Medicare Prescription Drug, Improvement and Modernization Act

Average Wholesale Price (AWP)

Medicare payments for outpatient injectable drugs in physicians' offices have historically been based on their AWP and are paid by Medicare's regional intermediaries (Carriers).^[2] Pharmaceutical manufacturers are free to set the AWP at their discretion, regardless of the actual price paid by purchasers. The AWP is not defined by law or regulation and does not reflect discounts obtained by most purchasers. Manufacturers provide information to organizations that calculate AWP and publish them in industry-sponsored drug price compendiums such as the Red Book or the National Drug Data File.^[3] Intermediaries such as pharmacy benefit managers (PBMs) and group-purchasing organizations negotiate prices with drug manufacturers based on market forces, volume, and several other considerations.^[2] In turn, these intermediaries sell the drugs to health plans, hospitals, medical groups, pharmacies, physicians, and other parties that actually pay for them and seek reimbursement from Medicare and other payers. The ultimate price paid by the end user is often significantly lower than the AWP.

The history of payments for outpatient injectable drugs in physician offices, Congressional debate on reform, and evolution in Medicare payments until 2003 have been elegantly reviewed by John K. Iglehart.^[2] Briefly, until 1997, Medicare paid for injectable drugs at 100% of the AWP. The Balanced Budget Act of 1997 led to a reduction in Medicare payments for outpatient injectable drugs from 100% to 95% of the AWP. Since physicians and suppliers keep the difference between the actual price they pay for the drug and 95% of AWP, there has been significant concern that this "spread" could serve as an inducement to use one brand of a drug over another and that drug manufacturers and their intermediaries seek to influence the prescribing habits of physicians through the use of incentives.

Indeed, publishing an artificially high AWP was used by pharmaceutical companies as a mechanism to increase market share. At a September 21, 2001 congressional hearing, William J. Scanlon, Director of Health Care Issues at the General Accounting Office, told the House Energy and Commerce Subcommittees on Health and Oversight and Investigations that there was a wide disparity between a drug's estimated acquisition cost and Medicare's payment for that drug.^[4] He specifically pointed out that for 17 of the physician-billed drugs that they examined, discounts averaged between 13% to 34% less than AWP. In fact, the average discounts for dolasetron mesylate and leucovorin calcium were 65% and 86% less, respectively, than AWP. These data suggested that Medicare's payments for these drugs were at least $532 million higher than providers' acquisition costs in 2000. He also suggested that additional discounts such as charge backs, rebates, and other discounts may drive down the final acquisition cost even further. At the same hearings, George F. Grob, Deputy Inspector General for Evaluation and Inspections in the Department of Health and Human Services estimated that the "spread" between Medicare's reimbursements to physicians and others for outpatient drugs and their acquisition costs was even larger, $887 million in 2000.^[5] In addition, the Office of the Inspector General estimated that Medicare beneficiaries would pay over $175 million less in coinsurance if Medicare paid for these drugs based on catalog prices, instead of 95% of AWP.^[6]

In December 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (MMA), which replaced the AWP methodology with a new pricing scheme based primarily on Average Sales Price (ASP).^[3,7] In keeping with the provisions in the MMA, the Centers for Medicare & Medicaid Services (CMS) issued an interim final rule establishing the ASP data reporting requirements for pharmaceutical manufacturers in April 2004,^[8] followed by a proposed rule implementing the ASP payment system on August 5, 2004.^[9] For 2004, the MMA mandated that the percentage variable of AWP reimbursement be decreased to 85%. New drugs that were not available before April 1, 2003 were paid at 95% of AWP in 2004. Beginning January 1, 2005, CMS has replaced the AWP methodology with the ASP payment system.

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