Behind the Scenes on Those Enormous Medicare Billing Numbers

| Thu Apr. 10, 2014 10:53 AM EDT

Yesterday's data dump of how much Medicare pays doctors has generated predictable outrage about the vast amounts some of the top doctors bill. Obviously there are a lot of reasons for high billing rates, but Paul Waldman points to an interesting one: the way Medicare reimburses doctors for pharmaceuticals is partly to blame. The #1 Medicare biller on the list, for example, was a Florida ophthalmologist who prescribes Lucentis for macular degeneration instead of the cheaper Avastin. Since Medicare pays doctors a percentage of the cost of the drugs they use, he got $120 for each dose he administered instead of one or two dollars. That adds up fast. (More on Avastin vs. Lucentis here.)

In the LA Times today, a Newport Beach oncologist who's also near the top of the Medicare billing list offers this defense:

For his part, Nguyen, 39, said his Medicare payout is misleading because all five physicians at his oncology practice bill under his name, and much of that money overall is reimbursement for expensive chemotherapy drugs on which he says doctors make little or no money. Other high-volume doctors voiced similar complaints about the data.

Anyway, Waldman wonders why we do this:

If nothing else, this story should point us to one policy change we could make pretty easily: get rid of that six percent fee and just give doctors a flat fee for writing prescriptions. Make it $5, or $10, or any number that makes sense. There's no reason in the world that the fee should be tied to the price of the drug; all that does is give doctors an incentive to prescribe the most expensive medication they can. That wouldn't solve all of Medicare's problems, but it would be a start. Of course, the pharmaceutical lobby would pull out all the stops trying to keep that six percent fee in place. But that's no reason not to try.

The backstory here is that Medicare used to set the reimbursement rate for "physician-administered drugs" based on an average wholesale price set by manufacturers. This price was routinely gamed, so Congress switched to reimbursing doctors based on an average sales price formula that's supposed to reflect the actual price physicians pay for the drugs. Then they tacked on an extra 6 percent in order to compensate for storage, handling and other administrative costs.

I don't know if 6 percent is the right number, but the theory here is reasonable. If you have to carry an inventory of expensive drugs, you have to finance that inventory, and the financing cost depends on the value of the inventory. More expensive drugs cost more to finance.

However, this does motivate doctors to prescribe more expensive drugs, a practice that pharmaceutical companies are happy to encourage. I don't know how broadly this is an actual problem, but it certainly is in the case of Avastin vs. Lucentis, where the cost differential is upwards of 100x for two drugs that are equally effective. And the problem here is that Medicare is flatly forbidden from approving certain drugs but not others. As long as Lucentis works, Medicare has to pay for it. That's great news for Genentech, but not so great for the taxpayers footing the bill.