .[114] In this report, released only days before January 1, 1998, when Medicare was to begin paying for prescription drugs at 95 percent of the AWP, the OIG stated that it did “not believe that the reimbursement methodology for prescription drugs recently adopted by Congress will curtail the excessive drug payments.”[115] The OIG criticized the solution finally adopted by Congress in the BBA, insisting that unlike the abandoned Clinton administration proposal, it would not successfully capture the full savings realized by physicians through discounts and rebates.[116] With no new legislative solutions on the horizon to address Medicare Part B’s continuing overpayment for prescription drugs, the OIG advised the CMS to consider “further options to reduce reimbursement.”[117]

One such non-legislative option available to the CMS was to invoke its “inherent reasonableness authority” to reduce payments for some prescription drugs. A provision of the BBA enacted by Congress in 1997 gave CMS the authority to adjust the reimbursement amounts for a given prescription drug if the Secretary of HHS found that the drug’s payment was “inherently unreasonable” on account of its being “grossly excessive.”[118] The particular factors to be considered in determining whether a payment was grossly excessive were left to the discretion of the Secretary, but in no event could the payment be reduced by more than 15 percent under the inherent reasonableness authority.[119] The BBA also permitted the Secretary to make larger payment reductions, but only in accordance with the slow, formal notice-and-comment rulemaking procedures.[120]

In 1998, after it had become clear that the 5 percent reduction embodied in the BBA had failed to correct Medicare’s overpayments for prescription drugs, CMS attempted to exercise its inherent reasonableness power for the first time to reduce reimbursement payments for a handful of Part B covered prescription drugs.[121] Several drugs whose reimbursement prices CMS had slated for reduction were central to chemotherapy treatment. Oncologists criticized these price reductions as they had the previous attempts to lower prescription drug reimbursement payments. This time, however, they acknowledged that a spread between the AWP and market price did exist, but they insisted that this spread was needed to offset Medicare’s underpayments to oncologists for their services in actually administering the chemotherapy drug to their patients. Oncologists warned that CMS’s plans to reduce payments for these drugs threatened to deprive Medicare beneficiaries of necessary chemotherapy services. The GAO echoed this criticisms and chided the CMS for “leaving its effort open to criticism” by reducing reimbursement payments for these drugs “before responding to public comment.”[122]

Congress responded to these criticisms of CMS’s proposed actions by passing the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 (BBRA), which prohibited the CMS from using its inherent reasonableness authority until the GAO could assess the possible consequences of CMS’s proposed reductions in prescription drug reimbursement payments. [123] Specifically, Congress directed the GAO to conduct a “nationwide study to determine the physician and nonphysician clinical resources necessary to provide safe outpatient cancer therapy services and the appropriate payment rates for such services under the Medicare program.”[124] This legislation also required CMS to issue a statement through the formal rulemaking process, taking into account both the GAO’s findings and public comment, before again resorting to the use of its inherent reasonableness power.[125]

The GAO subsequently issued its report, entitled Medicare Physician Fee Schedule: Practice Expense Payments to Oncologists Indicate Need for Overall Refinements , in October 2001. [126] CMS failed to issue the required formal statement responding to the GAO’s report. This failure precluded the agency from using either its streamlined inherent reasonableness authority or its notice-and-comment rulemaking power to reduce payments. Thus, legislative action was the only option for CMS to adjust its prescription drug reimbursement payments.[127]

3. Independent Agency Action Attempted by CMS to Reduce Drug Payments

a. Use of DOJ Market Price Data Blocked by Congress

In May 2000, the Department of Justice (DOJ) and the National Association of Medicaid Fraud Control Units (NAMFCU) undertook a joint investigation to determine whether drug manufacturers were reporting inflated AWPs to the drug compendia publishers and defrauding state Medicaid programs that reimbursed doctors based on a percentage of AWP.[128] The investigation focused on 49 drugs covered by Medicaid and compared these drugs’ published AWPs with prices in wholesale catalogues widely available to prescribing doctors.[129] The DOJ concluded from its investigation “that some drug manufacturers report inflated average wholesale pricing information” to the publishers of the drug pricing compendia.[130]

Faced with clear evidence that payment levels based on AWP were excessive for these 49 drugs, the CMS announced its intention to adjust the drugs’ Medicare reimbursement amounts.[131] As authority for its proposed actions the CMS pointed to the fact that AWP was not a statutorily defined term and that in the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 Congress had directed CMS to “look at appropriate factors” in determining appropriate drug reimbursements.[132] In a September 2000 memorandum, the CMS stated that the DOJ price data derived “from wholesalers’ catalogs [were] more accurate wholesale prices for these drugs” than published AWP.[133] It declared that it would therefore consider the data gathered by the DOJ “as another and more accurate data source than the list AWP in the published compendia” and would use these average prices in reimbursing physicians.[134]

Not surprisingly, this initiative was met with strong opposition from oncologists who made it clear that this fight would be taken to Congress.[135] While CMS insisted that its actions were justified in refusing to honor the “inaccurate and inflated” published AWPs for these drugs, it determined in November 2000 to hold off implementing its proposal in light of pending congressional action.[136] This proved to be a wise decision, as in December of 2000, Congress enacted the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), which established a moratorium on reductions in Medicare payments for drugs until the GAO had conducted a study on drug payments and their relationship to allegedly inadequate drug administration payments under Medicare Part B.[137]

b. The GAO Report Supports CMS’s Reform Position

The GAO performed the requested study, Medicare Payments for Covered Outpatient Drugs Exceed Providers’ Cost , which was released in September 2001.[138] In this comprehensive report the GAO looked at how and at what prices physicians acquire the drugs they administer to patients, in at attempt to answer the Congress’ question, “whether Medicare is reimbursing physicians and other providers adequately for covered drugs and related services.”[139] The GAO surveyed a number of physicians and found that most of them obtained their prescription drugs through pharmaceutical wholesalers and group purchasing organizations (GPOs). The GAO then gathered market pricing data from a number of wholesalers and GPOs and determined that widely available prices were “considerably less than AWPs used to establish the Medicare payment” for these prescription drugs.[140] The market purchase prices for these drugs ranged from 12 percent to 86 percent less than published AWP, with many of the highest spreads belonging to drugs used in the treatment of cancer.[141]

In its survey of physicians, the GAO specifically included a number of physicians it identified as billing for low volumes of chemotherapy drugs. They did this to ward off criticisms that had been launched by oncology groups against investigations conducted by the OIG, which had claimed that the prices available to oncologists who billed for only low volumes of cancer drugs were much higher than the prices for those physicians who were able to obtain volume discounts.[142] While the GAO found that “low-volume providers can also purchase drugs for markedly less than AWP, and often at additional discounts below widely available prices” they did acknowledge that “these discounts might not be as high as those obtained by higher-volume purchasers.”[143] They also admitted that their survey was limited in its ability to evaluate possible effects upon doctors billing for small-volumes of prescription drugs because of its limited, homogenous sample. This sample was small, with only 14 doctors submitting responses, and lacked diversity in practice types, as many of the doctors surveyed “belonged to large hospital-based or national chain oncology practices that likely had access to widely available drug price discounts.”[144]

In its final analysis the GAO found that Medicare’s current “method for establishing drug payment levels is flawed” because the AWP mechanism failed to incorporate information on actual market prices.[145] It suggested that CMS consider moving to systems more like those used by the Veterans Administration (VA) and the Medicaid program. In deflecting the claims of oncologists, that these generous drug payments were needed to compensate them for underpayments for the actual administration of chemotherapy, the GAO insisted that “it should be a principle of Medicare payment policy to pay for each service appropriately and not to rely on potential overpayments for some services to offset potential inadequate payments for complementary services.”[146] The GAO explored the adequacy of chemotherapy administration payments in a report released one month later.[147] There the GAO reported that payments to oncologists for chemotherapy administration were indeed inadequate.

c. CMS Seeks Legislative Solution In Congressional Hearings

The release of the GAO’s report, on September 21, 2001, coincided with the House Energy and Commerce Subcommittees on Health and Oversight and Investigations’ hearings on the appropriateness Medicare’s prescription drug payments. These were the first full-scale congressional hearings ever convened on the subject.[148] The GAO’s director of Health Care Issues, William Scanlon, testified at length about the findings and conclusions presented by the GAO in its recent report.[149] The President of ASCO, Dr. Larry Norton, was also invited to testify to provide a response from the oncology community to the GAO’s report.[150] Dr. Norton acknowledged that “payments for drugs should be reduced,” but insisted that the existing Medicare prescription drug reimbursement system had to remain in place until the Medicare payments for chemotherapy administration services could be simultaneously increased to compensate oncologists for those services.[151] Representative Billy Tauzin (R-La.), chairman of the House Energy and Commerce Committee, and outspoken opponent of Medicare’s AWP-based reimbursement system, led the hearings and had some sharp criticism for Dr. Norton’s position. Highlighting the fact that many cancer patients where suffering under the present system by having to pay inflated premiums, Tauzin remarked that “when my 82-year-old mom, a three-time cancer survivor, hears that she has to pay a 20 percent co-pay that’s higher than what the doctor is charged for that drug, I’m going to get some calls from that lady.”[152] This was a reference to GAO’s finding in its September 2001 report that the 86 percent spread for one cancer drug, leucovorin calcium, meant that the “Medicare beneficiary’s co-pay alone was actually more than the physician or supplier paid for the drug.”[153]

These hearings were followed by a flurry of other congressional subcommittee hearings. Noteworthy among these was the hearing of the Senate Finance Subcommittee on Health on March 14, 2002. Representatives from the GAO, OIG, and CMS were invited to give testimony. [154] The testimony of Thomas Scully, offered on behalf of the CMS, was particularly significant because he offered the first clear statement regarding CMS’s position on prescription drug reimbursement since the agency came under the direction of the Bush Administration. Administrator Scully called Medicare’s existing system of reimbursement “seriously flawed” and expressed concern that “the deep competitive discounts offered to physicians and providers by drug manufacturers, compared to the reported AWP, could give physicians and providers an incentive to use the manufacturer’s products,” a situation CMS found “simply unacceptable.”[155] While stating the agency’s hope that “an effective legislative remedy” to the problem would be forthcoming, Scully announced that the CMS was “prepared to take action” on its own should congressional silence on the issue continue.[156]

d. CMS Takes Decisive Steps to Revise Drug Payment System

As authority for the CMS’s threatened unilateral agency action, Scully referenced the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). That Act permitted CMS to lift the congressionally imposed moratorium and resume the use of its inherent reasonableness authority once it had issued a formal statement responding to the GAO’s September 2001.[157] He then announced that in the absence of a legislative solution, CMS intended to use the authority granted to it under BIPA to move away from the existing AWP-based reimbursement system and instead “develop market-based, competitive pricing systems for drugs” that would “not repeat the past mistakes of overpayment.”[158] There was no doubt that CMS’s proposed actions were statutorily supported, as even ASCO, the fiercest voice of the oncologist community, conceded that CMS could revise the Medicare payment amounts for prescription drugs and drug administration services and that those “changes can be implemented without further legislation.”[159]

Six months later, on October 3, 2002, Administrator Scully reiterated CMS’s aggressive position in his testimony before the House Ways and Means Subcommittee on Health.[160] And when Congress had failed to act nearly ten months later, the CMS responded by issuing a formal statement in the Federal Register responding to the GAO’s report, thus permitting it to resume the use of its inherent reasonableness authority to reform Medicare’s prescription drug reimbursement system. [161] In this statement the CMS relied upon data culled from GAO and OIG reports to estimate that Medicare would have saved between 1.7 and 2 billion in 2002, had Medicare reimbursed doctors based upon the market price of drugs rather than 95 percent of AWP.[162] Citing these “serious and well-documented flaws in the current Medicare payment system” the CMS sought public comment on several proposed plans to revolutionize the way Medicare compensated physicians for prescription drugs.[163] Based on the public comments it received, CMS vowed to select and implement one of the proposed plans.

4. Litigation Challenges to the AWP-Based Reimbursement System

Running parallel to CMS’s reform efforts were several high profile lawsuits against drug manufacturers by public and private entities. Many of these legal challenges were sparked by the DOJ’s 2000 report detailing its investigation of drug manufacturers that had reported inflated AWPs to the publishers of compendia.[164] By accusing drug manufacturers of criminal and tortuous conduct relating to their alleged manipulation of their drugs’ AWPs, the lawsuits shared a common goal of forcing drug manufacturers to report AWPs that were more closely aligned with actual market prices. Correcting AWPs would prevent overpayments to doctors for prescription drugs by the state Medicaid and federal Medicare programs.

