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Legal Matters
CMS Implements Average Sales Price Payment Methodology for Medicare Drugs


Diane Ung, JD; Lena Robins, JD
Drug Benefit Trends 16(10):495-496, 498, 2004. © 2004 Cliggott Publishing, Division of CMP Healthcare Media

Posted 12/20/2004


Introduction
In December 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA).[1] In addition to creating a landmark prescription drug benefit program, the MMA made sweeping changes in the way that Medicare prices and pays for many items and services. One of the most significant changes is in how payment is calculated for outpatient drugs that are currently covered by Medicare. Payment had been based on 95% of the average wholesale price (AWP). Largely in response to longstanding fraud and abuse concerns related to the AWP pricing methodology, the MMA replaced the AWP methodology with a new pricing scheme based primarily on average sales price (ASP).[2] The ASP payment system, which goes into effect January 1, 2005, will have a significant impact on pharmaceutical manufacturers, physicians, and suppliers involved in the distribution of covered medications.

The Centers for Medicare & Medicaid Services (CMS) took the first steps in implementing the ASP payment methodology when, in April 2004, it issued an interim final rule establishing the ASP data reporting requirements for pharmaceutical manufacturers.[3] Four months later, CMS issued a proposed rule implementing the ASP payment system.[4] CMS was accepting public comments on the ASP proposed rule until September 24; a final rule is expected by November 1, 2004.

MMA Changes to Part B Drug Payments
Historically, Medicare paid for Part B drugs and biologics (collectively "drugs") based on the lower of the physician's actual charge or 95% of the AWP. Medicare Part B drugs include:

Items that cannot be self-administered and that are furnished in physicians' offices.

Certain vaccines.

Certain drugs that can be self-administered.

Drugs administered in connection with durable medical equipment used in a patient's home.

A limited number of drugs covered as home dialysis supplies.


In addition to home dialysis supplies, these categories primarily represent medications that are administered in physicians' offices to treat cancer and lung conditions and that are not available through pharmacies. For 2004, the MMA mandated that the percentage variable of AWP reimbursement be decreased to 85%. Beginning January 1, 2005, CMS will abolish the AWP methodology and replace it with the ASP payment system.

Using AWP as a benchmark to pay for outpatient drugs has long been the target of criticism by government watchdog agencies, including the Department of Health and Human Services Office of Inspector General (OIG), the Government Accountability Office, and many in Congress. The primary concern has been the reporting and accuracy of AWP data and the reimbursement "spread" that may be created. AWP is a manufacturer-reported price, not defined by federal law or regulation, that is compiled in industry publications, such as the Red Book. The spread is the difference between what the supplier actually pays for the drug and what is paid to the supplier by Medicare.

The genesis for the ASP payment methodology was its use by the OIG in corporate integrity agreements imposed on pharmaceutical manufacturers resulting from fraud and abuse settlements.




ASP Reporting Requirements
The ASP methodology relies on manufacturers' sales data to set the Medicare payment amount for a particular drug. Consequently, the MMA requires pharmaceutical manufacturers to report ASP pricing data to CMS on a quarterly basis beginning this year. CMS required manufacturers to submit ASP reports starting April 30, 2004.

ASP is defined as the manufacturer's sales to all purchasers in the United States (excluding units associated with identified exempted sales) for the National Drug Code (NDC) for a quarter, divided by the total number of units of that NDC sold by the manufacturer in the quarter (excluding units associated with exempted sales).[5] For ASP reporting purposes, exempted sales include sales that are exempt from the Medicaid best price (BP) calculation as well as nominal sales under the Medicaid drug rebate program.

Manufacturers' reported ASP data must include all volume discounts, prompt pay discounts, cash discounts, free goods that are contingent on any purchase requirement, and related charge backs and rebates (other than Medicaid drug rebates).[6] On September 16, 2004, CMS issued a final rule on the ASP reporting requirements, which adopts the April 2004 interim final rule but revises the methodology for estimating price concessions.[7] The final rule directs manufacturers to use a methodology based on a rolling average percentage of price concessions divided by total sales in dollars when data on prompt pay discounts, rebates, and other price concessions are available on a lagged basis.

