Can Medicare save more money on the drugs it administers through its Medicare Medical Insurance (Part B) program? A debate has been brewing for years on how the program pays for these medications.

          Unlike the Medicare Prescription Drug (Part D) program, Part B drugs are administered directly by health care providers, usually in clinical settings, such as hospitals. They include some commonly used chemotherapy, anemia and prostate cancer drugs that are often delivered through infusion. These medications are among the most sophisticated and expensive treatments that Medicare provides, costing the government more than $20 billion every year, according to the U.S. Government Accountability Office (GAO).

          Just examining the growth in Part B medications provides a glimpse into how much overall Medicare expenses have been climbing. From 1992 to 1999, program expenditures rose from $700 million to $4 billion. From 1999 to 2000, expenses rose another $1 billion. What drove these costs to rise more than eight-fold between 1992 and 2002?

          A recent GAO report analyzed which kinds of drugs were used and their respective costs. The most-used Medicare drug was flu shots, which was given to more than 15 million beneficiaries. The least-used medicine was for 660 hemophilia patients.

          While the number of people receiving the drugs rose, costs also climbed, the GAO found. That is a cause for concern as Medicare tries to rein in expenses. Here's what the agency found:

    "Our analysis showed that most of the 55 drugs increased in expenditures, prices, and average annual cost per beneficiary from 2008 to 2010. The 5 drugs with the largest increase in Medicare expenditures over this time period also had the largest increase in the number of beneficiaries receiving each drug. Four of the 10 drugs that showed the greatest increase in expenditures were also among the 10 drugs showing the greatest price increases."

          As Medicare experiments with different payment systems, it's also reexamining how best to pay for Part B drugs. When it comes to more specialized treatments for cancer and the side effects of chemotherapy, Medicare is trying to find a middle ground between discounted prices for beneficiaries and ensuring that health providers cover their costs when purchasing the drugs. Here's a list of the most expensive drugs in Part B:

Drug                              Used for                        Annual Cost

Epogen/Procrit               anemia                           $2.4 billion

Rituxin                           cancer, arthritis              $1.3 billion

Lucentis                         macular degeneration     $1.2 billion

Avastin                          cancer                            $1.1 billion

Remicade                       autoimmune disorders   $900 million

Neulasta                         chemotherapy infect.     $880 million

Aranesp                         anemia                           $504 million

Alimta                            cancer                            $394 million

Taxotere                        cancer                            $387 million

Source: GAO

          As you may note, the majority of the drugs on this list are used to treat cancer and the side effects from chemotherapy (such as anemia and infections). Although a far larger number of beneficiaries received flu and pneumonia shots, those drugs were much less expensive and typically administered in single doses once per year.

Changing the Payment Formula   

         How can Medicare save more money on its most-expensive medications? Some policymakers have suggested that the program lower the threshold for what it's willing to pay for the medications, bringing it much closer to a true wholesale price.

          Medicare adjusted its Part B payment formula to what it calls "average sales price plus 6 percent" (ASP+6) in 2005, after it was reviewed by the Medicare Payment Advisory Commission (MedPAC). By paying 6 percent over the average sales price for the drugs, Medicare officials were hoping to restrain cost increases. It also provided some room for physicians and clinics to recover some of the costs associated with shipping, handling and storing the drugs.

          For oncologists, who administer the most expensive drugs in their clinics, Medicare reimbursement accounts for 70 percent of their revenue from the government. Lowering the price even more could threaten their ability to offer the drugs, argues the American Action Forum (AAF), a conservative group, in a report authored by Douglas Holtz-Eakin, its president and former chairman of the President's Council of Economic Advisors.

          What would happen if the Part B formula allowed for only 3 percent margin above the average retail price? According to the Joint Select Committee on Deficit Reduction, that would save the program $3.2 billion, which is about 6 percent of all Part B expenditures. Yet the AAF claims that it would put "smaller physician practices at risk." The group, citing MedPAC data, maintains that the ASP+6 formula has constrained spending in Part B to 2.4 percent, compared to nearly 11 percent growth from 1997 to 2004.

          It could be that the payment formula is a red herring in the growth of Part B medications. A 2003 MedPAC report noted that Congress expanded the number of reimbursable drugs three times in the 1990s alone. Now Medicare covers most cancer drugs at considerable cost without raising co-payments, which is one item under consideration as the government seeks to recover more of the costs of providing care.

          As with most of American health care, accelerated use of new drugs and therapies has been a huge cost driver. Older drugs are constantly being substituted with newer ones. Breakthrough technologies almost always cost much more than the ones that they are replacing. More than two decades ago, for example, biotechnology drugs were relatively rare and cost prohibitive. Now there are more than 350 products targeting 200 diseases. Most of them are still under patent protection, which allows the manufacturers to maintain high prices.

          Are the newer drugs more effective than the older ones in treating chronic or acute diseases? In many cases, such as Gleevac, which has proven to be a miracle drug in treating certain cancers, the answer is yes. But Medicare has yet to evaluate the entire spectrum of drugs used in clinical settings.

          There are going to be conflicts between what ongoing clinical research shows and what Medicare covers that will need to be resolved if the program is going to save money on its drug bills.

          The most recent high-profile example concerns Avastin, which the Food and Drug Administration last year ruled couldn't be marketed as a treatment for breast cancer. As seen in the chart above, it's the fourth-most expensive drug covered by Medicare.

          "Here you have a drug that costs $90,000 a year," wrote Joe Nocera in The New York Times. "For the vast majority of women, it does not work. For some of them, it has serious side effects. The FDA has ruled it can't be marketed as a breast cancer drug, yet no one has the nerve to say we can't pay for it."

          Only a comprehensive study of the efficacy of the most-expensive Medicare drugs will provide useful insight into whether Medicare is overspending on Part B medications. Some of it is already underway, courtesy of the Affordable Care Act. Once Medicare officials have some solid research, they can return the issue to policymakers, who will then have to make some tough decisions on which drugs are worth paying for in an ongoing struggle to limit program expenses. 

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