In September of 2000, the Bayer Corporation agreed to pay $14 million to settle claims with the federal government and the Medicaid programs of 47 states under the Federal False Claims Act.[165] Although Bayer admitted no liability in the settlement, the government had alleged that between 1993 and 1999 Bayer had “knowingly set and reported AWPs for six of its drugs at levels far higher than the actual acquisition cost of the majority of its customers and caused those customers to receive excess Medicaid reimbursement.”[166]

In October of 2001, in what was the largest health care fraud settlement ever, TAP Pharmaceutical Products agreed to pay $875 million to resolve criminal and civil charges stemming from the pricing and marketing of its prescription drug, Lupron.[167] TAP plead guilty to violating federal law by providing free samples of this prostate cancer drug to physicians with the understanding that the physicians would later bill patients, including Medicaid and Medicare beneficiaries, at the full AWP-based price.[168] Though TAP did not formally admit liability, the federal government had also alleged in its complaint that TAP had “set and reported AWPs for Lupron at levels far higher” than the price for which wholesalers or distributors actually sold the drug, resulting in falsely inflated prices.[169]

State Medicaid programs also entered the litigation fray against drug manufacturers. The Attorney General for the state of Nevada sued 12 drug companies, alleging that they had knowingly manipulated or intentionally misstated AWPs for their prescription drugs, “leading states, consumers, and others to significantly overpay for drugs.”[170] On February 25, 2002, the Montana Attorney General filed suit against 18 drug companies, accusing them of having engaged in Medicaid fraud by illegally manipulating and misreporting their drugs’ AWPs.[171]

A coalition of consumer groups instituted a their own litigation effort, in December 2001, with a suit against 28 drug companies for allegedly manipulating the AWPs of Medicare covered prescription drugs.[172] Specifically, the groups’ complaint alleged that, since 1993, the drug manufacturers had been engaged in “a pattern and practice” of selling drugs to doctors at wholesale discounts well below published AWPs with the knowledge that the doctors would then administer these drugs to Medicare beneficiaries and seek reimbursement from Medicare based upon the inflated AWP-based prices.[173]

C. Proposals for Medicare Prescription Drug Payment Reform

In 1997, Congress lowered the Medicare prescription drug reimbursement rate from 100 percent to 95 percent of AWP. In the six years following this reduction, no further substantive reforms were made to Medicare Part B’s prescription drug reimbursement system. While the CMS, the Clinton and then Bush administrations, the Congress, the oncology community, prescription drug manufacturers, and other interested groups continued to debate the optimal path for reform, Medicare’s spending on prescription drugs continued to escalate. Between 2000 and 2001 payments for covered drugs increased by $1.5 million,[174] and in 2002 Medicare spent over $8 million on prescription drugs.[175] CMS estimated that Medicare would have saved between $1.7 and $2.0 billion, in 2002 if it had reimbursed physicians based upon the purchased drugs’ actual sales prices rather than using 95 percent of AWP.[176]

The lack of congressional action if the face of these skyrocketing costs can be attributed largely to the efforts of those in the oncology community who warned that reductions in prescription drug reimbursement could have disastrous consequences for Medicare beneficiaries with cancer.[177] In 2002, nearly half of Medicare’s total payments for prescription drugs went to oncologists as reimbursement payments for medications administered in chemotherapy treatment.[178] Lowering the prescription drug reimbursement rate from 95 percent of AWP to an estimated market price would have significantly reduced Medicare compensation to oncologists, which could have affected these doctors’ willingness to provide chemotherapy to Medicare beneficiaries.[179]

By 2003, however, with CMS beginning to take unilateral agency action and several House and Senate subcommittees holding hearings on the issue, it became clear to all parties to the reform debate that the imminent overhaul of Medicare Part B’s prescription drug payment system was all but certain.[180] Drug manufacturers and oncology professional organizations finally came together with Medicare administrators and legislators to discuss possible options for reform. All of the options called for Medicare to reimburse doctors for the prescription drugs they administered to their patients based upon market prices. The mechanisms proposed for doing this varied, but the alternatives presented and the various legislative solutions offered could be grouped into five categories of possible reform options.

1. Retaining an Adjusted AWP-Based Reimbursement System

The least radical of the reform options was the proposal to retain AWP as the basis of Medicare’s prescription drug reimbursement, but to make the published AWPs more accurately reflect the actual market prices of prescription drugs. This option, which preserved AWP as the basis for Medicare’s prescription drug reimbursement system, would have minimized problems for the private insurers and other public health programs with AWP-based drug payment methodologies. Medicare’s use of AWP had sparked widespread reliance on the figure as “an important prescription drug pricing benchmark for payers throughout the health care industry.”[181] While state Medicaid programs are free to devise whatever prescription drug reimbursement system they desire, most states have adopted a system whereby they pay for drugs at a percentage discount below published AWP.[182] Retaining AWP would prevent the disruption of this “larger pricing infrastructure” of which AWP is an important component.[183]

a. CMS’s Proposal For Correcting Published AWPs

Under the version of this proposal advanced by CMS, an average percentage discount off of published AWP would be applied to each of Medicare’s Part B covered drugs.[184] The discount to be applied would be based upon data collected and reported by the OIG and GAO and would be between 10 and 20 percent off of the AWP. The discount rate for each drug would be increased annually by reference to the consumer price index for medical care. For drugs entering the market for the first time or coming off of patent, the percentage discount off of AWP would be set in the first year based upon expected market pricing information provided by the manufacturer. Drug manufacturers would be legally required to submit their best estimates of their drugs’ actual sales price, and any manufacturer found to have “knowingly supplied misleading pricing information to generate or maintain a ‘spread’ between Medicare payment and the widely available market price” would face prosecution for violation of Medicare’s “anti-kickback” statute.[185]

CMS’s version of the proposal to correct AWPs appears incomplete and would likely result in only a modest decrease in Medicare’s prescription drug payments. The OIG and GAO have only collected data on 50 or so prescription drugs, while Medicare Part B reimburses physicians for 450 different prescription drugs. In its proposal, CMS made no provision for determining appropriate discounts off of AWP for the 400 drugs that have not been the subject of these market price studies. The data developed by the OIG and GAO in previous reports, however, indicated that for all of the drugs they had studied the widely available market prices were 87 percent or less of the published AWP.[186] CMS could have applied a 13 percent off of AWP discount to all of these unstudied drugs, but this seems highly arbitrary and likely to underpay physicians for some drugs while overcompensating them for others.

Legally mandating manufacturers to provide CMS with their best estimate of their drugs’ actual sales prices seems to be a more promising option. It was this outcome, compelling manufacturers to report accurate AWPs for their drugs, which the public and private parties were striving to bring about in their litigation efforts against Bayer, TAP, and the other drug makers.[187] The CMS proposal, however, would afford this treatment only to new drugs just entering the market, not the 450 prescription drugs already covered by Medicare Part B. For the drugs that are already covered by Medicare, CMS’s proposal would merely reduce the percentage discount from 95 percent to something lower. This, in turn, would only encourage drug manufacturers to continue to report even more inflated AWPs.[188]

b. ASCO’s Proposal For Correcting Published AWPs

The oncology community, through its physician group ASCO, also supported a proposal to retain an AWP figure more closely aligned with actual market prices.[189] Under the ASCO plan, however, AWP would be defined by statute or regulation as a figure that must approximate a drug’s market price, and manufacturers would be legally required to submit AWPs that were within a percentage of the actual sales price.[190] ASCO suggested that actual sales prices be permitted to deviate by as much as 20 percent from the corrected AWP-based reimbursement price. This allowance, it maintained, would give manufacturers some leeway before they would be threatened with legal action if the market price for their drug were to fluctuate unexpectedly.[191] If a manufacturer wanted to sell their drug for less than 20 percent of its published AWP they would be required to publish a lower AWP before selling at the lower price.

In championing this proposal ASCO has called CMS’s and Congress’ attention to the fact that its approach would place the onus on drug manufacturers to work with the publishers of the AWP compendia to ensure that their drugs’ AWP accurately reflect market prices.[192] This would relieve the government of the enormous responsibility of compiling and updating the market price data for hundreds of prescription drugs.[193]   ASCO also favors this approach because of its concern that other proposed reforms of Medicare’s drug payment system, such as reimbursement based upon the physician acquisition price, would place the responsibility on physicians to accurately report prescription drug sale prices. ASCO said that placing this responsibility on oncologists would result in significant administrative burden for the doctors and their staff. And they also worried that inadvertent errors that resulted in an oncologist over billing Medicare would likely result in legal liability.

While it is understandable that oncologists would favor a reform plan that minimizes their paperwork and removes the prospect of legal liability for unintentional wrongdoing, ASCO’s proposed solution ignores the fact that the government would still have to do its own monitoring of market prices to ensure that manufacturers were faithfully reporting AWPs for their drugs.[194] It might be possible to eliminate this duty by incorporating into the plan a provision providing for private attorney general enforcement suits, wherein victorious plaintiffs would share with the government the damages awards they received, but this scheme would likely raise a host of other problems. Prominent among these is the fact that the true victims of the drug manufacturers’ fraud, the Medicare beneficiaries who pay 20 percent co-insurance for their prescription drugs, would not be compensated. There is also the concern that the citizen suit provision might encourage the filing of frivolous lawsuits against drug manufacturers.

ASCO’s proposed solution would also allow up to a 20 percent spread between the market price for a prescription drug and the Medicare AWP-based reimbursement amount. In its independent investigations, the OIG determined that any AWP-based drug reimbursement system with a built-in spread would create a situation where “physicians and suppliers actually make profits when pharmaceutical manufacturers raise their prices . . . [which in turn] creates incentives for price inflation, distorts clinical decisions, and cheats taxpayers.”[195] ASCO’s only answer to this ruinous criticism of its proposal is a cryptic assertion that the 20 percent spread “avoids some of the problems associated with payment amounts that are based on market surveys of acquisition cost.”[196]

ASCO’s proposal does have the advantage of being readily implemented. Though the AWP figure had been much maligned by many Medicare reformers all of the “previous attempts to develop an alternative system have been abandoned or rejected.”[197] Despite the widespread dissatisfaction with AWP, the only legislative reform proposals to have actually been enacted all involved simple “adjustments to the percentage of AWP that is reimbursed by Medicare.”[198] AWP continues to be used by private insurers as a basis for prescription drug reimbursement, albeit with larger percentage discounts.[199] This use of AWP by entities not statutorily obligated to do so suggests that the figure may offer an efficient means of determining appropriate prescription drug reimbursement for physicians under Medicare.

Despite these possible advantages to retaining a Medicare reimbursement system based on AWP, neither the CMS proposal nor the ASCO plan appear to effectively refute the fundamental flaw inherent in a payment system tied to “artificially inflated industry reported list prices,” that such a system will inevitably create “a pervasive incentive for price inflation” for drug manufacturers and over-prescription by physicians.[200]

2. Establishing an Average Sales Price Using Market Survey Data

In many ways this approach, which bases Medicare reimbursement on a drugs’ average sales price (ASP), resembled the proposal to retain a corrected AWP-based payment system because the ASP was intended to “reflect the true cost of purchasing prescription drugs, including manufacturer-provided rebates, charge backs, and other discounts to purchasers.”[201] Reliance on ASP was the reform proposal favored by many Democratic legislators as well as several powerful Republican Congressmen.[202] And, other than the retention of AWP-based reimbursement payments, the ASP approach was the only other proposal supported by the oncology community.[203]

This approach, as CMS proposed to implement it, would have defined ASP as the “widely available market price,” calculated based primarily upon surveys of advertised sales prices in manufacturer and distributor drug catalogs.[204] A given drug’s ASP-based payment could be no lower than the sale price for the drug available to “prudent physicians” from common sources such as “wholesalers, manufacturers, repackagers, physician supply houses, pharmacies, specialty pharmacies, and group purchasing organizations.”[205] As with the proposal to correct AWP, the ASP would initially be determined by reference to the average of the market price data gathered by the OIG and GAO. The ASPs for the hundreds of Part B-covered drugs for which CMS did not have market price data, would be initially set at a discount of 13 percent of the AWP. CMS proposed to do comprehensive market analyses “as soon as practicable in subsequent years” in order to determine each drug’s widely available market price.[206] In so doing, CMS planned to survey drug manufacturers, distributors, and wholesalers, as well as physician group purchasing organizations (GPOs).[207]

CMS maintained that the ASP would represent the purchase price of the prescription drugs “net of discounts, rebates, and price concessions routinely available to prudent purchasers,” but its plan called for ASP to be based on the prices listed in drug pricing catalogs which often did not include these savings.[208] Therefore, in order to make the ASP reflect the true cost of prescription drugs, the CMS would need to obtain additional data on actual market transactions in addition to surveying drug catalog prices. Critics of this plan alleged that purporting to capture the “true cost” of prescription drugs would be hopelessly naïve, as “drug prices are subject to various types of discounts and rebates, seen and unseen, on both the public and private side . . . and little is known publicly about this pricing information.”[209] Regardless, even if the CMS plan failed to realize all of the available savings, the OIG calculated that Medicare would have saved $887 million in 2000, had it reimbursed doctors based upon drug catalog prices.[210]

ASCO had proposed that instead of using drug catalog prices or market surveys, that the ASP be calculated based upon data provided to CMS by drug manufacturers regarding “the prices at which they sold each Medicare-covered drug, considering all discounts, and the quantity sold at that price.”[211] ASCO agreed to endorse the CMS proposal, however, so long as several conditions were fulfilled. The surveys of market prices conducted by CMS would need to be accurate and timely.[212] Because market prices could fluctuate quickly, ASCO suggested that in addition to these periodic and comprehensive market surveys, that CMS could require wholesalers and manufacturers to submit reports detailing the terms of their drug sales on a monthly basis.[213] This data could be used to make frequent, fine adjustments to each drug’s ASP.

