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Report (OEI-03-09-00510)

01-10-2011
Medicare Payments for Newly Available Generic Drugs

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Summary

Medicare and its beneficiaries could have saved an estimated $111 million had payment amounts reflected actual sales prices during the initial generic availability of 16 drugs. These potential savings accounted for 25 percent of total expenditures for these drugs during the same period.

Manufacturers are required to submit average sales price (ASP) data to CMS within 30 days after the close of each quarter, and those data are used to calculate the payment amounts for the following quarter. As a result, there is a two-quarter lag between when sales occur and when the payment amounts reflect those sales. This reimbursement lag is especially problematic when newly available generic drugs enter the market, as their ASPs are often substantially lower than their brand counterparts, but payment amounts remain at the higher brand level for two quarters or more.

We found that payment amounts were significantly higher than market prices for an extended period for the newly available generic drugs under review. In other words, during the period of initial generic availability, generic versions of these drugs were being administered or dispensed to beneficiaries, but Medicare was still paying brand prices. Furthermore, according to the Food and Drug Administration, 26 of the 48 brand-only drugs with the highest Part B expenditures in 2008 could have first generic versions approved in the next several years, meaning that the vulnerability posed by the two-quarter lag likely will continue to grow. Nearly half of the current high-dollar brand-only Part B drugs are biologics, which (because of recent legislation) may also gain approval in generic form. Compounding the problem of the two-quarter lag are the significant obstacles that remain in identifying in advance when generic versions of drugs will become available. Because of issues such as patent litigation and the generic manufacturers' timeliness in reporting ASPs, it is difficult to predict when first-generic versions will reach the market.

We recommend that CMS work with Congress to require manufacturers of first generics to submit monthly ASP data during the period of initial generic availability. This could substantially reduce the two-quarter lag and make Medicare payment amounts more reflective of actual market prices. If CMS finds this to be an effective means for alleviating the financial impact of the two-quarter lag, the agency may wish to consider requiring monthly ASP submissions for all Part B-covered drugs.

CMS did not concur with our recommendation, citing potential problems with manufacturer price submissions and increased administrative burdens under a proposed monthly ASP reporting requirement. CMS also stated that it believes the two-quarter lag protects Medicare and its beneficiaries from unchecked price increases and is an incentive for faster generic utilization. We believe that the savings from a reduced reimbursement lag may outweigh any issues involved with implementing a monthly ASP reporting system. Furthermore, we note that the ASP-based reimbursement system (in which all versions of a drug assigned to one payment code are paid at the same amount) is a natural incentive for manufacturers to limit rapid price increases, as well as for providers to utilize generic versions.

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