While manufacturers already report average manufacturer price (AMP) and BP data for the Medicaid drug rebate program, the new reporting requirement for ASP prices is separate. The MMA imposes stiff penalties on manufacturers who knowingly report inaccurate or incomplete ASP data.[8] Manufacturers are subject to civil money penalties of up to $10,000 per ASP data item per day that is knowingly reported as inaccurate or incomplete. In addition, manufacturers that fail to timely report ASP data may be subject to significant civil money penalties at a rate of $10,000 per late day.




ASP Methodology
Using the pricing data reported by manufacturers in April 2004, CMS issued a proposed rule in August 2004 that established the actual ASP payment system (proposed rule). The biggest surprise in the proposed rule is the new drug prices, which are contained in a table reflecting the preliminary effect of the ASP payment methodology on 32 widely used drugs.[9] While a few drugs will be paid at a higher level (some as much as 6%) and 2 drugs will not experience any change, the vast majority of drugs will be paid at lower prices, ranging from decreases of 2% to 89%. Under the new system, CMS expects to save millions of dollars for the Medicare program and beneficiaries' coinsurance obligations.

For example, the prices for 2 drugs—albuterol sulfate and ipratropium bromide—will be reduced by 89% (the OIG having previously found the prices for these drugs to be greater than their actual acquisition costs). The prices for several cancer drugs, including Taxol (pac litaxel), will be reduced by 81%, primarily because of the availability of less expensive generic versions.

In implementing the ASP payment system, CMS closely followed the structure contained in the MMA. The proposed rule distinguishes between single-source and multiple-source drugs.[10] Single-source drugs are those drugs approved by the FDA for which there is no therapeutic equivalent. Multiple-source drugs are medications for which there are 2 or more generic versions that are rated by the FDA as therapeutically equivalent and also pharmaceutically equivalent and bioequivalent.

The ASP for multiple-source drugs included within the same multiple-source drug billing and payment code is the volume-weighted average of the manufacturer's ASPs for those drug products. The actual ASP is calculated by adding the sum of the products (for each NDC assigned to the drug) of the manufacturer's ASP and the total number of units sold. That sum is then divided by the sum of the total number of units sold for all NDCs assigned to the drug. The Medicare payment allowance for a multiple-source drug is equal to 106% of the ASP.

For single-source drugs, the ASP is the volume-weighted average of the manufacturers' ASPs for all NDCs assigned to the drug. Similar to prices for multiple-source drugs, the ASP is calculated by computing the sum of the products (for each NDC assigned to the drug) of the manufacturer's ASP and the total number of units sold, and dividing that sum by the total number of units sold for all NDCs assigned to the drug. Payment for single-source drugs is equal to the lesser of 106% of the ASP or 106% of the wholesale acquisition cost (WAC). The WAC is the manufacturer's list price to wholesalers or direct purchasers, not including rebates, discounts, and other price concessions.[11]

Payment under the ASP payment methodology is also subject to findings by the OIG that a drug's ASP exceeds the "widely available market price" or the AMP (as determined under the Medicaid drug rebate program).[12] If a drug's ASP exceeds an applicable threshold, CMS is required to disregard the ASP and substitute the lesser of the widely available market price or 103% of the AMP. It is not clear how this disregard provision will ultimately play out, particularly because widely available market price is not defined (the AMP is the average price paid to the manufacturer for the drug in the United States by wholesalers for drugs distributed to the retail pharmacy class of trade, after deducting customary prompt pay discounts).[13] While the applicable threshold has been established at 5% for 2005, in future years CMS has discretion to alter the threshold and is likely to do so in upcoming physician fee schedule updates.