ASCO also insisted that the reimbursement rate should reflect the prices actually paid by the vast majority of oncologists.[214] It asked CMS to not determine ASP based on the average price paid by physicians, but rather to set reimbursement at the 95th percentile of prices paid by physicians.[215] They alleged that setting prescription drug reimbursement rates at a lower level would systematically under compensate oncologists who, because of geographical limitations or practice size constraints, were unable to negotiate lower prices with manufacturers and wholesalers.[216] ASCO was concerned that if CMS used the average physician purchase price to determine ASP, that oncologists would be forced to spend a great deal of their time obtaining multiple prescription drug bids from different wholesalers and distributors for each of the chemotherapy drugs they purchased.[217] ASCO also asked CMS to incorporate into its proposed ASP reimbursement system a provision that would have permitted individual physicians to submit “evidence of the cost of a particular drug in unusual circumstances so that the physician can always receive full recovery of costs.” [218] This procedure would allow physicians to be fully compensated when they had to purchase drugs at a premium price from a pharmacy during an emergency.[219]

ASCO’s major proviso in signing onto CMS’s plan, however, was that the reimbursement based on ASP must include an “add-on percentage to cover certain additional costs” related to the acquisition and administration of the prescription drugs.[220] This amount would compensate physicians for the possible spillage and wastage of drugs, the opportunity cost of the capital tied up in a physician’s expensive drug inventory, the procurement and storage costs of drugs, and unpaid patient bills.[221] For example, ASCO insists that drug wastage is a common, unavoidable phenomenon in oncology practices. Many physician-administered drugs are packaged in multiple-use vials. If an oncologist opens a vial and administers a dose to a Medicare patient the oncologist will only be able to bill Medicare for that one dose, but if the contents of the vial are not used before the expiration date on the vial the remainder of the expensive medication must be discarded.[222] There can also be wastage even where chemotherapy drugs are packaged in single-dose vials. If a drug is ordered for a patient but is not administered to the patient for some reason, perhaps because the patient has stopped responding to that treatment, has an allergic reaction, or unexpectedly dies, the drug will likely go to waste because suppliers do not accept returns of unused products because of concerns about drug contamination and tampering.[223]

To account for these additional costs ASCO recommended a flat 10 percent add-on above ASP.[224] It acknowledged that there was little hard data to support this figure but insisted that it was reasonable, especially in light of the fact that “the various components of these extra costs are difficult to estimate.”[225] As authority for its requested action, ASCO pointed to the provision of the BIPA legislation that had directed CMS “to the extent appropriate, [to] provide new or adjusted payments for the costs incurred in the administration, handling, and storage of drugs.”[226]

3. Leveraging Medicare’s Market Power to Secure Drug Discounts

Physicians often join together to form group purchasing organizations to negotiate directly with drug manufacturers to obtain lower prescription drug prices through the physicians’ pooled buying power. [227] This private party buying model was successfully replicated by the Medicaid program and the Department of Veterans Affairs, both of which established drug purchasing programs that harnessed their large size and market share to secure more favorable prices from prescription drug manufacturers and wholesalers. It was suggested that the Medicare program implement a similar system.

a. Adoption of a Rebate Program Like That of Medicaid

In 1996, the OIG suggested that Congress reform the Medicare prescription drug reimbursement system by legislatively adopting a “manufacturers’ rebate program” similar to that administered by the Medicaid program.[228] Most state Medicaid programs pay for their drugs based upon a discounted percentage of AWP, through a reimbursement system not unlike that of Medicare, though employing a more deeply discounted AWP. On top of this discount the Medicaid program also receives annual rebates from drug manufacturers. In order to be permitted to sell prescription drugs to Medicaid program beneficiaries, drug manufacturers must agree to give a rebate to the Medicaid program which “equals the . . . ‘best price’ for a particular drug” the manufacturer has offered that year.[229] The best price for a prescription drug is statutorily defined as “the lowest price available from the manufacturer to any wholesaler, retailer, non-profit entity, or U.S. governmental entity.”[230] Although the per-transaction profit margins are much reduced for drug manufacturers participating in the Medicaid rebate program, the cost of the rebates they must furnish to Medicaid are offset by the sheer volume of drug sales made to Medicaid beneficiaries by the manufacturers.

Through this rebate mechanism Medicaid programs realize great savings. In 2001, the OIG issued a report comparing the Medicaid and Medicare prescription drug reimbursement systems.[231] The report looked at Medicare’s spending on 24 drugs with the highest total drug payments in 1999, which comprised nearly 80 percent of Medicare’s total payments for prescription drugs that year.[232] It then compared the amount that Medicare had spent on the drugs with the amount that it would have cost the Medicaid program to buy the same quantities of these drugs. The OIG found that Medicare would have saved $429 million, 15 percent of the program’s total prescription drug spending, if Medicare had received rebates equal to those negotiated by the Medicaid program.[233]

While a rebate system similar to that of the Medicaid program initially seemed like a promising reform option for Medicare, the GAO identified a critical limitation of the proposal that has since precluded its consideration as a viable option for reform.[234] Medicare beneficiaries account for more than a third of the total drug expenditures in the United States,[235] and because of the program’s enormous size it will often be among the largest purchasers of a given prescription drug.[236] If legislation were passed requiring drug manufacturers to give Medicare their “best price,” manufacturers would likely raise their prices to all of their other purchasers so as to avoid providing a discount to Medicare.[237] This predicted marketplace distortion was more than mere theoretical speculation. In 1990, when the Medicaid program first implemented its rebate program and demanded to receive the “best prices,” drug manufacturers responded by increasing the prices they charged to all of their purchasers. For example, in the first year of the Medicaid rebate program, the prices drug manufacturers charged to the Veteran’s Administration for prescription drugs increased by over ten percent.[238] Administrators at the VA said that their “personal contacts with drug company representatives and media reports” had indicated that these price increases resulted from the drug manufacturers’ desires to “reduce the amount of the rebates they would have to pay to state Medicaid programs.”[239] Therefore, it seems likely that instituting a rebate system for the Medicare program would not only fail to produce savings for Medicare, but would also raise prices for all purchasers of prescription drugs.[240]

b. Adoption of a Competitive Bidding System Like That of the VA

In 1996, the OIG recommended that Congress enable Medicare to “take advantage of its market position” by enacting legislation establishing a “competitive bidding” system for the Medicare program.[241] After its hearings on Medicare reform in 2001, the majority staff of the House Ways and Means Committee also endorsed a competitive bidding approach.[242] CMS subsequently expressed its “preference” for a competitive, marketplace solution to address Medicare’s prescription drug overpayment problem.[243]

The competitive bidding system proposed by Medicare reformers would have been modeled on the system successfully maintained by the VA.[244] Unlike the Medicare program, which reimburses doctors for the prescription drugs they buy on the open market, the VA uses its position as a high-volume buyer to purchase the prescription drugs its doctors administer directly from manufacturers and wholesalers.[245] VA physicians order drugs from the Federal Supply Schedule (FSS), a catalog maintained by the VA that lists over 10,000 drugs for which the VA has negotiated low prices with drug manufacturers.[246] To have their drugs listed in the FSS manufacturers must agree to supply their drugs to the VA healthcare system at an agreed upon price for the duration of a five-year contract. The VA uses a competitive bidding procedure to determine which drug manufacturers will be listed in the FSS catalog.[247] The price offered by a drug manufacturer in the FSS must be at least 24 percent less than AWP,[248] but in any event must be “equal to or better than the price the manufacturer offers to its private customers under comparable terms and conditions.”[249] To ensure that the lowest prices are being offered to the VA, drug manufacturers must provide the VA with data regarding their actual sales transactions with their “most-favored” private customers. The information collected by the VA is similar to the “best price” data that drug manufacturers must report to CMS in order to participate in the Medicaid program.[250] This information, which is already collected by CMS, could be used to create a prescription drug catalog for the Medicare program similar to the FSS.[251]

To implement a competitive bidding approach for Medicare, CMS proposed to establish geographically based “competitive acquisition areas” wherein wholesalers and distributors would bid to supply prescription drugs to physicians.[252] Each competitive acquisition area would have a number of different distributors offering the same prescription drugs or their therapeutic equivalents. These distributors would have an incentive to negotiate low prices with drug manufacturers so as to profit on the difference between their bid price and the price at which they purchase the drug from manufacturers.[253] The physicians within these competitive acquisition areas would then purchase their drugs from the distributors and wholesalers offering the lowest prices in order to maximize their own profits, which would come from the difference between their cost and the Medicare reimbursement payment.[254]

In a study performed by the OIG using data from 1999, it was estimated that Medicare’s use of a competitive bidding system similar to that maintained by the VA would have resulted in Medicare saving a startling 52 percent on its drug purchases.[255] The OIG looked at data for 24 of the Medicare’s most prescribed drugs and found that Medicare had paid more than the VA’s FSS price for each of the drugs.[256] For half of these drugs Medicare paid more than double the FSS price.”[257] Based on this OIG report and its own investigations, the GAO suggested in 2001 that the CMS explore whether competitive bidding would be appropriate for the Medicare program’s prescription drug purchases.[258] GAO suggested that CMS utilize the authority granted to it by the Balanced Budget Act of 1997 to conduct several limited-scale competitive bidding demonstration projects.[259 ] The distributors and wholesalers invited to participate in these demonstrations would bid to provide drugs and medical supplies to the Medicare part B program in limited geographic areas and then the lowest bids would be used to determine the Medicare reimbursement price.[260]

A competitive bidding demonstration conducted in San Antonio resulted in savings of about 26 percent for Medicare in its purchases of prescription respiratory drugs.[261] Though this demonstration project suggested that a competitive bidding approach was effective on a limited scale, difficulties in implementing the system to the vast Medicare program led most reformers to dismiss competitive bidding as a viable option.[262] The most serious of these flaws was the fact that the use of a competitive bidding system by Medicare would result in the same marketplace distortions that had precluded Medicare’s adoption of a rebate program similar to Medicaid.

CMS also found that that a competitive bidding system would only be appropriate for Medicare in urban areas. [263] Because there would not be enough wholesalers and distributors serving doctors in rural areas, the bidding would likely not be competitive in the rural “competitive acquisition areas.” Presumably, this problem was not faced by the VA in implementing the FSS because its hospitals are located in cities, whereas many rural oncologists provide office-based chemotherapy precisely because hospitals are too far away to effectively serve their patients. For its part, the GAO also determined that a competitive bidding system would not be feasible because of the Medicare program’s need to reimburse physicians for a large number of drugs on patent and drugs with no therapeutic equivalents. [264] By definition these drugs have no competitive products, and in the absence of competition there would be no incentive for drug manufacturers to offer lower prices to the Medicare program.[265] Most chemotherapy drugs fall into this category, meaning that Medicare would likely fail to realize significant savings through a competitive bidding approach.[266]

Oncologists also expressed opposition to Medicare’s proposed use of a national drug purchasing program like that of the VA. A particularly strong critic of this option was Dr. Steve Coplon, the Co-Director of Community Oncology Alliance, a group whose oncologist members provide office-based chemotherapy to Medicare patients. Under the competitive bidding proposal advanced by the House Ways and Means Committee, a physician would order a patient's prescription from a contracted distributor or wholesaler who would ship the drugs overnight to the physician’s office. Medicare would then pay the seller directly. Coplon outlined four specific objections to this proposal. [267] First, this proposal would require oncologists to place orders for drugs only for an individual patient, effectively precluding them from stockpiling drugs. A patient’s chemotherapy regimen might need to be fine-tuned and an oncologist may decide to change a prescribed treatment on the day it is to be administered. If oncologists are not able to maintain a ready inventory, the necessary cytotoxic drug combination might not be on hand.[268] Second, in many cases treatment flexibility is needed and the chemotherapy drugs to be administered to a patient may have to be ordered only a day or two in advance. This situation would increase the likelihood that the drugs might arrive late to the oncologist’s office and there would be no back-up supply. Third, oncologists were concerned that this system would require their offices to store each patient’s prescription separately, resulting in an “administrative nightmare” for their staff.[269] The final, and most strenuous objection offered by Coplon was the concern that the safety and legitimacy of the drugs ordered and shipped to the oncologists’ offices could be compromised. He asserted that “some private insurance companies have turned to similar purchase arrangements and organized crime has infiltrated, causing counterfeit or diluted drugs to be passed on.”[270]

The first two concerns advanced by oncologists appear to have been addressed by CMS when it further elaborated the structure for the proposed Medicare competitive bidding system.[271] CMS would require that all of the Medicare-contracted wholesalers and distributors possess specific qualifications. They must have “sufficient capacity and shipping capability to supply the area,” even in emergency situations. CMS attempted to address oncologists’ concerns about drug tampering by requiring wholesalers and distributors to obtain the drugs they provide to doctors directly from the drugs’ manufacturer or from another distributor that could document that it had acquired the drugs directly from their manufacturer. The VA has not experienced grave problems related to illegitimate drugs in its use of the FSS and there was no reason to believe that the Medicare program would experience these problems if it implemented a similar system. In addition, the Medicare prescription drug reimbursement system that oncologists sought to preserve was not immune to drug tampering, as the much publicized prosecution of Robert Ray Courtney had highlighted. Courtney, a Kansas City pharmacist, was found guilty of diluting the chemotherapy drugs he sold to physicians who then administered the drugs to Medicare beneficiaries.[272]

4. Directing Carriers to Adjust Reimbursements on a Case-By-Case Basis

Another option proposed by CMS would have had Medicare carriers reimburse physicians for the “reasonable cost” of the prescription drugs they administered to Medicare beneficiaries. The Medicare carriers are private insurance companies who contract with CMS to administer the Medicare claims reimbursement system. Among their duties, carriers are responsible for paying claims for prescription drug reimbursement that are submitted by physicians. To ensure that Medicare pays appropriately, the carriers conduct claims reviews to determine whether the drugs to be reimbursed are covered by Medicare Part B, are reasonable and necessary, and have been billed with the proper codes.[273]

Before Medicare shifted to a uniform payment schedule based on AWP, and prescription drug reimbursement was still calculated based upon a physician’s actual acquisition cost, Medicare carriers were required to adjust Medicare reimbursement payments to reflect prevailing market prices as a part of their responsibility to pay those claims appropriately.[274] In 1988, Congressed responded to oncologist complaints by suspending the carrier-based adjustments and requiring these refinements be made by CMS itself through its formal, unwieldy “inherent reasonableness” process.[275]

Under the revitalized carrier-based approach proposed by CMS, the agency would set a national payment level for each of its covered drugs, presumably based upon OIG and GAO market price data, and then direct carriers to reimburse at a lower rate “in certain localities if ‘comparability’ data indicated that local private payments were lower than the national Medicare payment. The “private payments” referenced in the plan were the reimbursements that the private insurance companies in an area were paying doctors for prescription drugs, assumed to more accurately reflect market prices. If private payments were higher for a given drug in a locality, the Medicare program would not pay more than the national Medicare payment limit for each drug.”[276]

As authority for implementing this proposal, CMS pointed to the “comparability provision,” § 1842(b)(3)(B) of the Social Security Act, which “limits Medicare payment for a drug to what our contractors pay when the same drug is provided to their private policyholders and subscribers under comparable circumstances.”[277] The OIG expressed its support for this proposal in a 1996 report, stating that the CMS had the power under its “inherent reasonableness” authority to permit its contractors to adjust reimbursements.[278] Again in 2001, the OIG suggested this as a viable option for Medicare reform and directed CMS’s attention to a recent GAO report that had documented the Department of Defense’s successful use of a similar carrier-based adjustment system for paying health care claims to physicians.[279]

Despite the OIG’s support, this proposal was widely considered an unlikely candidate for Medicare reform. The “comparability” adjustments to be made by carriers on a case-by-case basis as a part of the CMS plan would have returned Medicare prescription drug reimbursement to its position before 1997, when carriers reimbursed physicians for drugs at allegedly market prices. The reason that Congress mandated CMS to transition Medicare to a uniform fee schedule was their dissatisfaction with this system, which had resulted in highly variable and arbitrary reimbursement payments to individual physicians. CMS seemed to acknowledge this criticism in introducing the proposal, stating that it would likely “result in regional variation in drug payments,” which it expected would generate complaints from oncologists.[280] Given that the oncology community was certain to be strongly opposed, and the fact that the Congress has rebuffed similar attempts by CMS to introduce carrier-based adjustments to physician prescription drug reimbursement payments, this proposal was not seriously considered by Medicare reformers.

