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CMS Proposes Cuts in Medicare Outpatient Drug Payments

Kate Traynor

The Centers for Medicare & Medicaid Services (CMS) published a proposed rule in the Aug. 20 Federal Register that would change the way the agency pays health care providers for drugs covered under Medicare Part B.

In the proposed rule, CMS requested public comments on four reimbursement options, each of which would end the agency's current practice of basing reimbursement on 95 percent of a product's average wholesale price (AWP). The options are:


  • Limit payments for Medicare Part B drugs to the amounts paid by private insurers. 
  • Set the April 1, 2003, AWP as a benchmark, and reimburse 80–90 percent of that amount through 2004. After 2004, use the consumer price index for medical care to adjust the benchmark. 
  • Set AWP values from prices obtained through reports previously published by the General Accounting Office (GAO) and the Health and Human Services Office of Inspector General, supplemented with additional price data obtained by Medicare officials. 
  • Institute a process through which companies would compete to supply drugs to health care providers and bill Medicare for the products. Under this option, health care providers would still be allowed to purchase drugs on their own and bill Medicare for them.


Coverage for outpatient drugs under Medicare Part B is limited mainly to medications that cannot be self-administered, such as intravenous cancer chemotherapy, and drugs delivered through durable medical equipment (DME). By changing the reimbursement system for these drugs to one of the four proposed options, CMS estimated that the Medicare program will save $4.1 billion to $27.6 billion during fiscal years 2004–2013.

Professional associations such as the National Home Infusion Association (NHIA) and the American Society of Clinical Oncologists have expressed concern that the reimbursement cuts would limit Medicare beneficiaries' access to cancer treatment and other services covered under Part B.

"I think anybody who knows about this is alarmed," said NHIA director Lorrie Kaplan.

CMS has long contended that the AWP for many drugs is artificially inflated, causing the agency to spend far more for drugs than health care providers pay to acquire the products. Using data from federal agencies, CMS estimated that Medicare and its beneficiaries paid as much as $2 billion over acquisition costs last year for Part B medications.

But health care providers counter that the above-cost reimbursements for drugs are needed to compensate for underpayments associated with administering the medications to patients.

Patrick E. Parker, M.S., director of Pharmacy, I.V. Therapy, and Oncology Services at Lawrence Memorial Hospital in Lawrence, Kansas, estimated that more than half of the income generated by the hospital's oncology clinic comes from payments for medications. "Drugs, quite frankly, have created the primary margin that allows us to run the clinic," he said.

Parker emphasized that providing drug therapy to cancer patients involves much more than simply purchasing medications.

"You have to order that drug, you have to maintain it in your inventory and on your shelves. You have to maintain the shelves themselves, you have to prepare that product, and you have to deliver that product to the patient to be administered. And you have to do all of those in ways that assure that that product's integrity is maintained and that it is potent and it is viable, and that it will work for the patient. And there are costs that are associated with that," Parker said.

"We have lived in the past on the margins that this differential in AWP created to do all of those things," he added. "Now, that margin is being taken away."

Gary C. Stein, Ph.D., director of federal regulatory affairs for ASHP's Government Affairs Division, echoed Parker's concerns.

"Unless CMS comes up with a way of dealing with some of the costs involved with [administering] the drugs, I don't know that any of the four proposals are going to be palatable," he said.

The Community Oncology Alliance, in its written response to the CMS proposal, estimated that Medicare overpaid community cancer clinics for drugs by $570 million last year but underpaid for practice-related expenses by $718 million, resulting in a net loss of $148 million for these clinics. These figures do not include estimates from other practice settings, such as hospital-based cancer clinics and home infusion pharmacies.

CMS proposed to offset some of the decrease in medication reimbursement by increasing payments under the physician fee schedule and allowing physicians to bill more than once per day for "multiple pushes" of intravenous chemotherapy. These reimbursements would increase by a total of $215 million annually, according to a CMS estimate, but would take place only if the far larger drug-reimbursement cuts are adopted.

Parker said that CMS's revised calculation of practice-related expenses still fails to consider all of the factors that go into providing cancer chemotherapy to patients. These costs include supplies, such as i.v. tubing, as well as costs tied to sterile product preparation such as maintaining and regularly certifying the laminar-airflow hood and training staff in the handling of cytotoxic agents.

"None of that," Parker said, "has been taken into consideration here—and it needs to be."

NHIA's Kaplan said that her organization plans to submit comments to CMS about the legality of the proposed reimbursement cuts.

"We have a strong argument that CMS does not have the authority to change the reimbursement methodology for infusion drugs," Kaplan said.

She explained that the current Medicare Part B reimbursement rate—95 percent of AWP—was set by Congress as part of the Balanced Budget Act of 1997.

A later statute, the Medicaid, Medicare and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA), mandated that GAO study whether the federal government provides adequate payment for drugs covered under Medicare Part B. In this act, Congress directed CMS not to reduce payment rates for Part B drugs until the report had been reviewed by the secretary of Health and Human Services (HHS).

Although the GAO report examined pricing for cancer chemotherapies, Kaplan said that the agency's study did not examine infusion therapies.

"In our view," Kaplan said, "the mandate has not been met that Congress set out. The issue needs to be explored before CMS makes any changes" to the reimbursement formula for infusion therapy.

Kaplan added that "BIPA also authorizes the [HHS] secretary to create additional payments to the extent necessary for costs incurred in the administration, storage, and handling of drugs."

In the section of the CMS proposal that describes reimbursement for DME-administered drugs, Kaplan said, CMS "is asking for comments on that issue. But I don't see anywhere where they're authorizing any payments for those services."

Parker was grim in his overall assessment of the effects of the proposed reimbursement cuts on cancer clinics: "Programs will close."

He said he believes that Congress should intervene to delay the reimbursement cut.

"CMS needs to be put off for at least a year," Parker said, "and a study needs to be done to assess the actual costs and allocate a reasonable working margin" for health care providers.

"The emphasis needs to be on what does the patient really need, and how can we provide really good care that incorporates physicians and nurses and pharmacists and the necessary technical staff to get things done well for patients," he added.

Stein said that ASHP will be soliciting information from members in preparation for sending CMS written comments on the AWP reform proposal. The deadline for submitting comments to CMS is Oct. 14.