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SEN. HEINZ' MEDICARE DRUG PROPOSAL PHASES IN COVERAGE MORE GRADUALLY THAN PREVIOUS DRAFTS; PROGRAM COST STUDIES BY HHS, CBO, GAO MANDATED BY AMENDMENT

Executive Summary

The Senate's lead Medicare outpatient prescription drug proposal, authored by Sen. Heinz (R-Pa.), would phase in pharmaceutical coverage more gradually than previous Senate drafts in order to assess costs before the program is expanded. Under an Oct. 6 draft, coverage would begin in 1989 for I.V. anti-infectives, chemotherapeutic agents, and immunosuppressive drugs. In 1990 the benefit would expand to include cardiovascular drugs and diuretics, which represents 38%-47% of prescriptions for the elderly, according to a summary of the amendment. All other drugs would be added to the coverage in 1992. However, if a June 1991 cost estimate required by the proposal is 20% or more higher than anticipated, the program would continue to cover only I.V. products, cardiovasculars, and diuretics. Under previous drafts, coverage for home-use I.V. drugs would begin in 1989 and the benefit would be expanded to cover all other drugs in 1990, or 1991 in the event of high first-year program costs ("The Pink Sheet" Aug. 3, p. 7). The amendment raises the drug benefit's annual deductible for 1989 to $700, from a previously proposed $600, and provides for annual increases proportional to "the percentage change in the medical care component of the consumer price index for all urban consumers." It requires HHS to publish the deductible for the following year every September, beginning in September 1989. In addition, the proposal increases the basic catastrophic care cap to $1,800 from $1,700. The cap also will be indexed to the medical care component of the consumer price index. In previous Heinz drafts, the deductible was indexed to the general consumer price index -- expected to remain lower than inflation for health care -- and the overall cap was not indexed at all. Like the House-passed bill, the new drug amendment also requires HHS to produce an annual price guide for drug products grouped according to therapeutic categories. The draft mandates that HHS "develop and update annually an information guide for physicians concerning the comparative average wholesale prices of at least 500 of the most commonly prescribed covered outpatient drugs." Under the proposal, the updated guide must be provided by March 1 every year to physicians and hospitals. It will list brandname and generic products grouped "in a manner useful to physicians by therapeutic category or with respect to the conditions for which they are prescribed," the draft states. The guide "shall specify the wholesale prices on the basis of the amount of the drug required for a typical daily therapeutic regimen." Because single-source drugs are reimbursed at AWP and multiple-source drugs are reimbursed at 50% of the brandname product's AWP, the proposal relies on published brandname prices. Reference prices will be established every three months under the draft, and the first three-month "calculation period" will base prices on Jan. 1, 1987 reference drug AWPs. Increases in reference prices for subsequent three-month periods will be calculated on "the percentage change in the consumer price index for all urban consumers . . . for the three-month period ending in the second month of the previous period." The proposal establishes an "administrative allowance" of $4.50 per Rx for participating pharmacies and $3.50 per Rx for nonparticipating ones beginning Jan. 1, 1989. The allowance in subsequent payment calculation periods will be increased over the previous period's allowance "by the percentage change (if any) in the implicit price deflator for the gross national product," the draft states. Like the previous Heinz draft, the Oct. 6 document allows HHS to lower payment limits during 1990 and beyond for drugs dispensed by high-volume pharmacies. The draft contains several provisions for monitoring program costs during the phase-in period. The Congressional Budget Office is required by the proposal to prepare by Dec. 31, 1990 an "updated estimate of the expenditures which will be made in fiscal year 1992 for coverage of covered outpatient drugs." The draft defines "covered outpatient drugs" as products listed in Volume I of USP/Dispensing Information. CBO is required to revise the estimate by June 1, 1991, using such actual cost data as becomes available. Heinz' proposal also mandates that OTA prepare "recommendations for adjustments to payment limits" before Jan. 1 of each year beginning in 1990, and it requires HHS to survey drug program expenses, consulting with CBO, the General Accounting Office, consumer groups, pharmacists, and industry. The study should include "distribution of such expenses by age, sex, income, and institutionalized status." The first report is due by Jan. 19, 1989; within two months, CBO shall estimate drug expenditures for 1990-1993, and the GAO shall report on the validity of the HHS survey and "the extent to which pharmacies accept assignment and the barriers (if any) to such acceptance." The draft requires additional studies on the following issues: insurance drug coverage among beneficiaries, a comparison of AWPs and actual acquisition costs by type of pharmacy; the overhead costs of retail pharmacies; "alternative payment methodologies for covered outpatient drugs that promote greater program efficiency, including use of lower cost medications"; and the possibility of covering unapproved drugs for cancer or immunosuppressive therapy. HHS is also required under the proposal to contract for demonstration projects by Oct. 1, 1988 to study the "feasibility of the use of magnetic cards, electronic billing, and other technological devices to simplify administration of the benefit."
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