5. Basing Payment on Physician Acquisition Cost

Though this proposal was not formally presented by CMS, the OIG had suggested that CMS explore the option of basing prescription drug reimbursements on physician acquisition cost.[281] This system would require physicians to identify the price they paid for a drug when they submitted their claim for reimbursement. This system, which ASCO called “cost-pass-through reimbursement”, was strongly disfavored by the oncology community as an option for reform. Oncologists believed that it would create “burdensome accounting” requirements for them.[282] Because they purchased vials of chemotherapy drugs at different times and at different prices, physicians would need to have elaborate tracking and accounting systems to determine exactly which vial was administered to a specific patient and bill Medicare at that rate. In addition to the inconvenience of such a requirement, oncologists were legitimately concerned that errors in accounting would inevitably occur and that they would “potentially be subject to prosecution for fraud” for submitting false claims to Medicare.[283] Year end rebates based on drug volume would also create complicated accounting arrangements and would necessitate a mechanism for doctors to refund money to the government and Medicare co-payers. This system would also fail to provide doctors with an incentive to seek lower prices, as they would be reimbursed for the full price of the drug regardless of the price at which they purchased it. Such a scenario creates enormous temptation for illegal kickbacks to doctors from drug distributors.[284]

Congress had also proven itself “unwilling to accept acquisition costs as a basis” for prescription drug reimbursement rates, in part because this payment structure presented many opportunities for exploitation.[285] Drug manufacturers could easily subvert this system through a host of creative purchasing arrangements.[286] For example, drug sellers could offer doctors a vial at $50 for every vial purchased at $100, for an average price of $75 dollars each. The more expensive vial could then be administered to a Medicare patient and the less expensive vials given to a privately insured patient, whose insurance company would reimburse the doctor under a non-cost method such as AWP.

A variant of this proposal called for physicians to complete periodic surveys regarding the prices at which they had purchased their drugs. This data would be used by CMS to set a reimbursement rate for all physicians purchasing particular drugs. This option is similar to proposal that drug manufacturers and wholesalers be surveyed to establish as ASP for reimbursement, and the same concerns that undermined that proposal apply here as well. In addition, ASCO complained that physician surveys would be “unduly burdensome” and time consuming for physicians given the frequency with which the surveys would need to be done to keep Medicare payments current with market prices.[287] They also suggested that surveying thousands of physicians would make little sense, given that the same information could be obtained from a much smaller number of prescription drug wholesalers and distributors.

V. Separate Medicare Payment for Chemotherapy Administration Services

Throughout the history of the Medicare reform effort the oncology community has repeatedly proven its ability to mobilize its supporters to block those reform proposals it opposes. Oncologists have unequivocally announced that they will not support any reform proposal that decreases prescription drug reimbursements without simultaneously increasing Medicare’s chemotherapy administration payments for the services they provide in delivering chemotherapy treatment.[288] They assert that any other proposal would make the continued treatment of Medicare beneficiaries financially impossible for them. Reports by the OIG and the GAO have substantiated this claim and the Congress has vowed that it will not adopt any reform proposals that could jeopardize Medicare patient’s cancer care. [289]

A. Medicare Physician Fee Schedule Used to Determine Administration Payments

Medicare Part B provides coverage for chemotherapy drugs because they are “incident to” a covered outpatient service, namely the administration of chemotherapy. Oncologists who provide patients with chemotherapy in their offices are compensated for the procedure by the Medicare Part B program through two separate mechanisms.[290] As was discussed above, oncologists are reimbursed for the cost of the chemotherapy drugs they administer to their patients and they also receive physician fee payment for their services in administering the office-based chemotherapy.[291] Chemotherapy delivery is a lengthy, labor intensive medical procedure and the physician fee payment is intended to compensate oncologists for their time and efforts, the cost of their skilled nursing staff, and the medical supplies and equipment needed to administer chemotherapy treatment.

The total payment received by oncologists for chemotherapy services is determined in accordance with the Medicare “physician fee schedule.”[292] Each major component of the chemotherapy administration session is listed on the schedule and is accompanied by a billing code. [293] For instance, there are billing codes for the preliminary and concluding steps in the treatment, such as patient consultation with the nurse and infusion with anti-nausea drugs and saline. There are also distinct billing codes for the administration of the cytotoxic drugs by push, infusion, or continuous infusion. Each of the billing codes in the fee schedule has a specific payment associated with it to compensate the oncologist for the service.

B. Medicare Payments for Chemotherapy Administration Are Inadequate

For many years oncologists have decried Medicare’s payments for chemotherapy administration as inadequate to fully compensate them for their services.[294] Oncologists estimated that the payments provided under the physician fee schedule for 2003 covered less than 25 percent of the total costs of the chemotherapy administration that they performed in their offices.[295] In response to these historical complaints, Congress has commissioned several studies to investigate the adequacy of Medicare payments to oncologists under the physician fee schedule.[296] After reviewing these reports, in 2000, CMS acknowledged that “Medicare payment for services related to the provision of chemotherapy drugs . . . are inadequate.”[297]

Despite their admittedly inadequate compensation, oncologists have not turned away Medicare beneficiaries in need of chemotherapy treatment.[298] If the compensation for the administration of chemotherapy were actually so inadequate as to be financially unviable for oncologists, they could refer their Medicare patients to hospitals where the treatment could be done as an inpatient procedure or in the hospital’s outpatient department. The Medicare program’s payments for hospital-based services are more generous than those for office-based chemotherapy, such that hospitals would face no financial hurdle to accepting Medicare beneficiaries referred for chemotherapy treatment by independent oncologists.

As a practical matter, however, if the majority of Medicare beneficiaries had to be referred to hospitals to receive chemotherapy treatment, the massive inflow of cancer patients that would result could force hospitals to turn away some beneficiaries.[299] There are hundreds of oncologists’ offices and outpatient clinics scattered across the United States that provide chemotherapy to an estimated 80 percent of cancer patients.[300] There is a concern that if hospitals were suddenly forced to provide chemotherapy for all of the Medicare patients currently receiving chemotherapy in oncologists’ offices, most hospitals would simply lack the capacity and resources to do so. Most hospitals would have to double or triple their capacity and given how meager Medicare’s payments for chemotherapy administration are, even when performed in a hospital setting, many hospitals might be unwilling or unable to undertake expansion projects.[301] Those hospitals that were able to accommodate this flood of patients would likely have to schedule some treatment sessions at night and patients may face long delays in receiving chemotherapy.

C. Office-Based Chemotherapy Treatment Is Advantageous for Many Patients

Even if hospitals had adequate capacity to treat the displaced Medicare beneficiaries, being referred to a hospital for chemotherapy treatment may be far from ideal for many chemotherapy recipients. Both the CMS and the Congress have recognized that having chemotherapy administered in their oncologists’ offices is superior in many situations.[302] Most patients elect to be treated for their cancer at an oncologist’s office in their local community. If Medicare patients had to receive their treatment in hospitals, they could potentially have to travel much further. For patients living in rural or other underserved areas this could mean that they would have to drive many hours to get to and from their chemotherapy treatment sessions.

The added comfort provided to patients receiving chemotherapy in their oncologists’ offices is another consideration, the importance of which is difficult to overstate. Although many medical advances have been made to alleviate and reduce the occurrence of side effects, chemotherapy remains an extremely unpleasant treatment regimen. Patients receiving chemotherapy treatment in their oncologists’ offices obtain all of their cancer treatment in one location, and are therefore able to become well acquainted with and trust the office staff. During the office-based administration procedure cancer patients receive individualized care with their treating oncologists nearby should something go wrong.

Patients who are given chemotherapy in an oncologist’s office or clinic also commonly receive a number of other benefits, including patient-education literature and comforts such as blankets, Popsicles, and other refreshments to ease them through chemotherapy.[303] Physicians also commonly furnish a wide range of counseling services to accompany chemotherapy treatments, including psychological therapy sessions, nutrition counseling, family support services, and pain management classes.[304] These essential services that are provided in oncologists’ offices incident to a patient’s cancer treatment are not compensated by Medicare under the physician fee schedule. They are presently paid for by oncologists using the overpayments they collect from Medicare for prescription chemotherapy drugs. Oncologists warn that if Medicare’s prescription drug payments are reduced without a corresponding increase in physician fee schedule payments for chemotherapy administration they will have no choice but to refer their Medicare patients to hospitals for their chemotherapy treatments.[305] Most hospitals do not provide these additional services to chemotherapy patients and there is no reason to believe that they would suddenly begin to do so for the Medicare patients referred by private oncologists. Even if the reduction in Medicare’s payment amounts was not so severe as to preclude oncologists from administering chemotherapy treatment to beneficiaries in their offices, ASCO warns that the reduced compensation would “imperil quality cancer care” by forcing oncology practices to:

“reduce staffing levels and replace highly skilled oncology certified nurses with lower-paid assistants. Less staff time would be available during the chemotherapy sessions to educate patients and monitor for ill effects. Qualified nurses would no longer be readily available to respond to patients’ inquiries about their treatment and its side effects. Seriously ill cancer patients would not have the support services that oncologists’ offices now provide and would have to struggle on their own in coping with their life-threatening disease.”[306]

On the basis of these earnest assertions from oncologists, all parties to the Medicare reform debate have agreed that removing chemotherapy treatment from oncologists’ offices and returning it to a the hospital setting has the potential to become a “nightmarish scenario, that must be avoided by preserving the financial viability of office-based chemotherapy.”[307]

VI. The Medicare Prescription Drug Improvement and Modernization Act of 2003

After seven years without modification to the Medicare Part B prescription drug reimbursement system, Congress finally took its next step in Medicare reform when it passed the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA).[308] The Act, signed into law by President George W. Bush on December 8, 2003, represents the largest expansion of Medicare since the program’s enactment in 1965.[309] The MMA was widely heralded for having extended Medicare’s prescription drug coverage to self-administered prescription drugs. Less well known, however, is the fact that the law also provided for sweeping reforms in the way that Medicare Part B compensates oncologists for chemotherapy drugs and chemotherapy drug administration services.

A. The Provisions of the MMA

Congress directed CMS to promulgate regulations, effective as of January 1, 2004, that would implement the MMA’s provisions that revised the Part B payment system for prescription drugs and the physician fee schedule payments for chemotherapy administration services. The CMS published its proposed regulations for comment on January 7, 2004.[310] These regulations have not yet been finalized by publication.

Sections 303 and 305 of the MMA modified the payment methodology for Part B covered drugs by implementing two of the widely considered proposals for Medicare reform: retention of a more accurate AWP, and a mechanism for drug manufacturers to base reimbursement rates on their drugs’ ASP. With the exception of a few drugs discussed below, the reimbursement rate for Medicare Part B drugs was reduced from 95 percent of AWP to 85 percent of AWP.[311] The justification offered by CMS for the payment level of 85 percent of AWP was the fact that all of the drugs that were the subject of study by the GAO and OIG had market prices that were no greater than 87 percent of their published AWP. Retaining a corrected AWP as a basis for Medicare payment could provide incentive for continued inflation of AWPs above market prices, so CMS calculated the 85 percent reduction using the AWPs published on April 1, 2003.[312]

For 16 commonly prescribed drugs that were the subject of OIG and GAO studies, the CMS regulations provided for reimbursement based on an average of the OIG and GAO’s market price data, not on the flat 85 percent rate.[313] Many of these drugs are used in the treatment of cancer. There were five drugs that had an average market price of less than 80 percent of their published AWP, but the reimbursement payment for these drugs was set at 80 percent of AWP. The two drugs that had documented market prices above 85 percent of AWP, prices of 87 and 86 percent, were reimbursed in accordance with those average market prices.