Several drugs are excepted from the ASP payment system.[13] Vaccines for hepatitis B, pneumococcal disease, and influenza will continue to be paid at 95% of the AWP. For 2005, payment for drugs furnished in connection with renal dialysis services billed separately by a facility will be the ASP of the drug less 3%, based on the results of a recent OIG study.[14] As of October 1, 2003, infusion drugs furnished for use with a durable medical equipment item will be paid at 95% of the AWP for that drug.

On the horizon is the MMA-mandated competitive acquisition program, which will provide an alternative to the ASP payment methodology. Beginning in 2006, CMS will phase in a competitive acquisition program under which a single payment amount for each drug in a geographic area will be based on bids submitted and accepted by CMS. On an annual basis, physicians and other providers will have the option to obtain Part B covered drugs and seek Medicare reimbursement under the ASP methodology or to have an arrangement with a contractor under the competitive acquisition program.




Potential Impact
The new ASP payment system represents a fundamental change in the way Medicare pays for part B covered drugs. Using the new methodology, the proposed rule will result in lower Medicare payments for many drugs. Pharmaceutical manufacturers, physicians, and suppliers should carefully evaluate the proposed rule to determine how the new payment methodology will impact them. Pharmaceutical manufacturers also will need to ensure that they comply with the quarterly reporting requirements.


References
Medicare Prescription Drug, Improvement and Modernization Act of 2003, Pub L No. 108-173 (December 8, 2003).
Medicare Prescription Drug, Improvement and Modernization Act of 2003 A7303(c) (codified at A71847A of the Social Security Act).
69 Federal Register 17,935 (April 6, 2004) (codified at 42 CFR A7414.800-414.806).
69 Federal Register 47,488, 47,520 (August 5, 2004).
A71847A of the Social Security Act.
42 CFR A7414.804.
69 Federal Register 47,566-47,567, 55,763 (September 16, 2004).
42 CFR A7414.806.
69 Federal Register 47,566-47,567.
69 Federal Register 47,521.
A71847A(c)(6)(B) of the Social Security Act.
A71927(k)(l) of the Social Security Act.
69 Federal Register 47,522.
Dept of Health and Human Services, Office of Inspector General. Medicare Reimbursement for Existing End-Stage Renal Disease Drugs. Washington, DC: Office of Inspector General's Office of Evaluation and Inspections; May 2004. OEI 03-04-00120.



Ms Ung is a partner in the Los Angeles office and Ms Robins is senior counsel in the Washington, DC, office of Foley & Lardner LLP, the nation's 10th largest law firm, which has a nationally recognized health law department.

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Moving to ASP (Average Sales Price) Reimbursement Under Medicare Will Have Significant Negative Impact on Community Retail Pharmacy
Issue
Using Average Sales price (ASP) to determine pharmaceutical reimbursement under Medicare Part B, rather than Average Wholesale Price (AWP), will have a significant negative impact on pharmacies. This negative result will be further magnified and multiplied if other public and private prescription drug programs such as a Medicare outpatient drug benefit, Medicaid, private PBMs, insurance companies, DOD’s Tricare program, and the FEHBP program, use ASP rather than their current reimbursement system.

Pharmacy and Pharmacists Paid Only for Pharmaceutical Product, Not Medication-Related Patient Services
AWP has been widely and consistently used for pharmaceutical pricing for many years and is well understood by payers. Almost every single third party pharmacy contract – which represents about 85 percent of the average pharmacy’s business –uses AWP as the basis for reimbursement. Problems with AWP are primarily associated with Medicare Part B payment systems, such as physician-provider drugs, and drugs dispensed by a limited number of specialty pharmacies that provider Part B drugs. Manufacturers attempt to use the spread between the AWP and acquisition cost as a marketing tool to encourage the prescribing and dispensing of certain products.

Conversely, traditional retail pharmacies do not prescribe and thus do not have the same opportunity to shift products from a lower to a higher AWP. These same significant spreads do not exist between traditional pharmacy-acquired drugs as they do for Part B covered drugs.

