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Management Issue 9:
Avoiding Waste in Health Care Pricing Methodologies

Why This Is a Challenge

A trash can full of crumpled money

The federal government must act as a prudent purchaser of health care to ensure access to quality care without wasteful spending. Payment methodologies must be designed to reimburse providers and suppliers fairly for appropriate care and to respond to changes in the health care marketplace. However, certain Medicare and Medicaid payment methodologies are misaligned with the current health care market.

Medicare and Medicaid prescription drug payments raise such concerns. State Medicaid agencies lack accurate information about pharmacies' costs to purchase drugs, typically relying upon inaccurate and unreliable published prices to estimate pharmacy costs. As a result, Medicaid payments to pharmacies for drugs often significantly exceed pharmacies' costs for those drugs. Although drug manufacturer rebates to State Medicaid agencies present opportunities for savings, these savings are not always realized. For example, OIG found that manufacturers avoided paying billions of dollars in rebates related to increases in their drug prices by modifying existing drugs and treating them as new drugs. Further, for brand-name drugs, Medicaid is entitled to an additional rebate when the price of a drug rises faster than the rate of inflation. However, generic drugs are not subject to these additional rebates, a missed savings opportunity. Finally, beneficiaries who are eligible for both Medicaid and Medicare Part D (dual eligibles) receive their drug benefits through Medicare Part D. This shift may result in higher net costs for dual eligibles' drugs because the rebates that Part D plans have negotiated with drug manufacturers are lower than those mandated for Medicaid.

Like Medicaid drug reimbursement, Medicare fee-schedule payments for certain types of durable medical equipment (DME) bear little resemblance to market prices. For example, Medicare reimbursed suppliers approximately $17,000 for individual wound therapy pumps that suppliers, on average, purchased for $3,600. The Medicare payment rate had not been lowered as more wound pump models and manufacturers entered the market and competition drove prices down.

OIG also reviewed the effects of a regulatory change in how Medicare pays skilled nursing facilities (SNF) for certain types of therapy in 2011. CMS intended the change to be budget neutral; however, we indentified a $2.1 billion increase in payments to SNFs because SNFs changed their billing patterns in unexpected ways.

Failure to monitor and update eligibility for enhanced payments under the Medically Underserved/Health Professional Shortage Areas program (MUA/HPSA) also results in waste. This program provides enhanced Medicare payments, among other incentives, to attract providers to medically underserved areas to improve health care access. However, HRSA has not updated the criteria for qualifying as an MUA or a HPSA and does not systematically redetermine whether the shortages have been alleviated in designated areas. Thus, some locations receive enhanced funding despite no longer meeting the criteria.

The challenges and opportunities in meeting the objective of better price alignment and waste reduction are complex and are evolving, particularly as the Department is moving to paying for health care based on value rather than volume of care delivered and to linking payment to quality and health outcomes. (See Challenge 1, Implementing the Affordable Care Act, for additional information.)

Progress in Addressing the Challenge

With respect to prescription drugs, provisions of the ACA increased Medicaid drug rebates and are intended to prevent manufacturers of brand-name drugs from circumventing payment of additional rebates on alternate versions of existing drugs. CMS is also developing alternative drug price benchmarks through a monthly retail price survey so that States will have more accurate estimates of drug costs to use for their pharmacy reimbursement.

With respect to DME, the Department has implemented the Competitive Bidding Program for certain DME, which is intended to achieve savings by better aligning reimbursement with market prices. OIG has identified excessive fee-schedule payments for oxygen concentrators and power wheelchairs, whose prices are now subject to competitive bidding. We will monitor competitive bidding to determine whether it addresses our pricing concerns. The Department is also moving forward with several value-based purchasing initiatives.

In July 2011, CMS announced a final rule reducing Medicare SNF payments in FY 2012 to correct for the unintended spike in payment levels and better align Medicare payments with costs.

What Needs To Be Done

Overall, the Department must take steps to better ensure that Medicare and Medicaid payments are economical and respond timely to changes in the marketplace, including seeking new authority where needed to implement pricing changes.

Other specific actions include CMS's continuing to work with States to more accurately reimburse pharmacies for drugs, ensuring that drug manufacturers are meeting their Medicaid rebate obligations, and monitoring the Competitive Bidding Program and updating it as needed. Also, HRSA should update the HPSA and MUA criteria, as needed; review designations periodically; and remove the designations from locations that no longer face health care shortages. Finally, the Department must be vigilant in the implementation and oversight of its new VBP programs.

Key OIG Resources

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