In its comments regarding the proposed regulations, ASCO complained that the OIG and GAO market price data relied upon by CMS was grossly out of date, as even the most recent studies were already three years old. ASCO also contended that the flat reduction from 95 to 85 percent of AWP was unsupported by market price data and could therefore result in arbitrary overcompensation or underpayment to oncologists. CMS answered these complaints by pointing to the provision of the new regulations, Section 303(b)(2), which provides an opportunity for drug manufacturers to petition to have the reimbursement percentage for their drug changed.[314] The section applies the drugs with payment levels set by the OIG and GAO data as well as drugs subject to the flat 85 percent of AWP rule. Accompanying a manufacturer’s request must be data regarding the manufacturer’s average sales price for the drug for the most recent quarter of sales. With only limited exceptions, the ASP data provided should include all of the manufacturer’s domestic sales divided by the total number of units sold.[315] In the calculation of the ASP the manufacturers were also directed to include “volume discounts, prompt pay discounts, cash discounts, free goods that are contingent on any purchase requirement, chargebacks, and rebates.”[316]

The reforms mandated by the MMA and implemented by the CMS regulations failed to include the 10 percent add-on amount that ACSO had maintained was an essential component of any reform proposal based on market prices. Without this 10 percent payment increase, ASCO determined that the MMA would result in a $600 million cut in funding for community-based chemotherapy offices and clinics, which it warned could effectively preclude oncologists from continuing to provide quality office-based chemotherapy services to Medicare beneficiaries.[317] CMS agreed that the changes it implemented would result in a $510 million reduction in oncologists’ drug reimbursement payments, but it calculated that this would be exactly counterbalanced by a corresponding $510 million increase in oncologist compensation for office-based chemotherapy administration services.[318]

B. Policy Implications of MMA Reform

While the disagreement between oncologists and the CMS regarding the exact financial repercussions of the MMA is beyond the scope of this paper, the broader policy implications of its Medicare Part B reform provisions merit inquiry. From one perspective the MMA is a clear victory for reformers, as there is no question that its enactment will result in prescription drug savings for the Medicare program. It also curtails admittedly excessive Medicare payments for prescription drugs while simultaneously increasing payments for chemotherapy administration, a reform both legislators and oncologists had long supported. What is more controversial, however, is the retention by Medicare of an AWP-based payment methodology, with adjustments based on ASP, for prescription drug reimbursements.

Continuing the use of AWP to determine program payments prevents disruption for public and private insurers who also rely upon AWP to set reimbursements for prescription drugs, but the retention of AWP also perpetuates the past effects of prescription drug price inflation. CMS attempted to address this problem by making the calculation of reimbursement prices dependent on 85 percent of AWP as of April 1, 2003. While this should remove incentives for further price inflation, Medicare’s reimbursement payments will continue to overpay those drug makers who had successfully inflated their AWPs prior to that date. Oncologists have financial incentives to administer those drugs with the lowest prices relative to their reimbursement rates, which results in an unfair market advantage for drugs with inflated AWPs.[319] Because the MMA makes the introduction of market data dependent upon manufacturers electing to use its petition process, CMS is unable to adjust those prescription drug payments whose reimbursements based on 85 percent of AWP are presently excessive.

By far the most fundamental failing of the MMA reform is its failure to address a serious, systemic fault in the Part B prescription drug system: Medicare’s continued reliance on a reimbursement methodology that provides profits to doctors based on the medications they administer to their patients. For many years this system has left oncologists susceptible to immense amounts of popular criticism. The New York Times, for example, has published an ongoing series of articles critical of the fact that “at a time when overall spending on prescription drugs is soaring, cancer specialists are pocketing hundreds of millions of dollars each year by selling drugs to patients – a practice that almost no other doctors follow.”[320] The critics of this component of the Medicare prescription drug system, which was preserved by the MMA, are at the very least correct in their claims that the payment methodology has the potential to give rise to a conflict “between the physician’s duty to his patient and his natural desire for financial gain.” [321]

As far back as historical records stretch, practitioners of medicine have adhered to ethical cannons that prohibited them from entering into business arrangements that would give them potentially conflicting financial incentives in caring for patients. In the Genoa Legal Code of 1407, it was declared by the city’s rulers that “we fix and ordain – to prevent any pharmacist from having temptation or reason for sinning – that no pharmacist may have shop in partnership or agreement with any physician.”[322] This aspiration was long reflected in the American Medical Association’s (AMA) ethical canons which held that “the prime object of the medical profession is to render service to humanity; reward or financial gain is a subordinate consideration.”[323] In 1954, however, the AMA shifted its position and discarded a tenet that had held that “an ethical physician does not engage in barter or trade in the . . . remedies prescribed for patients, but limits the source of his professional income to professional service rendered to the patient.”[324]

After the loosening of the AMA’s prohibitions, some physicians opened pharmacies or established referral agreements with established pharmacies. These activities attracted the attention of the Senate Judiciary’s Subcommittee on Antitrust and Monopoly, which subsequently held hearings “to consider the possible antitrust implications of doctor-owned pharmacies and . . . physician ownership in drug companies.”[325] In the early 1960s, the legislatures of several states also observed these perceived failures of the medical profession to self-regulate and responded by passing laws regulating or eliminating physician ownership in pharmacies.[326] The CMS took the step, in 1989, of prohibiting physicians who participated in its programs from referring Medicare or Medicaid patients to clinical laboratories in which the physicians or the physicians’ family members had a financial interest.[327]

The Medicare billing practices of oncologists do not place them in formal violation of any of these ethical constraints because the oncologists do not set Medicare Part B’s prescription drug reimbursement rates and they do not have ownership interests in the drug distributors and manufactures from which they purchase the drugs they administer to their patients. However, it has not escaped the attention of many observers that physicians are faced with a financial conflict which potentially “distorts clinical decisions” made by oncologists receiving Medicare prescription drug payments. [328] A report by a team of researchers at the National Institutes of Health provided support to those who argue that the spread between Medicare reimbursement prices and drug costs could be encouraging oncologists to over-prescribe chemotherapy treatment.[329] The investigators found that one-third of Medicare beneficiaries with cancer received chemotherapy treatment even when their cancers were of a type that was unresponsive to chemotherapy, which “strongly suggests overuse of chemotherapy at the end of life.”[330] The report drew no conclusions concerning the causes of this phenomenon, though critics of the present Medicare chemotherapy drug reimbursement system have cited the report for support.[331]

Oncologists responded to the findings of this report by explaining that chemotherapy is commonly used to relieve cancer symptoms and can help patients live more comfortably when patients are in the final stages of the disease.[332] Additional possibilities for alleged overuse of chemotherapy at the end of life were presented in the report itself; that the treatment may be given in response to patient or family demands, or as a result of a physician’s reluctance to acknowledge the inevitable.[333] Because the report studied only the medical records of Medicare beneficiaries it was not possible to determine if the overuse of chemotherapy is also prevalent in the treatment of patients with private insurance.

Though it must be acknowledged that “it is not known to what degree, if at all, physicians act on this incentive” to over-prescribe chemotherapy, this is hardly a justification for the MMA’s failure to address this financial conflict of interest.[334] The fact is, “some practices may be demoralizing to the medical profession and shake the public confidence . . . in spite of the fact that the doctors engaged in these practices maintain the highest professional standards.”[335] Thus, in the situation that oncologists presently find themselves, they have a duty to work with the CMS to revise the Medicare Part B prescription drug payment structure to remove this conflict of interest, and thereby avoid “the appearance of evil for the sake of professional honor and integrity.”[336] Advocating for the adoption of a proposal that would institute for Medicare a prescription drug reimbursement like that of the VA, with its FSS payments going directly to drug manufacturers rather than oncologists, would do just this.

VII. Conclusion

There is no doubt that “chemotherapy is central to modern cancer treatment” and that medical advances in the field suggest that it “is likely to be even more important in the coming years.”[337] The Medicare Part B program makes this lifesaving treatment available to older Americans, those who are at the highest risk of developing cancer. Medicare’s coverage of chemotherapy treatment cost American taxpayers over $5 billion in 2002, with over three-quarters of this money being paid to oncologists to reimburse them for the cost of the prescription chemotherapy drugs they administered to Medicare beneficiaries. For the past decade it has been widely known that these payments were excessive and many reform proposals were advanced. Congress was hesitant to act, however, in the face of oncologists earnest protestations that this overpayment for prescription drugs was necessary to compensate them for the services they provided in actually administering the chemotherapy drugs to Medicare beneficiaries in their offices.

With the passage of the Medicare Prescription Drug Improvement and Modernization Act of 2003, major reform in Medicare Part B’s prescription drug reimbursement system was finally realized. The Act appears likely to provide large savings for the Medicare program while at the same adjusting payments to oncologists so that both prescription drugs and chemotherapy administration services are compensated adequately. Where the legislation utterly fails, however, is in its retention of a system of reimbursement that permits oncologists to profit directly on the chemotherapy drugs they prescribe for their patients.


[1] INSPECTOR GEN., DEPT. OF HEALTH & HUMAN SERVS., MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS iii, OEI-03-97-00290, (Jan. 2001).

[2] See WILLIAM S. KLUG & MICHAEL R. CUMMINGS, CONCEPTS OF GENETICS , 5th ed. 591 (1997).

[3] Cytotoxic means “cell killing.” These drugs are also sometimes called antineoplastic (“anti-cancer”) drugs. See CANCERBACUP, WHAT IS CHEMOTHERAPY?, (Jan. 20, 2004) at http://www.cancerbacup.org.uk/Treatments/ Chemotherapy/Chemotherapy.

4 NATIONAL CANCER INSTITUTE, NATIONAL INSTITUTES OF HEALTH, CHEMOTHERAPY AND YOU: A GUIDE TO SELF-HELP AND CANCER TREATMENT 11, NIH Pub. No. 03-1136 (1999), at http://www.cancer.gov/cancerinfo/chemo therapy-and-you.org.

[5] NATIONAL CANCER INSTITUTE , CHEMOTHERAPY AND YOU , supra note 4, at 15.

[6] See CANCERBACUP , supra note 3.

[7] When administered for this purpose the treatment is called neoadjuvant chemotherapy. AMERICAN CANCER SOCIETY, MAKING TREATMENT DECISIONS: CHEMOTHERAPY PRINCIPLES (2004), at http://www.cancer.org/ docroot/ETO/eto_1_3_Chemotherapy_Principles.asp.

[8] When given to kill all remaining stray cancer cells, the treatment is known as adjuvant chemotherapy. Id .

[9] DAVID S. FISHER, ET AL., THE CANCER CHEMOTHERAPY HANDBOOK , (6th ed. 2003).

[10] See CANCERBACUP , supra note 3.

[11] Most chemotherapy is administered by medical oncologists, although some surgeons provide post-surgery chemotherapy and urologists also treat prostate cancer patients with orally administered drugs. See AMERICAN SOCIETY OF CLINICAL ONCOLOGY, REFORM OF THE MEDICARE PAYMENT METHODS FOR CANCER CHEMOTHERAPY 2, 3 (May 2001).

[12] AMERICAN CANCER SOCIETY , supra note 7.

[13] Logically, this treatment was first given to patients with lymphoma, a cancer that causes the white blood cells to replicate out of control. Id .

[14] See AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 3.

[15] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers: Hearing Before the Subcomm. on Oversight and Investigations, House Comm. on Energy and Commerce , 107th Cong. (Sept. 21, 2001) (statement of Dr. Larry Norton, President, American Society of Clinical Oncologists).

[16] See FISHER , supra note 9.

[17] Specifically, “doxorubicin was determined to be effective for many tumor types, and, together with 5-FU, cyclophosphamide, and methotrexate” these drugs revolutionized chemotherapy treatment. AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 3.

[18] Misti Crane, Chemo Centers in Peril, Doctors Say Medicare Proposals Could End Local Cancer Care for Cancer Patients, Some Specialists Say , COLUMBUS DISPATCH , Aug. 19, 2003, at Metro 15, http://ee.dispatch.com/Repository.

[19] Because chemotherapy so frequently results in side effects, oncologists may spend as much time managing the effects of treatment as they do the symptoms of the cancer itself. See AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 3-4.

[20] Id. at 4.

[21] See AMERICAN CANCER SOCIETY , supra note 7.

[22] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 4.

[23] Id.

[24] Steroids may be given to suppress immune response to the cytotoxic drugs and to treat nausea. See id. at 3.

[25] Medicare Drug Reimbursements (statement of Dr. Larry Norton, ASCO), supra note 15.

[26] See LEN. M. NICHOLS & KATHARINE LEVIT, MEDICARE AND MEDICAID IN CONTEXT WITHIN THE U.S. HEALTH CARE SYSTEM , (Jan. 23, 2003) at http://www.nhpf.org/M&M_E-Book/Nichols_Levit.ppt (providing all population figures and estimates of health insurance coverage in this paragraph).

[27] Medicare Drug Pricing Mechanism: Hearing Before the Subcomm. on Labor, Health, and Human Servs., Education, and Related Agencies, Senate Comm. on Appropriations , 107th Cong., 2d Sess. (Oct. 3, 2002) (statement of Leslie G. Aronovitz, Director, Health Care Program Admin. & Integrity Issues, General Accounting Office).

[28] John K. Iglehart, Medicare and Drug Pricing , 348 NEW ENG. J. MED. 1590, 1590 (2003).

[29] Before July 1, 2001, the Center for Medicare and Medicaid Services (CMS) was called the Health Care Financing Authority (HCFA). In this paper, for simplicity’s sake, I will refer to the CMS when discussing actions taken either by CMS or its predecessor, the HCFA.

[30] Medicare’s coverage of outpatient drugs through Part B is limited primarily to drugs used in dialysis, organ transplantation, and cancer treatment as well as a few vaccines and drugs used with certain medical devices. Medicare Drug Pricing Mechanism: Hearing Before the Subcomm. on Health Care, House Ways and Means Comm. , 107th Cong., 2d Sess. (Oct. 3, 2002) (statement of George Reeb, Assistant Inspector General, Office of Inspector Gen., Dept. of Health and Human Servs.).

[31] GENERAL ACCOUNTING OFFICE, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 1 n.4, GAO-01-1118 (Sept. 2001).

[32] Medicare Reform for Part B Drugs, 68 Fed. Reg. 50,428, 50428-50429 (proposed Aug. 20, 2003). There is an exception to this rule for a small number of drugs in oral form that can be self-administered but must be taken in a physicians’ office under careful supervision. These medications are mostly pills containing hormones and cytotoxic drugs used to treat cancer. See GENERAL ACCOUNTING OFFICE, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST, S upra note 31, at 1.

[33] See Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50428-50429, supra note 32.

[34] Id .

[35] Joseph P. Newhouse, How Much Should Medicare Pay for Drugs? , 23 HEALTH AFFS . 89, 95 (2004).

[36] See Iglehart, Medicare and Drug Pricing , supra note 28, at 1590.

[37] See GENERAL ACCOUNTING OFFICE, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 8, supra note 31.

