Medicare: Overview and Discussion of

Impact on Supply Chain Economics and

other Affects

Wayne L. Russell, Pharm.D., FASHP

Senior Director, Premier, Inc.
 Medicare Program: Overview
• Health Insurance Program for people 65 years and older
• People under 65 years with certain disabilities quality
• People of all ages with end-stage renal disease requiring
dialysis or renal transplant
• www.CMS.gov website for a lot of information on Medicare
program
 Medicare Component Parts

• Part A: Hospital inpatient care, skilled nursing facilities,

hospice, some homecare
• Part B: physician services, hospital outpatient care, some
physical and occupational therapy
• Part D: Prescription drug program for seniors
 Drug Coverage Differences Part B and D
Part B Coverage
• Drugs that require administration via durable medical
equipment (DME) such as inhalation drugs and IV drugs that
require an infusion pump
• Drugs furnished “incident to” physician services such as
injectables and IV drugs that are not usually self-administered

Part D Coverage
• Drugs administered in self-administration (retail) setting or
home infusion setting
 Medicare Legislative History
• Balanced Budget Act 1997: Gave CMS authority to establish a
prospective payment system under Medicare for hospital
outpatient services
• Balanced Budget Refinement Act 1999 – Modifications –
OPPS went into effect August 2000
• Dec. 8, 2003 – Medicare Prescription Drug, Improvement, and
Modernization Act (MMA) – provides voluntary prescription
drug benefit under Medicare
• MMA section 303(c) revised payment methodology for Part B
covered drugs going from AWP % to ASP methodology for
hospitals to match physician payment
 ASP Payment Model
• January 1, 2005 drugs and biologics will be paid on a ASP
(average sales price) model at 106% or ASP + 6% for
outpatient services
• ASP adjusted quarterly using data submitted by pharmaceutical
manufacturers to CMS
• ASP calculation includes volume discounts, prompt pay
discounts, chargebacks, rebates(except Medicaid), free goods
contingent on drug purchase, promotional fees, administrative
fees (?)
 Average Sales Price Calculation
• CMS calculates a weighted average sales price for each billing
code NDC
• ASP = averages sales price per billing unit
• If a drug is sold as a package of 4 vials of 20mg per vial and
the billing unit is 10mg then the ASP per billing unit is
ASP/(4X20/10) = ASP/8
• For single source drugs, payment is calculated on ASP or WAC
whichever is lesser
• Return goods are not included in the calculation
 Medicare Advisory Panel
• Medicare Advisory Panel comprised of up to 15 full-time
hospital employees or other providers subject to OPPS rules
with minimum 5 years experience
• Focus on technical agenda: reconfiguration of APCs, evaluation
of APC weighting, HCPCS codes, claims data procedures, etc.
• Minutes of meetings published on CMS website
• March 2006 meeting – ASHP and hospital pharmacy
representation presentations to Advisory Panel
 Recommendations to Advisory Panel 3/06
• Provide recommendations on how and when medication
management codes used by pharmacists for patient
assessment and intervention should be used and provide
reimbursement
• Implement by 2007
• Examine pharmacy overhead cost issues and study how to
measure and solicit feedback on how pharmacy should be
reimbursed
• Develop appropriate payment for IVIG products
• CMS ignored recommendations of advisory panel, Medicare
Payment Advisory Commission (MEDPAC), associations and
providers to increase payment in 2006 to cover pharmacy
overhead
Potential Impact on Supply Chain: GPO Perspective
• Some manufacturers increase product price routinely due to
ASP + 6% reimbursement model
• Manufacturers of selected high-cost, biotech, outpatient drugs
impacted by OPPS reluctant to contract with GPOs due to
possible affect on ASP calculation
• Supply Chain distribution model could be changed to
fragmented model where high-cost biotech drugs would not be
distributed through a “prime vendor” model due to manufacturer
wanting to close gap between ASP and WAC price
• Increase pressure on pharmacy distributors to move these
products to specialty distribution model which increases cost to
hospitals and decreases efficiency of supply chain possibly
 Summary
• Medicare legislation has wide-ranging impact on hospital
pharmacy practice as well as supply chain expenses
• Pharmacy needs to continue to provide data and active
participation to CMS and others in Washington,DC on the
impact the ASP reimbursement model is having not only on
hospital finances but possibly supply chain distribution and
associated costs
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