U.S. Department of Health & Human Services Office of Inspector General Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices OEI-03-18-00120 August 2018 Suzanne Murrin Deputy Inspector General oig.hhs.gov Report in Brief U.S. Department of Health & Human Services August 2018 OEI-03-18-00120 Office of Inspector General Medicare Part B Drug Payments: Impact of Price Why OIG Did This Review Substitutions Based on 2016 Average Sales Prices When Congress established average sales price (ASP) as the basis for Medicare What OIG Found Part B drug reimbursement, it also provided a mechanism for monitoring  The Centers for Medicare & Medicaid Services (CMS) lowered Part B market prices and limiting potentially reimbursement for 16 drugs on the basis of 2016 data. excessive payment amounts. The Social  CMS’s price-substitution policy saved Medicare and its beneficiaries Security Act mandates that the Office of $13.1 million over 1 year. Inspector General (OIG) compare ASPs  Medicare and its beneficiaries could have saved up to an additional with average manufacturer prices (AMPs). $2.7 million over 1 year if CMS implemented a more expansive If OIG finds that the ASP for a drug price-substitution policy that, for example, allowed substitution for drugs exceeds the AMP by a certain percentage that exceeded the 5-percent threshold in a single quarter. (currently 5 percent), the Act directs the Secretary of Health and Human Services Exhibit 1: Results of the Medicare Part B Price-Substitution Policy to substitute the ASP-based payment amount with a lower calculated rate. Through regulation, CMS outlined that it would make this substitution only if the ASP for a drug exceeds the AMP by 5 percent in the previous 2 quarters or 3 of the previous 4 quarters. Over the last decade, OIG has produced annual reports aggregating the results of our mandated quarterly ASP-to-AMP comparisons. This annual report quantifies the savings to Medicare and its beneficiaries that are a direct result of CMS’s price-substitution policy based on 2016 ASPs, and this report also offers recommendations for achieving additional Source: OIG analysis of average sales price (ASP) and savings. average manufacturer price (AMP) data from 2016 How OIG Did This Review What OIG Recommends To determine the effects of the Because of the potential for savings to Medicare beneficiaries and the price-substitution policy, we calculated the program, OIG recommends that CMS expand the price-substitution policy. difference between ASP-based payment CMS did not concur with the recommendation, instead stating that as and AMP-based payment for each drug additional data become available and as it continues to gain experience with with a price substitution. We then applied the price-substitution policy, it will consider further changes as necessary. this difference to the Medicare utilization OIG recognizes that CMS, in setting policy for payment substitution, needs to for each of these drugs. To account for balance safeguarding access to drugs and ensuring that Medicare and its a 3-quarter lag between the reporting of beneficiaries do not overpay for drugs. To provide greater flexibility and pricing data and the application of price achieve this continued balance, any future expansion of the payment- substitutions, we used drug utilization substitution policy could contain a provision that would prevent a price data for the fourth quarter of 2016 substitution when there are indications that the substitution amount is below through the third quarter of 2017 to the provider acquisition costs. calculate the savings based on 2016 data. Full report can be found at http://oig.hhs.gov/oei/reports/oei-03-18-00120.asp TABLE OF CONTENTS BACKGROUND 1 Methodology 3 FINDINGS CMS’s price-substitution policy saved Medicare and its beneficiaries $13.1 million over 1 year 5 Expanding the price-substitution criteria could have generated up to $2.7 million in additional 6 savings for Medicare and its beneficiaries CONCLUSION AND RECOMMENDATIONS Expand the price-substitution policy 7 Agency Comments and OIG Response 8 APPENDIXES A: Detailed Methodology 9 B: Agency Comments 10 ACKNOWLEDGMENTS 12 BACKGROUND Objectives 1. To quantify the Medicare savings resulting from price substitutions—based on 2016 average sales prices (ASPs)—for certain Part B-covered drugs. 