[38] Almost 58 percent of all newly diagnosed cancers and 71 percent of all cancer deaths are in people 65 years or and older. NATIONAL CANCER INSTITUTE, SPOTLIGHT ON RESEARCH: THE INTERFACE BETWEEN CANCER AND AGING (2004) at http://plan2004.cancer.gov/discovery/aging.htm.

[39] AIS Physician Mgmt., Oncologists Pay Rose in 2000, As Group Profit Margins Fell , PHYSICIAN COMPENSATION REPORT , June 2002, http://www.aishealth.com/PhysMgmt/Business%20Tools/PCROncologists Pay.html (quoting Brenda Edwards of the National Cancer Institute, in the May 2002 issue of Cancer ). It is expected that 20 percent of the U.S. population will be over 65 years of age by 2030. NATIONAL CANCER INSTITUTE, SPOTLIGHT ON RESEARCH, supra note 38.

[40] Medicare’s payment for chemotherapy administration services under the physician fee schedule is discussed in more detail in Part V, infra at 65.

[41] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 6. For a listing of, and more details about, NDCs, see http://www.fda.gov/cder/ndc/.

[42] INSPECTOR GEN., DEPT. OF HEALTH & HUMAN SERVS., APPROPRIATENESS OF MEDICARE PRESCRIPTION DRUG ALLOWANCES 3 , OEI-03-95-00420 (May 1996).

[43] See GENERAL ACCOUNTING OFFICE, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 9, supra note 31.

[44] Reimbursement and Access to Prescription Drugs Under Medicare Part B: Hearing Before the Subcomm. Health Care, Senate Comm. on Finance , 107th Cong., 2d Sess. (March 14, 2002) (statement of Laura A. Dummit, Director, Health Care-Medicare Payment Issues, General Accounting Office).

[45] See Dawn M. Gencarelli, Average Wholesale Price for Prescription Drugs: Is There a More Appropriate Pricing Mechanism? , NATIONAL HEALTH POLICY FORUM ISSUE BRIEF 3 , No. 775, (2002) (stating that “because the AWP is part of the reimbursement formula used in Medicare Part B and by many state Medicaid programs, any increase in the published AWP can increase the billions of dollars that federal and state governments pay for prescription drugs”).

[46] Drug manufacturers and distributors commonly have different prices for different groups of purchasers. INSPECTOR GEN., DEPT. OF HEALTH & HUMAN SERVS. ,PHYSICIANS’ COSTS FOR CHEMOTHERAPY DRUGS, at app. 2, A-02-91-01049 (Nov. 1992).

[47] See GENERAL ACCOUNTING OFFICE, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 9, supra note 31.

[48] Major drug manufacturers have insisted that the publishers, not the manufacturers themselves, determine the AWP that will be published. The publishers, on the other hand, maintain that manufacturer input is their primary source for pricing information, a contention the OIG has accepted. INSPECTOR GEN., DEPT. OF HEALTH & HUMAN SERVS. ,PHYSICIANS’ COSTS FOR CHEMOTHERAPY DRUGS, supra note 46, at 7 n.2.

[49] See Medicare Part B Drugs, Program Payments Should Reflect Market Prices: Hearing Before the Subcomm. on Oversight and Investigations, House Comm. on Energy and Commerce 2, 107th Cong. (Sept. 21, 2001) (statement of William J. Scanlon, Director, Health Care Issues, General Accounting Office).

[50] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 6.

[51] Id.

[52] See GENERAL ACCOUNTING OFFICE, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 10, supra note 31.

[53] See id.

[54] Medicare Part B Drugs 5 (statement of William J. Scanlon, GAO), supra note 49.

[55] The OIG reported in a 1992 study that “the correlation between AWP and cost remains fairly consistent for both single-source and multiple-source drugs from a given manufacturer.” OIG, PHYSICIANS’ COSTS FOR CHEMOTHERAPY DRUGS , supra note 46, at 7. Either the stability in the market has deteriorated since this report was published or the sample size of prescription drug prices was too small to capture what the OIG now concedes are recognized differences in spread between these different categories of drugs.

[56] GENERAL ACCOUNTING OFFICE, CHANGES IN DRUG PRICES PAID BY VA AND DOD SINCE ENACTMENT OF REBATE PROVISIONS 20 , GAO/HRD 91-139 (Sept. 1991).

[57] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 29.

[58] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50431, supra note 32 (finding “that when actual market prices decline with the introduction of generic competition, the list AWPs do not usually experience a corresponding decline of the same magnitude”).

[59] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 29-30.

[60] See Iglehart, Medicare and Drug Pricing , supra note 28, at 1590.

[61] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50429, supra note 32.

[62] Id.

[63] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 2.

[64] INSPECTOR GEN., DEPT. OF HEALTH & HUMAN SERVS., EXCESSIVE MEDICARE PAYMENTS FOR PRESCRIPTION DRUGS , OEI-03-97-00290 (Dec. 1997).

[65] The OIG mission is mandated by P.L. 95-452. The Inspector General Act of 1978, Pub. L. No. 95-452 (HR 8588) (1978).

[66] Id.

[67] In the past three years alone, congressional hearings regarding Medicare Part B reform have been held by: the House Ways and Means Subcommittee on Health; the House Energy and Commerce Subcommittee on Oversight and Investigations; the Senate Finance Subcommittee on Health; and the Senate Appropriations Subcommittee on Labor, Health and Human Services, Education, and Related Agencies.

[68] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 1.

[69] Medicare Drug Reimbursements (statement of Dr. Larry Norton, ASCO), supra note 15.

[70] Gencarelli, supra note 45, at 3.

[71] Accuracy of AWP was a significant issue because the prescription drug coverage offered by the state Medicaid programs was much more comprehensive than that provided by Medicare before the program’s recent amendment.

[72] OIG, APPROPRIATENESS OF MEDICARE PRESCRIPTION DRUG ALLOWANCES , supra note 42, at 2.

[73] Medicare Drug Pricing Mechanism (statement of Leslie G. Aronovitz, GAO), supra note 27.

[74] Gencarelli, supra note 45, at 6.

[75] Medicare Drug Pricing Mechanism (statement of George Reeb, OIG), supra note 30.

[76] This survey only looked at sales transactions in six states, but its sample size was statistically significant. GAO, CHANGES IN DRUG PRICES PAID BY VA AND DOD SINCE ENACTMENT OF REBATE PROVISIONS , supra note 56, at 3.

[77] Id.

[78] OIG, APPROPRIATENESS OF MEDICARE PRESCRIPTION DRUG ALLOWANCES , supra note 42, at i. Omnibus Budget Reconciliation Act of 1990 (OBRA), Pub. L. No. 101-508, 104 Stat. 1388 (1990).

[79] The potential for Medicare to adopt a rebate system like that of the Medicaid program is explored in Part 4-C-3-a, infra at 52.

[80] Following the passage of the OBRA in 1990, state Medicaid programs now purport to reimburse prescription drug providers based on their Estimated Acquisition Cost (EAC), but most of the states use AWP minus some percentage discount to calculate this EAC reimbursement payment. Gencarelli, supra note 45, at 6-7.

[81] INSPECTOR GEN., DEPT. OF HEALTH & HUMAN SERVS., MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS 2 , OEI-03-97-00290, (Jan. 2001).

[82] Medicare Drug Pricing Mechanism (statement of George Reeb, OIG), supra note 30 (testifying regarding the OIG’s findings that “there is a significant difference between pharmacy acquisition costs . . . and the basis for most states reimbursement for drugs – the AWP” such that if the “states would reimburse pharmacies . . . more in line with the actual acquisition costs of the drugs, substantial savings could be realized by the Medicaid program”).

[83] Gencarelli, supra note 45, at 4.

[84] Medicare Drug Pricing Mechanism (statement of Leslie G. Aronovitz, GAO), supra note 27, at 8. For a discussion of the applicability of a carrier-based approach to modern Medicare reform see Part 4-C-4, infra atXXX .

[85] Under provisions of the Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, § 4602(b), 101 Stat. 1330, 1330-100 (1987), Congress effectively blocked the use of the carrier-administered process until 1991. In 1988, Congress put in place the “inherent reasonableness” process for adjusting Medicare prescription drug reimbursement payments through the Medicare Catastrophic Coverage Act of 1988, Pub. L. No. 100-360, § 411(g)(1)(B)(xiii), 102 Sat. 683, 782 (1988).

[86] Medicare Drug Pricing Mechanism (statement of Leslie G. Aronovitz, GAO), supra note 27, at 8.

[87] Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, § 6102, 103 Stat. 2106, 2169 (codified at 42 U.S.C. § 1395w-4) (Supp. I 1989).

[88] 56 Fed. Reg. 25,792, 25,800-801 (June 5, 1991).

[89] Physicians commonly pay less for prescription drugs than do retail pharmacies and the GAO’s report, Changes in Drug Prices Paid by VA and DOD Since Enactment of Rebate Provisions , supra at note 56, indicated that pharmacies were getting an average discount of about 16 percent off AWP, making a payment of 85 percent of AWP a reasonable proposition. AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 7.

[90] Reimbursement and Access to Prescription Drugs Under Medicare Part B: Hearing Before the Subcomm. Health Care, Senate Comm. on Finance , 107th Cong., 2d Sess. (March 14, 2002) (statement of Thomas A. Scully, Administrator, Centers for Medicare and Medicaid Services).

[91] Medicare Program; Fee Schedule for Physicians’ Services, 56 Fed. Reg. 59,502, 59,507 (Nov. 25, 1991) (to be codified at 42 C.F.R. Pt. 405, 415).

[92] OIG ,PHYSICIANS’ COSTS FOR CHEMOTHERAPY DRUGS , supra note 46, at 2.

[93] Gencarelli, supra note 45, at 4.

[94] ASCO was a particularly loud opponent of the EAC survey methodology, claiming that CMS had “proposed to survey only a handful of physicians in each state and to base the Medicare payment rate on the median acquisition cost of the surveyed group,” resulting in “large underpayments to some physicians.” AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 7 (emphasis added).

[95] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50429, supra note 32.

[96] OIG ,PHYSICIANS’ COSTS FOR CHEMOTHERAPY DRUGS , supra note 46, at 2.

[97] OIG ,PHYSICIANS’ COSTS FOR CHEMOTHERAPY DRUGS , supra note 46.

[98] Id. at 1, 5 (classifying as high volume those drugs for which Medicare spent more than a million dollars in 1989).

[99] OIG, APPROPRIATENESS OF MEDICARE PRESCRIPTION DRUG ALLOWANCES , supra at note 42, at i.

[100] Id. at ii, 10. This was the OIG’s first comprehensive investigation of Medicare prescription drug reimbursements, but an earlier OIG report, Medicare Payments for Nebulizer Drugs , had also suggested that CMS reexamine its Medicare drug payment methodologies for possible physician overpayment.

[101] Id. at 8.

[102] The OIG used AWP discounted by 10 percent, the figure used by the majority of state Medicaid programs. Id.

[103] Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Thomas A. Scully, CMS), supra note 90.

[104] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 8.

[105] Id.

[106] Id.

[107] Iglehart, Medicare and Drug Pricing , supra note 28, at 1591.

[108] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 8.

[109] Balanced Budget Act of 1997, Pub. L. No. 105-33, 111 Stat. 251 (1997). Medicare Part B reimbursed brand-name drugs at 95 percent of AWP, while multi-source drugs (those drugs with generic equivalents or brand-name drugs with at least one competing product ) were reimbursement at 95 percent of the lower of (a) the median AWP or all generic forms of the drug or (b) the lowest brand-name product’s AWP. Gencarelli, supra note 45, at 4-5.

[110] Id.

[111] H.R. Rep. No. 105-149, P.L. 105-53, at 1354 (1997).

[112] Medicare Drug Pricing Mechanism 7, (statement of Leslie G. Aronovitz, GAO), supra note 27.

[113] H.R. Rep. No. 105-149, P.L. 105-53, at 1354 (1997).

[114] OIG, EXCESSIVE MEDICARE PAYMENTS FOR PRESCRIPTION DRUGS , supra note 64.

[115] Id. at iii.

[116] Id. at ii.

[117] Id.

[118] Balanced Budget Act of 1997 (BBA), § 4316; Pub. L. No. 105-33, 111 Stat. 252, 390, (1997) (codified at 42 U.S.C.A. § 1395u(b)(8)(A)(i)) (Supp. III 1997)).

[119] BBA of 1997; 42 U.S.C.A. § 1395u(b)(8)(A)(ii).

[120] BBA of 1997; 42 U.S.C.A. § 1395u(b)(8) (B).

[121] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS , supra note 81, at 2-3.

[122] Medicare Drug Pricing Mechanism 2, (statement of Leslie G. Aronovitz, GAO), supra note 27.

[123] Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No. 106-113, App. F., §§ 213, 223, 113 Stat. 1501, 1501 A-352 (codified at 42 U.S.C. 1395u(b)(8) (Supp. V 1999).

[124] Id.

[125] Id.

[126] GENERAL ACCOUNTING OFFICE , MEDICARE PHYSICIAN FEE SCHEDULE: PRACTICE EXPENSE PAYMENTS TO ONCOLOGISTS INDICATE NEED FOR OVERALL REFINEMENTS , GAO-02-53 (Oct. 2001).

[127] Medicare Drug Pricing Mechanism 9, (statement of Leslie G. Aronovitz, GAO), supra note 27.

[128] Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Thomas A. Scully, CMS), supra note 90.

[129] Id.

[130] Gencarelli, supra note 45, at 3.

[131] GAO, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 1,2, supra note 31.

[132] Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, § 223, supra note 123.

[133] CENTERS FOR MEDICARE AND MEDICAID SERVICES, PROGRAM MEMORANDUM TO INTERMEDIARIES/CARRIERS, AN ADDITIONAL SOURCE OF AVERAGE WHOLESALE PRICE DATA IN PRICING DRUGS AND BIOLOGICALS COVERED BY THE MEDICARE PROGRAM , HCFA-Pub. 60AB (Sept. 8, 2000).

