View from Washington: First Steps

What the Democrats’ health policy agenda will look like.

In the late 1990s, and on into the early part of this decade, allegations that marketing and pricing games were being played with physician reimbursements for pharmaceuticals under Medicare Part B (a.k.a. “marketing the spread”) were rampant. The government’s policy was to reimburse physicians based on 95 percent of the average wholesale price (AWP). However, the AWP wasn’t a real price, or for that matter, an average of any real prices.

After Congressional oversight hearings detailed abuses, and realizing that Medicare expenditures were exploding, Congress inserted a provision in the 2003 Medicare Modernization Act requiring pharmaceutical manufacturers to report to the Centers for Medicare and Medicaid Services their average sales price (ASP) — a more accurate price. The plan was to transition to a new reimbursement policy where physicians would be reimbursed for drugs under Part B at the rate of 106 percent of the new ASP.

The ASP was to be calculated based on data submitted by the manufacturers for sales in the United States, net of price concessions such as rebates and discounts, and reported on a quarterly basis for transactions two quarters earlier. From the beginning, there were questions about how to calculate the ASP. What should or should not be included? How should terms used on the business side of healthcare be defined?

When a manufacturer sold directly to a physician, the transaction was fairly straightforward, and so was the process of determining the ASP. However, the majority of sales are not so simple. The sale and/or the product moves through a maze of wholesalers, distributors, specialty pharmacies and GPOs. There are services (and often related fees) of shipping, storage, and handling, not to mention price negotiation and contract management.

Determining which of these fees should be included or excluded, or which ones actually affect the price paid by the purchaser or the price received by the manufacturer, has been a regulatory challenge. This has been especially complicated as it relates to administrative fees paid to GPOs, as the nature of the relationship between the GPO and its provider members (the actual purchaser) varies. This relationship provides the basis for how much money is distributed to the provider member from the proceeds of the GPO. It could be difficult for the manufacturers to tell how much is distributed to the providers, and what it is based on, so they have no way of knowing how to determine the price actually paid.

On Dec. 1, 2006, CMS issued regulatory guidance on how to handle administrative fees paid to GPOs, and said, “to the extent that such fees meet the definition of ‘bona fide service fee’ they were excluded from the calculation of ASP.” Then, CMS went on to say they would “continue to consider the comments received and to study the matter further.”

GPOs appear to be reacting differently to this guidance. Some have decided that the effect of this rule and guidance is to prohibit them from returning any administrative fees to their members, while others are segregating the fees from products potentially reimbursed under Part B, while others simply appear not to be worrying about it at all.

It will likely take months, if not years, for the government and the industry to come to some understanding about what Congress actually intended when ASP was created. In the days ahead, what is sure to be the case is less clarity than more about the effects this new governmental policy is having upon participants in the healthcare supply chain.

About the Author

Robert Betz Ph.D.
Robert Betz, Ph.D., is president of Robert Betz Associates, Inc. (RBA), a well-established federal health policy consulting firm located in the Washington, D.C. area. Additionally, Dr. Betz is an adjunct professor teaching at The George Washington University where he specializes in political science and health policy. For more information about RBA, visit