2. To estimate the financial impact of expanding the Centers for Medicare & Medicaid Services’ (CMS) criteria for price substitution. When Congress established ASP as the basis for Medicare Part B drug Drug Pricing Terms reimbursement, it also provided a mechanism for monitoring market prices Manufacturer’s Average Sales and adjusting ASP-based payments in certain situations. Specifically, the Price (ASP) Social Security Act (the Act) mandates that the Office of Inspector In general, the manufacturer’s ASP General (OIG) compare ASPs with average manufacturer prices (AMPs).1 for a unit of drug that is sold is If OIG finds that the ASP for a drug exceeds the AMP by a certain defined as the manufacturer’s sales percentage (currently 5 percent), the Act directs the Secretary of Health and of a drug to all purchasers in the Human Services (after being notified by OIG) to substitute the payment United States in a calendar quarter divided by the total number of units amount with the lesser of the widely available market price (if any) or 103 of the drug sold by the manufacturer percent of the AMP.2, 3 in that same quarter. Average Manufacturer Price Payments for Prescription Drugs Under Medicare Part B (AMP) Medicare Part B covers a limited number of outpatient prescription drugs. In general, AMP is defined as the These drugs are usually administered in a physician’s office or other average price paid to the outpatient setting and include, for example, drugs used to treat cancer. manufacturer for the drug in the To obtain reimbursement for Part B drugs, health care providers submit United States by (1) wholesalers for claims to Medicare contractors using Healthcare Common Procedure drugs distributed to retail community pharmacies and (2) retail Coding System (HCPCS) codes. (Hereinafter in this report, we refer to community pharmacies that HCPCS codes as “drugs.”4) purchase drugs directly from the manufacturer. CMS calculates the payment amount for these drugs using information provided by manufacturers. Certain manufacturers must provide CMS National Drug Code (NDC) quarterly with the ASP and volume of sales for each of their National Drug An NDC is a code used to identify a Codes (NDCs).5, 6 CMS then calculates an ASP-based payment amount for drug based on its manufacturer, product, and package size. the drug; this amount includes all of the NDCs associated with the drug.7 Under the ASP pricing methodology, the Medicare reimbursement for most Healthcare Common Procedure Coding System (HCPCS) Code A HCPCS code is a standardized 1 Section 1847A(d)(2)(B) of the Social Security Act (the Act). billing code that is used primarily to 2 Section 1847A(d)(3) of the Act. identify products, supplies, and other 3 Pursuant to § 1847A(d)(3)(B)(ii) of the Act, the threshold percentage has been maintained at 5 percent. 4 A HCPCS code for a drug defines the drug name and the amount of the drug represented by the services. A HCPCS code specifies the HCPCS code but does not specify the manufacturer or package size. name and the amount of the drug 5 Section 1927(b)(3) of the Act. and may represent one or more 6 See sidebar for the definition of an NDC. NDCs. 7 Section 1847A(c) of the Act. Certain types of sales are exempted from ASP, and ASP is net of any price concessions (with limited exceptions). Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 1 OEI-03-18-00120 Part B drugs is equal to 106 percent of the volume-weighted ASP for the drug.8 However, under sequestration legislation, Medicare’s portion of the payment amount for most drugs is reduced by 2 percent.9 Quarterly reimbursement amounts are not based on current quarter data because there is a 2-quarter lag between the sales period for which ASPs are reported and the effective date of the reimbursement amounts. For example, manufacturers’ ASPs from the first quarter of 2016 were used to establish reimbursement amounts for the third quarter of 2016. Manufacturer Reporting of AMPs In addition to providing quarterly ASPs, certain manufacturers must provide CMS quarterly with the AMP for each of their NDCs.10 The AMP is generally calculated as a weighted average of prices for all of a manufacturer’s package sizes of a drug and is reported for the lowest identifiable quantity of the drug, e.g., 1 milliliter, one tablet, one capsule. AMP-Based Price Substitutions Through regulation, CMS established the criteria under which it would implement a price substitution for a drug. CMS may substitute 103 percent of the AMP for the ASP-based reimbursement amount when OIG identifies a drug that exceeds the 5-percent threshold in the previous 2 quarters or 3 of the previous 4 quarters.11 CMS implemented the AMP