[134] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50430, supra note 32.

[135] AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 8.

[136] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50430 (citing the “disruption” that would have occurred if CMS decreased payments and then Congress immediately increased them). The memorandum retracting this proposed initiative was entitled Program Memorandum to Intermediaries/Carriers, Source of Average Wholesale Price Data in Pricing Drugs and Biologicals Covered by the Medicare Program , AB-00-115) (Nov. 17, 2000).

[137] The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), § 429(a), Pub. L. No. 106-554, Appendix F, Sec. 429, 114 Stat. 2763, 2763A-522 directed the GAO to conduct a study on drug payment and administration under the then current Medicare methodology. § 429(c) of BIPA established the moratorium.

[138] GENERAL ACCOUNTING OFFICE, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST , supra note 31.

[139] Id. at 2.

[140] Id. at 11. The GAO “requested price data on specific drugs form major pharmaceutical wholesalers, oncology specialty wholesalers, and GPOs” but reported that none of these entities responded in time to their request. Thus, the GAO’s information must have come primarily from billing invoices and wholesaler prescription drug catalogs.

[141] Id. at 11 (Table 4) (two commonly prescribed cancer drugs, leucovorin and dolasetron mesylate, had spreads of 86 and 65 percent respectively).

[142] The GAO “defined low-volume biller as a physician who billed for between the 10th and 25th percentile of total allowed units for three or more” common cancer drugs. Id. at 29.

[143] Id. at 13, 14 (Table 5 providing spreads for selected drugs purchased by low-volume billing physicians).

[144] Id. at 14 (Table 5).

[145] Id. at 25.

[146] Id.

[147] GAO , MEDICARE PHYSICIAN FEE SCHEDULE, supra note 126.

[148] Iglehart, Medicare and Drug Pricing , supra note 28, at 1591.

[149] Medicare Part B Drugs, Program Payments Should Reflect Market Prices (statement of William J. Scanlon, GAO), supra note 49.

[150] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayer (statement of Dr. Larry Norton, ASCO), supra note 15.

[151] Id.

[152] Iglehart, Medicare and Drug Pricing , supra note 28, at 1592.

[153] Medicare beneficiaries are responsible for a 20 percent co-pay for prescription drugs under the Part B program. In the dramatic case of leucovorin calcium the GAO found that the published AWP for the drug was $18.44 and that the Medicare beneficiary co-pay was $3.69, but that the drug had a widely available market price of $2.77. Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50430, 50,431, supra note 32.

[154] Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Laura A. Dummit, GAO), supra note 44; Statement of Janet Rehnquist, Inspector General, Office of Inspector General, Dept. of Health and Human Servs.; Statement of Thomas A. Scully, CMS), supra note 90.

[155] Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Thomas A. Scully, CMS), supra note 90 (acknowledging the legitimacy of oncologists complaints about the inadequate payments they received for the administration of chemotherapy and called for both payments systems to be adjusted “at the same time” to protect patient access to physician services).

[156] Id.

[157] Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), Pub. L. No. 106-554. § 429(c) required the CMS to issue its statement in accordance with established notice and comment procedure in the Federal Register. Section 429(b) of BIPA actually instructed the CMS to use its inherent reasonableness authority “to revise the Medicare payment methodology for drugs . . . based on the GAO report to the Congress.”

[158] Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Thomas A. Scully, CMS), supra note 90.

[159] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 12.

[160] Medicare Drug Pricing Mechanism: Hearing Before the Subcomm. on Labor, Health, and Human Servs., Education, and Related Agencies, Senate Comm. on Appropriations , 107th Congress, 2d Sees. (Oct. 3, 2002) (statement of Thomas A. Scully, Administrator, CMS) (stating again that CMS preferred and legislative remedy but warned that the agency was prepared to take action)

[161] Medicare Reform for Part B Drugs, 68 Fed. Reg. 50,438, supra note 32.

[162] Id. at 50431.

[163] Id. at 50431-50432.

[164] Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Thomas A. Scully, CMS), supra note 90.

[165] Gencarelli, supra note 45, at 11.

[166] Such conduct was alleged to constitute fraud on the Medicaid program. Medicare Drug Pricing Mechanism , (statement of George Reeb, OIG), supra note 30.

[167] Newhouse, supra note 35, at 101 n.28 (alleging that the manufacturer (TAP) raised the AWP while keeping its actual sales price constant as an inducement to the prescribing physician to use Lupron rather than Zoladex, a competing drug).

[168] Reimbursement and Access to Prescription Drugs Under Medicare Part B , (statement of Janet Rehnquist, OIG), supra note 154.

[169] Medicare Drug Pricing Mechanism , (statement of George Reeb, OIG), supra note 30.

[170] Gencarelli, supra note 45, at 11.

[171] Id.

[172] Id. at 12.

[173] Id.

[174] Medicare Drug Pricing Mechanism , (statement of George Reeb, OIG), supra note 30.

[175] This $8 billion expenditure represented more than 3 percent of the Medicare program’s total spending. Newhouse, supra note 35, at 95.

[176] To compute its estimate CMS used sales price data compiled by the OIG and GAO for 29 commonly prescribed drugs and then assumed that market prices were between 80 and 90 percent of AWP for all of the other Part B drugs. Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,431, supra note 32.

[177] Iglehart, Medicare and Drug Pricing , supra note 28, at 1590, 1591.

[178] Medicare’s spending on drugs billed by oncologists increased by 41 percent between 1998 and 2002, going from $1.2 billion to $3.8 billion. Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,429, supra note 32.

[179] Reducing reimbursement to market prices would have cut oncologists’ compensation by between $1.2 billion and $1.4 billion in 2002. Id. at 50,431. This could have had a profound impact on cancer care, as prescription “drugs are central to the treatment of cancer” and half of all cancer patients are covered by Medicare. AMERICAN SOCIETY OF CLINICAL ONCOLOGY, supra note 11, at 3.

[180] In April of 2003, one commentator declared that “the political environment is changing, as Republicans assume control of Congress and President George W. Bush presses an agenda (a war, further tax cuts, and expansion of Medicare’s prescription-drug coverage) that will add to the growing federal budget deficit and accelerate his administration’s drive for savings wherever they can be found,” and he thus predicted that Congress would finally curtail Medicare’s excessive payments for prescription drugs. Iglehart, Medicare and Drug Pricing , supra note 28, at 1590.

[181] Gencarelli, supra note 45, at 2.

[182] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS 2 , supra note 81 (reporting that “most state Medicaid agencies reimburse pharmacies based on the AWP of a drug less a discount which averages about 10.3 percent nationally”).

[183] Gencarelli, supra note 45, at 3 (finding that “from a policy perspective . . . AWP is part of a larger pricing infrastructure that requires examination”)

[184] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,433, supra note 32.

[185] Id.

[186] Id. at 50,433 (citing OIG and GAO data).

[187] See , Part IV-B-4, supra at 38.

[188] Gencarelli, supra note 45, at 13.

[189] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[190] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 36.

[191] Id. at 37.

[192] Id. .

[193] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[194] ASCO suggests that the law could be amended to permit CMS to confirm the accuracy of published AWP by comparing them to the market price data that manufacturers already must submit to CMS to qualify for participation in the Medicaid program. AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 37. There is no reason, however, to believe that a drug manufacturer determined to defraud Medicare would not similarly defraud the state Medicaid programs through the parallel submission of incorrect pricing information to both programs.

[195] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS 19, iii, supra note 81.

[196] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 36-37.

[197] Despite the dissatisfaction with AWP the only legislative proposals to actually be enacted all involved simple “adjustments to the percentage of AWP that is reimbursed by Medicare.” Id. at 8-9.

[198] Id.

[199] Id. at 9 n.6.

[200] Reimbursement and Access to Prescription Drugs Under Medicare Part B 5 (statement of Thomas A. Scully, CMS), supra note 90; OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS 19 , supra note 81.

[201] Gencarelli, supra note 45, at 13. In fact, the OIG proposed this when it suggested that CMS improve Medicare’s payment system by “making AWPs more accurate by collecting more accurate information from drug pricing catalogues.” OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS iii, supra note 81.

[202] In 2002, Representative Pete Stark (D-Calif.) introduced a bill that reflected this approach and in a letter dated Nov. 14, 2001, the Republican chairs of the House Energy and Commerce Subcomm. on Health and House Energy and Commerce Subcomm. on Oversight and Investigations, told CMS that they supported basing Medicare’s drug payments on ASP. Iglehart, Medicare and Drug Pricing , supra note 28, at 1595.

[203] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 30.

[204] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,433, supra note 32. It was the OIG that first proposed this. OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS iii, supra note 81.

[205] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,433, supra note 32.

[206] Id. at 50,434.

[207] ASCO objected to the proposed use of GPO data to calculate the ASP, claiming that it disadvantaged physicians who were unable to participate in these entities, but CMS insisted that where “a drug manufacturer establishes a buying group easily accessed by prudent physicians, the lower price offered to the buying group should be reflected as the widely available market price.”Id. at 50,433.

[208] Id. at 50,434.

[209] Gencarelli, supra note 45, at 2.

[210] Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Janet Rehnquist, OIG), supra note 154, at 86-87. This was just an estimate of Medicare’s savings for 24 of its 450 Part B covered drugs.

[211] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[212] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 31.

[213] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[214] The GAO had also warned that “the lowest prices . . . may not be available to all Medicare providers for all Medicare-covered drugs” and that in setting reimbursement amounts, CMS should be “mindful that providers’ ability to secure discounts likely varies.” GAO, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 25, supra note 31.

[215] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[216] Id.

[217] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 32.

[218] Id. at 33.

[219] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[220] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 2. These were various costs that were not covered by the separate Medicare payment for drug administration.

[221] In its 1992 report, Physicians’ Costs for Chemotherapy Drugs , the OIG found that the “costs associated with wasted and spoiled drugs, spilled drugs, storing the drugs and bad debts . . . [were] minimal and should not have great impact on providing the drug.” This report was an informal study of only a handful of oncologists in New York state and many of its tentative findings have been questioned by later studies. OIG ,PHYSICIANS’ COSTS FOR CHEMOTHERAPY DRUGS , supra note 46.

[222] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[223] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 34.

[224] Id. at 36.

[225] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[226] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,430, supra note 32. The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), § 429(b), Pub. L. No. 106-554, Appendix F, Sec. 429, 114 Stat. 2763, 2763A-522.

[227] GAO, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 10, supra note 31.

[228] OIG, APPROPRIATENESS OF MEDICARE PRESCRIPTION DRUG ALLOWANCES , supra note 42, at 10.

[229] GAO, CHANGES IN DRUG PRICES PAID BY VA AND DOD SINCE ENACTMENT OF REBATE PROVISIONS 4 , supra note 56. The Omnibus Budget Reconciliation Act of 1990 (OBRA), enacted Nov. 5, 1990, implemented the Medicaid rebate program. OIG, APPROPRIATENESS OF MEDICARE PRESCRIPTION DRUG ALLOWANCES , supra note 42, at i.

[230] Prices offered to the VA under its FSS and single award contracts are exempted from the rebate calculation. GAO, CHANGES IN DRUG PRICES PAID BY VA AND DOD SINCE ENACTMENT OF REBATE PROVISIONS 4 n.5, n.6, supra note 56. In order to ensure that “best prices” are faithfully reported, CMS may audit drug manufacturers and prosecute them for Medicaid fraud if they are found to have misreported their sales data. GAO, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 23-24, supra note 31.

[231] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS , supra note 81.

[232] Medicare spending on these 24 drugs comprise $3.1 billion of the total $3.9 billion in Medicare drug expenditures in 1999. Reimbursement and Access to Prescription Drugs Under Medicare Part B 87, (statement of Janet Rehnquist, OIG), supra note 154.

[233] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS ii, supra note 81.

[234] GAO, CHANGES IN DRUG PRICES PAID BY VA AND DOD SINCE ENACTMENT OF REBATE PROVISIONS , supra note 56.

[235] Newhouse, supra note 35, at 96.

[236] Medicare Drug Pricing Mechanism 1 (statement of Leslie G. Aronovitz, GAO), supra note 27.

[237] Newhouse, supra note 35, at 96. This would effect would likely be exacerbated by the fact that Medicaid, a very large program in its own right, would also be demanding a drug manufacturer’s “best price.”

[238] GAO, CHANGES IN DRUG PRICES PAID BY VA AND DOD SINCE ENACTMENT OF REBATE PROVISIONS 10 , supra note 56.

[239] Id. at 7.

[240] If Medicare were to implement this approach, the drug prices could not be as low as the prices paid by most favored customers, “but would need to be high enough to assure access for all beneficiaries.” Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Laura A. Dummit, GAO), supra note 44. This option would likely not result in optimal savings for the Medicare program.

[241] OIG, APPROPRIATENESS OF MEDICARE PRESCRIPTION DRUG ALLOWANCES , supra note 42, at 11.

[242] Gencarelli, supra note 45, at 13. Such an endorsement is of particular note because the House Ways and Means Committee shares jurisdiction over Medicare with the House Energy and Commerce Committee. Iglehart, Medicare and Drug Pricing , supra note 28, at 1595.

[243] Though CMS didn’t come out and officially endorse this approach, its director, Administrator Scully, made public statements in favor of the proposal. Iglehart, Medicare and Drug Pricing , supra note 28, at 1595.

[244] In addition to the FSS, the VA also uses the competitive bidding process to obtain even lower drug prices through blanket purchase agreements and single award contracts. A discussion of these procedures, however, is beyond the scope of this paper. See [2] or Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Laura A. Dummit, GAO), supra note 44, for more information.

[245] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS i, 1, supra note 81.

[246] GAO, CHANGES IN DRUG PRICES PAID BY VA AND DOD SINCE ENACTMENT OF REBATE PROVISIONS 4-5 , supra note 56. Physicians with the Department of Defense and the Public Health Service also order prescription drugs through the FSS. Iglehart, Medicare and Drug Pricing , supra note 28, at 1591.

