If a 10 cent coupon incentive works, is anyone surprised that $120 does?

Great editorial today in BloombergView on Medicare’s payment practices for drug administration:

Here’s how the system works: When a doctor administers a drug in his or her office, Medicare pays 106 percent of its average selling price. The doctor keeps the extra as compensation for administering the injection.

What has this got to do with eye doctors? The drug Lucentis, used to treat macular degeneration, cost Medicare almost $2,000 a shot in 2012. Another drug, Avastin, which works just as well, costs about $50. If you were the doctor, faced with a system that pays you 6 percent of the drug’s cost, which would you choose? That Medicare spent a total of about $1 billion on Lucentis in 2012 suggests most ophthalmologists went with the more expensive one.

Get that? You’re an ophthalmologist. You see a patient with macular degeneration. You have two options. One pays you $3. The other pays you $120. Which are you going to choose?

Recognize that we’re not talking about costs to the patients. We’re talking about payments to doctors. Medicare is going to cover the cost of the drug no matter what (which is also crazy, since one costs them 3900% more than the other). We’re talking about the “profit” the physician or practice makes. They get $3 or $120. Do we really think that doctors might not be influenced by this?

Medicare spent about a billion dollars on Lucentis in 2012. It’s not alone:

This problem goes beyond a single drug. Of the $20 billion Medicare spent on drugs administered by doctors in 2010, 85 percent went to the 55 most expensive ones. In what seems unlikely to be a coincidence, 42 of those drugs also showed an increase in use from 2008 to 2010.

So why is it this way?

The Centers for Medicare & Medicaid Services, the agency that runs Medicare, says it’s required to pay for treatment that a doctor deems medically necessary, and it lacks the authority to direct treatment based on cost. All Medicare can do to control costs is tell doctors the price of what they’re prescribing, as well as the alternatives. Which is to say, almost nothing.

Evidently, the administration’s latest budget request dropped the fee paid to doctors from 6% to 3%. In other words, it would change the math on this to $1.50 for Avastin and $60 for Lucentis. Think this will fix it?

We could set a fixed amount for drug administration, period. That would end the incentive for choosing the more expensive drug. Or, we could change the whole model, to only reimburse the cost of the cheapest drug if they’re equivalent. I’m not holding my breath.


UPDATE: Loren Adler informs me that there are proposals to set the administrative payment to a flat fee. Here’s one. Here’s another.

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