Moreover, under Medicare Part B, the costs associated with providing pharmacy services have traditionally been bundled into the AWP payment (i.e. AWP minus a five-percent discount). With the exception of nebulizer drugs (which are primarily used to treat asthma), pharmacies do not receive any other payment for providing these drugs or for compounding, packaging, or providing patient related services. In contrast, physicians and other providers receive direct payment for practice expenses and the office visit which help to compensate them for providing the pharmaceuticals.

Average Sales Price Inappropriate for Pharmacy
ASP is calculated as a “weighted average sales price” across all payors (except direct Federal and hospital sales) for a particular pharmaceutical, net of various discounts and rebates that might accrue to the purchaser. Further consideration is being given to a “competitive bidding” system in the later years, which has not been fully developed. There are significant and serious issues with the use of ASP, especially for pharmacy.



ASP does not reflect actual costs to pharmacies of acquiring drugs: ASP reflects the sales revenue earned by a manufacturer, not the actual price paid by the purchaser. At a minimum, therefore, the ASP would have to be increased by a significant percentage to cover the providers’ costs of purchasing the drug from the wholesaler, as well as the costs of storage, inventory, cost of capital, etc., of the provider. Moreover, any reimbursement formula would have to consider that generic drugs usually have a lower base price. Any percentage increase in the ASP for a generic drug would have to be sufficient to cover all the additional costs involved in purchasing and distributing these drugs. If the reimbursement amounts for generics are insufficient, it will encourage the use of more expensive brand-name drugs. This is an outcome that public and private payors want to avoid.


ASP cannot be calculated across purchasers: Because pharmaceutical manufacturers charge much different prices to different purchasers, a weighted average across all purchasers is inappropriate to determine the reimbursement rate for a particular class of purchaser. Some purchasers would consistently take a loss on the reimbursement, while others would be paid excessively. Because retail pharmacies are generally charged higher prices than other pharmaceutical purchasers, the use of weighted average ASP would drive down the reimbursement to start well below retail pharmacy’s purchasing price. Even some inflation factor (e.g. ASP +8%) may not make pharmacy whole just for acquiring the drug, no less the costs of storing, inventory, warehousing, and distribution of the drug. This would force participating pharmacies to provide these products at a loss. This scenario would create severe and widespread access problems for Medicare beneficiaries.


ASP will be outdated by the time it is used: ASP is a retrospectively-determined price that lacks “real time” value for claim payment purposes. Pharmacies adjudicate claims in an “online real time” environment. Given this fact, the costs of pharmaceuticals change daily, and cannot be reimbursed on an ASP amount that might be six months out of date.


ASP does not incentivize prudent purchasing: Under an ASP structure, 100% of discounts are shifted to the government and as a result, providers have no incentive to purchase at lower costs—the provider payment will be the same whether they secure significant discounts or smaller discounts. Removing the incentive to secure discounts (by sharing in those savings) could result in an increase in Medicare payments for the products.


ASP will disrupt tens of thousands of existing contracts: Tens of thousands of current pharmacy contracts are based on discounted AWP reimbursement, including Medicaid, private pay, DOD TriCare, and FEHBP. Combined, the AWP reimbursement amount plus the dispensing fee payment represent the total reimbursement paid to the pharmacy. These components combined must be adequate to cover the pharmacy’s cost of buying and dispensing the drug and providing professional services as well as profit. Some contracts have a higher discount on the AWP amount and a higher dispensing fee, while others have just the opposite. Both public and private third party payors recognize the issues relating to the use of AWP and have adjusted their reimbursement accordingly.


ASP does not reflect the cost of dispensing and providing professional services to patients: Eliminating the use of AWP-5% for Medicare pharmacy reimbursement will mean that pharmacies may be first, undercompensated for the product, and second, receive no payment for packaging and dispensing the product, or for any professional services that are provided. The spread between AWP-5% and acquisition cost helped to pay for these costs, since there are no dispensing or professional fees established for Medicare pharmacy suppliers.