[247] GAO, CHANGES IN DRUG PRICES PAID BY VA AND DOD SINCE ENACTMENT OF REBATE PROVISIONS 4-5 , supra note 56; OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS 2 , supra note 81.

[248] Iglehart, Medicare and Drug Pricing , supra note 28, at 1591.

[249] GAO, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 23, supra note 31.

[250] Medicare Part B Drugs 11 (statement of William J. Scanlon, GAO), supra note 49.

[251] The current Medicaid statutes, which only permit the agency to use this data for the Medicaid program, would need to be amended.

[252] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,435, supra note 32.

[253] Newhouse, supra note 35, at 90-91.

[254] Gencarelli, supra note 45, at 13. This, of course, assumes that the doctors are economically rationale actors.

[255] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS i-ii, supra note 81.

[256] Id. at 6.

[257] Reimbursement and Access to Prescription Drugs Under Medicare Part B 87, (statement of Janet Rehnquist, OIG), supra note 154.

[258] GAO, MEDICARE PAYMENTS FOR COVERED OUTPATIENT DRUGS EXCEED PROVIDERS’ COST 25-26, supra note 31.

[259] BBA at § 4318, 111 Stat. 251, 392 (codified at 42 U.S.C. § 1395w-4 (Supp. III 1997))

[260] Medicare Drug Pricing Mechanism 9 (statement of Leslie G. Aronovitz, GAO), supra note 27.

[261] Medicare Part B Drugs 12 (statement of William J. Scanlon, GAO), supra note 49. The GAO found that two other such demonstration projects conducted by CMS had also “reported savings without any measurable problems in beneficiary access.” Medicare Drug Pricing Mechanism 2 (statement of Leslie G. Aronovitz, GAO), supra note 27.

[262] “While this idea of injecting greater competition into the Medicare drug reimbursement system would seem like one that would garner significant support, efforts to use competitive pricing within the Medicare program in the past have not been successful.” Gencarelli, supra note 45, at 14.

[263] Iglehart, Medicare and Drug Pricing , supra note 28, at 1595.

[264] Reimbursement and Access to Prescription Drugs Under Medicare Part B (statement of Laura A. Dummit, GAO), supra note 44.

[265] “If Medicare were prepared to pay any price a manufacturer named for such a drug . . . there would be little or no incentive for the manufacturers to hold back.” Newhouse, supra note 35, at 90-91.

[266] The FSS lists many of these chemotherapy drugs at reduced prices, but the VA is only able to obtain these savings because it demands a discount from the AWP-based price offered to Medicare. If both of these large public programs were to demand the “best price,” a prudent drug manufacturer would respond by simply raising its drug’s FSS price to match the price it intended to offer to the Medicare program.

[267] Liz Freeman, Potential Chemotherapy Drug Coverage Changes Worry Oncologists , NAPLES DAILY NEWS , Jun. 22, 2003, http://www.marconews.com/03/06/naples/d926156a.htm.

[268] Another commentator has pointed to the fact that physicians must occasionally purchase drugs on the open market and then seek reimbursement later, such that the FSS “pricing schedule is not considered an option for Medicare.” Iglehart, Medicare and Drug Pricing , supra note 28, at 1591.

[269] A study evaluating Medicare’s competitive bidding demonstration projects found that the demands placed upon physicians were administratively burdensome. Nora Super Jones, Medicare Competitive Pricing: Lessons Being Learned in Phoenix and Kansas City , Issue Brief No. 750, National Health Policy Forum (Nov. 8, 1999).

[270] Freeman, supra note 267.

[271] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,436, supra note 32.

[272] United States v. Courtney, 240 F. Supp.2d 1052 (W.D. Mo. 2002), aff’d , 362 F.3d 497 (8th Cir. 2004) (upholding sentence enhancements on appeal).

[273] Medicare Drug Pricing Mechanism 4 (statement of Leslie G. Aronovitz, GAO), supra note 27.

[274] Id.

[275] Medicare Catastrophic Coverage Act of 1988, Pub. L. No. 100-360, § 411(g)(1)(B)(xiii), 102 Stat. 683, 782. (codified at 42 U.S.C. 1395m(a)(10)(B) (1988)). See Part 4-B-2-b, supra at p. 22.

[276] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,432, supra note 32.

[277] Id.

[278] OIG, APPROPRIATENESS OF MEDICARE PRESCRIPTION DRUG ALLOWANCES , supra note 42, at 11.

[279] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS 2-3 , supra note 81. (referencing the: General Accounting Office Report, Comments on Obligations Incurred by TRICARE Management Activity, Pub. No. B-287619 ( July 5, 2001)).

[280] Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,432, supra note 32.

[281] OIG, APPROPRIATENESS OF MEDICARE PRESCRIPTION DRUG ALLOWANCES , supra note 42, at 11.

[282] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 38.

[283] Id. at 39.

[284] Id. at 40-41.

[285] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS 21 , supra note 81.

[286] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 39-40.

[287] Id. at 41.

[288] See , id.. at 1, 2; Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[289] See, i.e. , OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS 20 , supra note 81. (“We recognize that drug payments are not made in a vacuum, and that program payments for other administrative expenses must be fair and reasonable to ensure that Medicare beneficiaries have access to the drugs that they need.”)

[290] In 2002, Medicare paid oncologists approximately $5.0 billion in payments related to chemotherapy administration. Roughly speaking, about 20 percent of this payment ($1.1 billion) was compensation for physician fee schedule services and the remaining amounts ($3.8 billion) were reimbursement for prescription drugs. Medicare Reform for Part B Drugs, 68 Fed. Reg. at 50,440, supra note 32.

[291] This payment is analogous to the fee the oncologist charges their non-Medicare patients for the office visit and accompanying chemotherapy administration.

[292] The physician fee schedule governs payments to a wide range of physicians who provide services to Medicare Part B beneficiaries, not just oncologists. In 2001, the physician fee schedule established payments for 7000 different services such as office visits, surgical procedures, and treatments. GAO , MEDICARE PHYSICIAN FEE SCHEDULE 1 , supra note 126.

[293] Medicare Part B Drugs 7 (statement of William J. Scanlon, GAO), supra note 49.

[294] Medicare Program; Request for Comments On Payment for Chemotherapy in Physicians’ Offices, 53 Fed. Reg. 39,644 (Oct. 11, 1988) (acknowledging complaints regarding inadequate Medicare payments for office-based chemotherapy administration)

[295] Gencarelli, supra note 45, at 5.

[296] See , e.g. , Omnibus Budget Reconciliation Act (OBRA) of 1987, Pub. L. No. 100-360, § 4055(d) (redesignated § 4056(d) by the Medicare Catastrophic Coverage Act of 1987, § 411(f)(14)) (directing the Secretary of HHS to study and report back to Congress on possible changes that should be made to the Medicare program to ensure that oncologists are compensated appropriately for chemotherapy administration).

[297] Letter from Nancy-Ann DeParle, HCFA Administrator, to Members of Congress, dated Sept. 8, 2000 (quoted in AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 12).

[298] ASCO warned that if payments for oncologists’ services were to become too low “oncologists would be financially unable to furnish chemotherapy in their offices and would instead refer patients to hospitals for treatment.” AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 13.

[299] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.

[300] NATIONAL CANCER INSTITUTE, FACTS ABOUT THE COMMUNITY CLINICAL ONCOLOGY PROGRAM , at http://www3.cancer.gov/prevention/ccop/facts.html (accessed on Feb. 12, 2004).

[301] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 13.

[302] Medicare Program; Request for Comments On Payment for Chemotherapy in Physicians’ Offices, 53 Fed. Reg. 39,644 (Oct. 11, 1988) (acknowledging that “furnishing these services in the physician’s office is more convenient for some patients and may provide other benefits as well” and that “Congress believes that inadequate Medicare payments for chemotherapy . . . may preclude the most advantageous use of this service”).

[303] Crane, supra note 18 (reporting the favorable experiences recounted by several cancer patients interviewed regarding office-based chemotherapy administration).

[304] AMERICAN SOCIETY OF CLINICAL ONCOLOGY , supra note 11, at 4.

[305] Id. at 14.

[306] Id.

[307] Id.

[308] Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA), Pub. L. 108-173, Dec. 8, 2003, 117 Stat. 2066 (2003).

[309] John K. Iglehart, Health Policy Report: The New Medicare Prescription Drug Benefit – A Pure Power Play , 350 NEW ENG. J. MED. 826 (2004).

[310] Medicare Program; Changes to Medicare Payment for Drugs and Physician Fee Schedule Payments for Calendar Year 2004, 69 Fed. Reg. 1084 (proposed Jan. 7, 2004)

[311] MMA, § 303(b), Pub. L. 108-173, 117 Stat. 2066 (2003).

[312] 42 C.F.R. Pt. 414, § 414.07

[313] MMA, § 303(b)(2), Pub. L. 108-173, 117 Stat. 2066 (2003).

[314] Id.

[315] These exceptions included sales to the Medicaid, the VA, and a handful of other public health programs that have negotiated to receive the “best prices” from drug manufacturers. 69 Fed. Reg. 1084, 1091 (Jan. 7, 2004).

[316] 69 Fed. Reg. 1084, 1091 (Jan. 7, 2004).

[317] Crane, supra note 18 (interviewing an oncologist who attested that a proposal like that adopted by Congress in the MMA it could be expected “that elderly cancer patients will be turned away from the centers that are best suited to their needs; hospitals will be clogged with cancer patients and unable to offer them timely service; and those in rural areas will have to travel up to several hours for treatment because small practices will be closed”).

[318] Sections 303 and 304 of the MMA require the Secretary of HHS to revise Medicare payments for the administration of drugs made using the physician fee schedule that would increase physician compensation by 32 percent in 2004 and another 3 percent in 2005. 69 Fed. Reg. 1084, 1095, 1108 (Jan. 7, 2004) (claiming that the change in payments “resulting from this final rule will produce virtually no net change in total Medicare payments to oncologists”).

[319] A spread between market and reimbursement prices “serves as an inducement for physicians to use one brand of the drug over another” such that maintaining “an artificially high AWP is used as a marketing device to increase a drug company’s market share.” Reimbursement and Access to Prescription Drugs Under Medicare Part B 88, (statement of Janet Rehnquist, OIG), supra note 154.

[320] Reed Abelson, Drug Sales Bring Huge Profits, and Scrutiny, to Cancer Doctors , N.Y. TIMES , Jan. 26, 2003; see also D.S. Cloud & L. McGinley, How Drug Makers Influence Medicare Reimbursements to Doctors , WALL ST. J ., Sept. 27, 2000:B1; Harris Gardiner, Among Cancer Doctors, a Medicare Revolt; New Payment System Spurs Talk of Return to Hospital Care and Old Drugs , NY TIMES at C1, Mar. 11, 2004; Editorial Desk, Cancer Scare Tactics , NY TIMES at A22, Mar. 22, 2004.

[321] Martin F. Idzik, Note, Physician Ownership in Pharmacies , 32 NOTRE DAME LAW. 49, 55 (1966).

[322] The Hippocratic Oath contains a similar prohibition: “with purity and holiness I will pass my life and practice my art . . . [and] into whatever houses I enter I will go into them for the benefit of the sick and will abstain from every voluntary act of mischief and corruption.” Id.. at 49.

[323] AMERICAN MEDICAL ASSOCIATION, JUDICIAL COUNCIL OPINIONS AND REPORTS 3 (1964).

[324] Principles of Medical Ethics, ch. I, § 8 (1955); see also Idzik, supra note 321, at 56.

[325] Hearings on Physician Ownership in Pharmacies and Drug Companies Before a Subcommittee of the Senate Committee on the Judiciary , 88th Cong., 2d. Sess. 175-77 (1964). [5 at 50]

[326] Idzik, supra note 321, at 49; see ,e.g. , Mich. Stat. Ann. § 14.771 (1956); N.D. Cent. Code 43-15-35(5) (Supp. 1965); Cal. Bus. & Prof. Code § 654; Pa. Stat. Ann. tit. 63 § 390-5(9)(xii) (Supp. 1964); Md. Ann. Code art. 43, § 266A(c)(4)(iii) (Supp. 1964).

[327] Omnibus Budget Reconciliation Act of 1989, Pub. L. No. 101-239, § 6102, 103 Stat. 2106, 2169 (codified at 42 U.S.C. § 1395w-4) (Supp. I 1989).

[328] OIG, MEDICARE REIMBURSEMENT OF PRESCRIPTION DRUGS iii, supra note 81.

[329] Lawrence K. Altman, Study Suggests Overuse of Chemotherapy Near Life’s End, N.Y. Times, May 13, 2001.

[330] Chemotherapy: Drug Treatment For Unresponsive Tumors In patients At End of Life ‘Hard to Justify,’ Cancer Weekly June 5, 2001 p. 14.

[331] Peter Chowka, Chemo Versus Nutritional Therapies: Is a Conflict of Interest Compromising Fair Evolution of Alternative Cancer Treatments? , Natural Health Line News, (Mar. 1, 2002), at http://www.naturalhealthline.com/ newsletter/1mar03/chemo.htm.

[332] NATIONAL CANCER INSTITUTE, CHEMOTHERAPY AND YOU 3, supra note 4.

[333] Chemotherapy: Drug Treatment For Unresponsive Tumors In patients At End of Life ‘Hard to Justify,’ CANCER WKLY ., June 5, 2001, p. 14.

[334] Newhouse, supra note 35, at 95.

[335] Idzik, supra note 321, at 71.

[336] Id. at 71. But see , id. at 55 (citing to Statement of Robert B. Throckmorton, General Counsel, American Medical Association, Hearings, 219 (testifying that “the mere opportunity to exploit, the opportunity for personal gain, should not in itself condemn such ownership”)).

[337] Medicare Drug Reimbursements, A Broken System for Patients and Taxpayers (statement of Dr. Larry Norton, ASCO), supra note 15.