Drug bill deals AWP pricing a heavy blow

Wednesday, December 31, 2003

WASHINGTON - After warding off cuts to the average wholesale price drug reimbursement for nearly a decade, the respiratory medications market was dealt a $4.2 billion blow with the creation of the average sales price model in the recent Medicare Prescription Drug Act.

The inhalation drug industry in 2005 can expect a massive revamping of reimbursement formula with a switch to the average sales price plus 6%. This change equates to a 58% cut in reimbursement, according to Wall Street analysts who are tracking stocks of companies affected by this bill.

“This [drug reimbursement] cut is the most painful cut spelled out in the legislation, prior to competitive bidding,” said Bob Fary, Inogen’s vice president of sales and former corporate director of respiratory for Apria Healthcare.

According to one ASP model, a box of albuterol that costs providers $8 would warrant $8.48 in reimbursement. Today, providers receive $56.50 for the albuterol, according to Don White, president of Associated Healthcare Systems.

“There will be no margin left for a business like mine to provide these medications through Medicare,” said White. “A patient may pay out of pocket. I might do it to private insurance, but I’m certainly not going to accept Medicare rates.”

Starting this month, manufacturers will be required to submit to CMS their average sales prices and the number of units sold for each drug covered under the change. The agency will then use the figures to determine the national average sales prices, according to healthcare attorney Lisa Smith.

“There is going to be huge incentive for everybody to purchase at the cheapest that they can because if you are purchasing at a higher amount you very well could get stuck getting reimbursed less than what your cost is,” said Smith.

Next year, in a run-up to the massive changes, Part B drug reimbursement will be set at 85% of the average wholesale price, a change CMS administrators have been gunning for in recent months.

Drugs listed in a recent OIG and GAO report on the percentage of the AWP paid by providers will be reimbursed based on the findings in the that study, with cuts not to exceed 80% of the AWP. The report found that providers pay a mere 17% of the AWP for albuterol and 34% for ipratropium, said Smith. Medicare currently reimburses 95% of the average wholesale price.

The Congressional Budget Office expects that these drug cuts will account for a total of $4.2 billion in federal savings by the end of 2013. The estimated savings in 2004 with the AWP cut is $100 million, thereafter the savings show a steady increase from $200 million per year in 2005 to $800 million in 2013.

The CBO estimates that CMS will spend about $1.24 billion on inhalation drugs in 2004 and $2.88 billion in 2013.

Some companies already have felt the impacts of the ASP’s development. Lincare Holdings, the nation’s largest provider of respiratory meds in the home, saw its stock price plummet by 32% - from 43.98 to 29.35 - after an outline of H.R. 1 was released on November 16. Apria’s stock lost nearly 17% of its value in the same time period.

Respiratory medication accounts for nearly a fifth to a quarter of Lincare’s annual revenue, and Wall Street analysts said the slump was a direct result of a “worst-case reimbursement cut scenario” of covered drugs.

Lincare’s and Apria’s stock value had begun to creep back up after reaching lows at the end of November, but, at press time, the initial rebound was just two to three points for each of the companies.

In a release regarding the legislation’s changes, Lincare warned that the ASP model would have drastic effects on the market and the services available to beneficiaries.

“[Lincare] does not believe that the ASP provision contained in the Medicare bill would adequately compensate home care providers for inhalation drug therapies and, if implemented, could eliminate access to these critical respiratory medications by home care providers to more than one million end-stage emphysema patients across the United States,” the press release said.

“It’s just like any other DMEPOS reimbursement, there is an assumption that only the drug is reimbursed,” said Fary. “This is another screaming example of where, if the drug prices are going to go there, there needs to be an acknowledgment and provision for their service.”