Opening Statement of Hon. Nancy L. Johnson, a Representative
 in Congress from the State of Connecticut, and Chairwoman, Subcommittee on Health

Hearing on Medicare Payments for Currently Covered Prescription Drugs

October 3, 2002

Good morning.  This morning=s hearing is a very important one in our effort to strengthen our Medicare program.   The evidence is overwhelming that Medicare is paying way too much for some items of durable medical equipment and prescription drugs.  It is imperative that we adopt a system that more accurately aligns costs and payments. 

 While this would not normally be a difficult task, it is a very difficult problem at this time because most cancer care is paid for through drug reimbursements.  That means that as we change the way we pay for drugs, we must also realistically and accurately reimburse for the practice expenses associated with the delivery of, for example, chemotherapy, and these practice expenses are significant B personnel, special equipment, costly drug inventories, and the insurance to cover them and so forth.

 So assuring reimbursement for practice expense is no easy task, yet it has been only a minor part of the AWP discussion.

The GAO tried identifying practice expenses but neglected to focus its work appropriately on oncologists who deliver such care in an office setting.  The oncology community was slow as well to rise to this quite daunting task.  Now, however, we are developing the needed information and today, are unified in our quest to change the way we pay for Medicare-covered drugs... and the way we pay for the costs of administering those drugs.

While I am keenly disappointed in the GAO study, I am pleased that oncologists have taken advantage of a provision that I wrote in the Benefit Improvement and Protection Act that permits groups to submit practice expense data and requires the Centers for Medicare and Medicaid Services to evaluate that data and use it, if it meets certain standards.  Their most recent data is very important and particularly significant because GAO failed to collect appropriate data in the study we sought for that purpose, though unintentionally.

Overpaying for drugs burdens seniors with co-payments that in some instances exceed the cost paid for the drug by the physician, pharmacist, or provider of durable medical equipment.  On the other hand, underpayment will without question deny seniors access to life-saving care.

Medicare spending on Part B drugs is very concentrated:  just 35 drugs account for 82 percent of Medicare spending and 95 percent of the claims volume.

 Furthermore, Medicare payments for covered drugs have skyrocketed, increasing beneficiary and taxpayer costs.  In 1992, Medicare paid about $700 million for prescription drugs; in 2000, it paid $5 billion B a 700 percent increase over 8 years, though the number of drugs used has soared as well. 

 Medicare=s payment for these drugs is prescribed in law.  The Balanced Budget Act of 1997 specifies that Medicare pay 95 percent of the average wholesale price, or AWP, for the drug.  AWPs, however, are not defined by law or regulation.  They are reported by drug manufacturers to organizations that publish the data in compendia, like the Red Book.  Medicare carriers use the published data to calculate payment.

The problem is that AWPs do not reflect the actual price paid by purchasers, nor do they accurately account for the costs associated with administering the drugs, for which no other Medicare payment is made.  The AWPs are often far greater because they do not reflect the discounts, rebates or so-called Acharge backs@ that manufacturers and wholesalers customarily offer to providers.  On the other hand, for cancer drugs, the heavy costs of inventory, insurance, special equipment, nursing and other personnel are not captured by any other payment.

 Examples of overpayment abound, forcing seniors to bear higher copayments and premiums.  Beneficiaries pay a copayment equal to 20 percent of Medicare=s payment for the drug.  For some drugs, beneficiaries are paying more in copayments than physicians or suppliers are paying to purchase the drug. 

 Consider vancomycin, with an AWP of $382.  The beneficiary would pay 20 percent of the Medicare reimbursement of $363, or $73.  The provider would pay about $5, on average.  That=s a $73 payment by the beneficiary for a drug that costs the provider $5.

A second and equally serious problem are reports that some manufacturers use inflated AWPs as a strategy to increase market share.  If Medicare reimburses physicians and suppliers based on the inflated AWP, providers have a greater incentive to use products with a larger Aspread@ between the actual price they pay and Medicare=s reimbursement.  Providers may base prescribing decisions on economic incentives rather than clinical appropriateness.  This practice may harm patient care, and drive over-utilization of services.

Of all countries, America has the greatest access to cancer care.  In recent years there has been a revolution in cancer care, enabling physicians to deliver the latest in quality care in many small centers across America. Medicare does not reimburse oncologists for the practice expenses associated with providing treatment to cancer patients in outpatient settings.  Consequently, they rely on the overpayments for the drugs to cover these costs.  Before we eliminate these overpayments, we must assure appropriate reimbursement of practice expense.  While all agree on this, I am determined it be done accurately and fairly and am disappointed with how little real attention seems to be focused on it in today=s testimony and will pursue this matter in questioning.

 We are pleased to welcome Tom Scully from the Centers for Medicare and Medicaid Services who will give us his views on AWP reform.

Our second panel will include: 

• George Reeb, from the Office of the Inspector General in the Department of Health and Human Services will update us on his findings comparing AWP to actual acquisition costs;

• Michael O=Grady from Project Hope will discuss a competitive bidding approach to establishing Medicare reimbursements for outpatient drugs;

• Dr. Paul Bunn from the American Society of Clinical Oncology will tell us about the new information on practice expenses that the Society has collected and submitted for consideration; and

• Kim Glaun from the Medicare Rights Center will present concerns from beneficiaries perspective. 

 I look forward to your testimony.