substitution policy in April 2013. Because CMS believes that comparisons based on partial AMP data may not adequately reflect market trends, the agency will consider lowering reimbursement amounts only when corresponding AMP data is available for each of the NDCs used to determine the published reimbursement amount for a drug.12 To prevent the price-substitution policy from inadvertently raising Medicare reimbursement amounts, CMS does not substitute prices when the substituted amount is greater than the ASP-based payment amount calculated for the quarter in which the price substitution takes effect.13 CMS also does not substitute prices when the Food and Drug Administration (FDA) has identified a drug as being in short supply.14 Price substitutions take effect in the quarter after OIG shares the 8 Section 1847A(b)(1) of the Act. Medicare beneficiaries are responsible for 20 percent of this amount in the form of coinsurance. 9 Part B claims dated on or after April 1, 2013, incur a reduction in payment in accordance with the Budget Control Act of 2011 and the American Taxpayer Relief Act of 2012 (see CMS Medicare FFS Provider e-News, Mandatory Payment Reductions in the Medicare Fee-for-Service (FFS) Program – “Sequestration,” March 8, 2013). Under this mandatory payment reduction, Medicare’s portion of the payment rate for most Part B drugs is reduced by 2 percent. This reduction does not apply to the coinsurance portion of the Medicare allowed amount for Part B drugs. 10 Section 1927(b)(3) of the Act. 11 42 CFR § 414.904(d)(3). 12 Ibid. 13 Ibid. 14 Ibid. Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 2 OEI-03-18-00120 results of its most recent pricing comparison and remain in effect for 1 quarter.15 Because of the 2-quarter lag between the ASP reporting period and the effective date of reimbursement amounts, and the additional quarter that is necessary for OIG to complete its pricing comparison, there is a 3-quarter lag between the ASP reporting period and the effective date of the price substitutions. As shown in Exhibit 2, price substitutions that took effect in Exhibit 2: Timeline for AMP-Based Price Substitutions in 2016 First  Manufacturers collected ASPs and AMPs for their drugs sold during the first quarter of 2016 Quarter 2016 Manufacturers sent ASPs and AMPs from the first quarter of 2016 to CMS by April 30, 2016 Second  CMS sent first-quarter 2016 ASP and AMP data to OIG by end of June 2016 Quarter 2016  OIG identified the drugs that met the price-substitution criteria and provided them to CMS by August 15, 2016 Third  CMS published Part B drug reimbursement rates for the fourth quarter of 2016, including price substitutions for Quarter drugs that met the criteria based on data from the first quarter of 2016 2016  CMS used AMP-based reimbursements for Part B drugs that met criteria based on data from the first quarter Fourth of 2016 Quarter 2016 the fourth quarter of 2016 were based on comparisons of ASPs and AMPs from the first quarter of 2016. OIG Monitoring of ASPs and AMPs To comply with its statutory mandate, OIG has provided CMS with pricing comparisons since the January 2005 implementation of the ASP reimbursement methodology for Part B drugs. OIG issued six annual reports for the years prior to CMS’s April 2013 implementation of the AMP price-substitution policy. Only four of these reports calculated estimated savings. These four reports estimated that Medicare and its beneficiaries would have saved $35 million from 2009 through 2012 if CMS had implemented the AMP price substitutions. OIG’s 2013 annual report was the first to provide annual savings that were a direct result of CMS’s price-substitution policy. Methodology To determine the effects of the price-substitution policy, we calculated the difference between ASP-based payment and AMP-based payment for each drug with a price substitution. We then applied this difference to the Medicare utilization for each of these drugs. To account for a 3-quarter lag between the reporting of pricing data and the application of price 15 Ibid. Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 3 OEI-03-18-00120 substitutions, we used drug utilization data from the fourth quarter of 2016 through the third quarter of 2017 to calculate the savings based on 2016 ASP data. Appendix A provides a more detailed methodology. Standards This study was conducted in accordance with the Quality Standards for Inspection and Evaluation issued by the Council of the Inspectors General on Integrity and Efficiency. Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 4 OEI-03-18-00120 FINDINGS CMS’s CMS initiated price substitutions for 16 drugs based on 2016 data. Price substitutions for these drugs saved Medicare and its beneficiaries price-substitution $13.1 million over the 1-year period between the fourth quarter of 2016 policy saved and the third quarter of 2017, as shown in Exhibit 4. Since CMS instituted Medicare and its its price-substitution policy in 2013, Medicare and its beneficiaries have saved $55.4 million, including the $13.1 million for 2016. beneficiaries $13.1 million over 1 year Exhibit 4: Price substitutions saved Medicare and its beneficiaries $13.1 million Quarter(s) in Which Price Substitutions Occurred Drug Description Fourth First Second Third Savings Quarter Quarter Quarter Quarter 2016 2017 2017 2017 J0636 Calcitriol injection  $31 J0670 Mepivacaine HCl injection  $802 J0834 Cosyntropin cortrosyn injection  $2,816 J0878 Daptomycin injection   $1,605,561 J1568 Octagam injection   $5,292,644 J1570 Ganciclovir sodium injection    $89,282 J2400 Chloroprocaine HCl injection  $243 J2501 Paricalcitol    $477 J2700 Oxacillin sodium injection  $3,678 J7520 Sirolimus oral     $5,967,216 J9178 Epirubicin HCl injection   $5,640 J9190 Fluorouracil injection   $92,260 J9200 Floxuridine injection    $638 J9209 Mesna injection   $3,941 Q0166 Granisetron HCl oral   $3,281 Q0167 Dronabinol oral   $3,875 Total $13,072,385 Source: OIG analysis of AP and AMP data from 2016 Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 5 OEI-03-18-00120 Expanding the CMS has maintained a cautious approach to price substitutions. However, this cautious approach may restrict the Government’s ability to limit price-substitution potentially excessive payment amounts based on ASPs. If CMS had criteria could have expanded its price-substitution criteria to include certain other Part B drugs generated up to in 2016, Medicare and its beneficiaries could have saved up to an additional $2.7 million in $2.7 million over 1 year. additional savings Millions could be saved by expanding the substitution criteria to include drugs that exceeded the 5-percent threshold in a single quarter. for Medicare and its Nineteen drugs with complete AMP data exceeded this threshold in at least beneficiaries 1 quarter of 2016 but were not eligible for price substitution in that quarter because they did not meet CMS’s duration criteria, i.e., did not exceed the threshold in the previous 2 quarters or 3 of the previous 4 quarters. If the 19 drugs had been eligible for price reductions on the basis of data from a single quarter only, Medicare and its beneficiaries could have saved up to an additional $2.7 million between the fourth quarter of 2016 and the third quarter of 2017.16 Since 2014, Medicare and its beneficiaries could have saved up to an additional $22.2 million, including the $2.7 million for 2016, if CMS had expanded its criteria to include drugs that exceeded the 5-percent threshold in a single quarter. Previously, CMS has expressed concern that price substitutions based on results from a single quarter may represent one aberrant quarter of pricing rather than a market trend.17 However, price discrepancies for over half of the 19 drugs do not appear to have resulted from isolated fluctuations. According to 2015 and 2016 data, 11 of these 19 drugs exceeded the 5-percent threshold more than once over the 2-year period.18 Specifically, 8 of the 19 exceeded the threshold in 2 of the 8 quarters, and another 3 drugs exceeded the threshold three or more times in the 8 quarters. If CMS would prefer to employ a more cautious approach than substitution based on a single quarter of data, it could expand its price-substitution criteria to include drugs that exceed the 5-percent threshold in 2 of the previous 6 quarters. Under this approach, three drugs would have been eligible for price substitutions. Medicare and its beneficiaries could have saved an estimated $64,000 on these three drugs. 16 These 19 drugs were not identified by FDA as being in short supply and did not have AMP-based substitution amounts that were greater than the ASP-based reimbursement amounts in the quarters during which the substitutions would have occurred. Three of these drugs did not have any allowed Part B utilization during the reviewed period; therefore, the estimated savings for these drugs was $0. 17 76 Fed. Reg. 73026, 73288 (Nov. 28, 2011). 18 This analysis is based on pricing comparison results for the 2-year period between the first quarter of 2015 and the last quarter of 2016. Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 6 OEI-03-18-00120 CONCLUSION AND RECOMMENDATION Under the current price-substitution policy, 16 drugs were subject to reimbursement reductions on the basis of data from 2016, saving Medicare and its beneficiaries $13.1 million between the fourth quarter of 2016 and the third quarter of 2017. Since the inception of price substitution, Medicare and its beneficiaries have saved $55.4 million. Thus, price substitution continues to be an important mechanism for CMS to employ in ensuring reasonable payments for Medicare Part B drugs. CMS could achieve even greater savings for Medicare and its beneficiaries by expanding its criteria for AMP-based price substitutions. OIG has previously recommended that CMS expand the price-substitution criteria. Since 2014, Medicare and its beneficiaries could have saved up to an additional $22.2 million if CMS had expanded its criteria. CMS stated that it did not concur with expanding the price-substitution policy and expressed concern that expanding price-substitution criteria may impede physician and beneficiary access to drugs. OIG agrees that access to prescription drugs should always be considered when contemplating pricing policies and supports current safeguards to prevent substitutions for drugs that FDA has identified as being in short supply. However, OIG continues to believe that CMS can achieve a better balance between safeguarding access to drugs and ensuring that Medicare and its beneficiaries do not overpay for drugs. To provide greater flexibility and achieve this continued balance, any future expansion of the payment substitution policy could contain a provision that would prevent a price substitution when there are indications that the substitution amount would be below provider acquisition costs. Therefore, we continue to recommend that CMS: Expand the price-substitution policy To more effectively limit excessive payment amounts based on ASPs and to generate greater savings for Medicare and its beneficiaries, CMS should consider broadening its price-substitution criteria to include at least some additional drugs. A more expansive policy might include drugs with complete AMP data that exceed the 5-percent threshold in a single quarter. However, CMS also could consider a more modest expansion of the policy that better captures drugs that repeatedly exceed the threshold. For example, CMS could expand the criteria to include drugs with complete AMP data that exceed the 5-percent threshold in 2 of 6 quarters. Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 7 OEI-03-18-00120 AGENCY COMMENTS AND OIG RESPONSE CMS did not concur with our recommendation, instead stating that as additional data becomes available and as it continues to gain experience with the price-substitution policy, it will consider further changes as necessary. CMS believes the current policy safeguards—which identify drugs that exceed the 5-percent threshold for 2 consecutive quarters or 3 of 4 quarters—identify situations in which AMP consistently exceeds ASP. OIG continues to believe that expanding the policy can achieve a balance between safeguarding access to drugs and ensuring that Medicare and its beneficiaries do not overpay for drugs. Our examination of 2016 data shows that if the policy had been expanded to include the 19 drugs that exceeded the 5-percent threshold in a single quarter, up to an additional $2.7 million could have been saved by beneficiaries and the program. The majority of the 19 drugs we identified for these potential savings exceeded the threshold multiple times over a 2-year period. Expanding the policy to capture drugs that exceed the threshold in a single quarter could increase the savings to beneficiaries and the program and still ensure access to drugs. To help ensure that CMS has sufficient information for its consideration regarding the price-substitution policy, OIG will continue to provide CMS with the results from our quarterly pricing comparisons, along with annual reports on the impact of the price-substitution policy. For the full text of CMS’s comments, see Appendix B. Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 8 OEI-03-18-00120 APPENDIX A: Detailed Methodology We obtained NDC-level ASP data and AMP data for Part B drugs from CMS for 2016. We also obtained ASP-based reimbursement amounts and Part B drug utilization for the quarters in which price substitutions occurred, i.e., the fourth quarter of 2016 through the third quarter of 2017. In addition, we obtained the drugs that had price substitutions based on data from 2016. For each quarter of 2016, we calculated the volume-weighted AMP for drugs in a manner consistent with CMS’s methodology for calculating volume-weighted ASPs. We then compared the volume-weighted ASPs and AMPs and identified all drugs with ASPs that exceeded the AMPs by at least 5 percent. We also identified drugs that exceeded the 5-percent threshold but did not meet CMS’s duration criteria for price substitution, i.e., they did not exceed the threshold in the previous 2 quarters or 3 of the previous 4 quarters. To calculate the savings associated with price substitutions or potential price substitutions19 that could be made by expanding the policy, we first reduced AMP-based and ASP-based reimbursement amounts (103 percent of the volume-weighted AMP and 106 percent of the volume-weighted ASP, respectively) by the 2-percent reduction required by sequestration legislation. We then subtracted the AMP-based reimbursement amount from the ASP-based reimbursement amount for the quarter in which the price substitution occurred20 and multiplied the difference by the Part B utilization for each drug in the respective quarter that the price substitution occurred. Limitations We did not verify the accuracy of manufacturer-reported ASP and AMP data, nor did we verify the underlying methodology used by manufacturers to calculate ASPs and AMPs. We also did not verify the accuracy of CMS’s calculations of reimbursement amounts for Part B drugs. Manufacturers are required to submit their quarterly ASP and AMP data to CMS within 30 days after the close of the quarter. We did not determine whether manufacturers provided any updated data to CMS at a later date. 19 There were two drugs that would have met the criteria to be included in our analysis of potential price substitutions. However, manufacturers subsequently provided CMS with revised AMPs and unit types for these drugs. As a result of these revisions, these drugs no longer met the criteria for inclusion in our analysis and we therefore removed them. 20 AMP-based price substitutions based on data from the first through fourth quarters of 2016 were applied in the fourth quarter of 2016 through the third quarter of 2017, respectively. Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 9 OEI-03-18-00120 APPENDIX B: Agency Comments Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 10 OEI-03-18-00120 Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 11 OEI-03-18-00120 ACKNOWLEDGMENTS Conswelia McCourt served as the team leader for this study. Office of Evaluation and Inspections staff who provided support include Joe Chiarenzelli, Althea Hosein, Christine Moritz, and Meghan Riggs. This report was prepared under the direction of Linda Ragone, Regional Inspector General for Evaluation and Inspections in the Philadelphia regional office, and Edward Burley, Deputy Regional Inspector General. To obtain additional information concerning this report or to obtain copies, contact the Office of Public Affairs at Public.Affairs@oig.hhs.gov. Medicare Part B Drug Payments: Impact of Price Substitutions Based on 2016 Average Sales Prices 12 OEI-03-18-00120 ABOUT THE OFFICE OF INSPECTOR GENERAL The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as amended, is to protect the integrity of the Department of Health and Human Services (HHS) programs, as well as the health and welfare of beneficiaries served by those programs. This statutory mission is carried out through a nationwide network of audits, investigations, and inspections conducted by the following operating components: Office of Audit The Office of Audit Services (OAS) provides auditing services for HHS, either by conducting audits with its own audit resources or by overseeing audit Services work done by others. Audits examine the performance of HHS programs and/or its grantees and contractors in carrying out their respective responsibilities and are intended to provide independent assessments of HHS programs and operations. These assessments help reduce waste, abuse, and mismanagement and promote economy and efficiency throughout HHS. Office of Evaluation The Office of Evaluation and Inspections (OEI) conducts national evaluations to provide HHS, Congress, and the public with timely, useful, and reliable and Inspections information on significant issues. 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