Under treatment: as oncologists struggle with the traditional process of charging patients for chemotherapy medication, insurers are offering their own cure for the situation. (Life/Health: Medical Costs).

Cancer doctors are finding them selves caught between perception and what they say is reality. In the past few months, oncologists have been the target of bad publicity caused by the revenue they receive from the sale of chemotherapy drugs to patients. The doctors are able to purchase the drugs at significant discounts, but are reimbursed by Medicare--the federal program which often sets the benchmark for private insurers--at much higher levels.

This practice by oncologists is setting off consumer groups' radar, especially after the General Accounting Office revealed Medicare paid at least $532 million more than the actual cost to doctors to obtain certain drugs in 2000. Congress also is investigating, ordering that studies be done and testimony heard. But doctors say the reimbursement structure is antiquated and doesn't consider the expense of administering the highly toxic drugs. They say they'd be willing to accept a lower reimbursement for the drugs themselves, if they were fairly compensated for the cost of delivering the medication to the patient.

Doctors admit they make a profit on the drugs, but say that's not their motivation. 'We're not a bunch of cowboys giving drugs because of making money," said Dr. Kenneth D. Zeitler, a Raleigh, N.C.-based oncologist. "We aren't covered for the cost of delivering the drug. I think most oncologists would be glad to be rid of the appearance of inappropriateness of the drug profit, but we'd have to be compensated for delivering the drugs."

Zeitler said the current reimbursement system does not recognize the cost of the infrastructure required to administer chemotherapy, which is tremendous. Chemotherapy is not as simple as handing a patient a pill to swallow. An oncologist's office requires extra space, special equipment and additional staff to administer chemotherapy.

Private Insurers Also Struggle

While 50% of all cancer patients are Medicare eligible, the issue also impacts private health insurers, who deal with the other cancer patients. Private insurers are more flexible than the federal Medicare program in setting rates, but agree that there has been a disparity between what physicians pay to buy cancer drugs and how much they are reimbursed for those drugs.

Susan Pisano, a spokeswoman for the American Association of Health Plans, said health insurers handle reimbursement in a number of ways. "Some offer the option of either buying the drug themselves and then the plan will reimburse them with an add-on fee for administering or the plan will negotiate for the drugs and get them delivered to the doctors' offices," Pisano said. "They are certainly looking to do this in a way that keeps drugs affordable."

While insurers are more reluctant than public entities to reveal exact dollar figures, they also have been quicker to adjust their funding schemes.

Dr. Reed Thckson, senior vice president of UnitedHealth Group, said there's a wide variance in the actual purchase price that physicians are charged for chemotherapy drugs.

"It's unpredictable, as well as variable, and quite often, not the most cost-effective way of acquiring the drugs," Tuckson said.

UnitedHealth is in the early stages of testing a new program whereby doctors have the option of obtaining chemotherapy drugs through a contract that UnitedHealth has negotiated with drug manufacturers, instead of buying the drugs on their own. Also, UnitedHealth has raised the reimbursement schedule for administering the drugs. While doctors still have the option of obtaining the drugs directly through the drug makers, the reimbursement they receive is based on the same price the company has negotiated with the drug makers.

"One of the great values we bring to the people on whose behalf we organize health care service is our ability to negotiate a favorable rate," Tuckson said. "We pay attention to where the costs are and where the opportunities are This became clear to us as an area that required intervention."

He noted many chemotherapy drugs are made by a single manufacturer, so there's no price competition. The recommended doses and drugs, or combination of drugs, vary depending on a patient's type of cancer, stage of cancer and such variables as weight and health.

Cigna HealthCare is a proponent of office-based chemotherapy administration, said Lindsay Shearer, a spokeswoman for the company. She said the company pays doctors in a variety of ways based on their individual contracts, but it's common for the professional reimbursement to include facilities and administration while the cost of the drug is paid separately. "The most predominate method for determining the amount for physicians is based on the average wholesale price of the drug," Shearer said. "We're in ongoing discussions with oncologists on ways to manage costs for our members while at the same time helping to ensure fair reimbursement for network oncologists for the services they provide."

Some health-care companies are suggesting shipping the drugs directly to the patient, an approach called "brown bagging," that some doctors dislike.

"We want to be responsible for mixing the drug, so we don't have a break in the chain," of custody, Zeitler said, adding doctors fear a repeat of cases such as the Kansas City, Mo., pharmacist who was recently sentenced to 30 years in prison for diluting chemotherapy drugs. Also, physicians want to be sure the drugs have been stored and handled properly.

Some health-care companies want to ship the chemotherapy drugs premixed directly to doctors, an approach that the American Society for Clinical Oncologists dislikes, saying the protocol of the drug should be altered depending on the patient's blood count the day of the treatment.

In addition, without the income from the drug itself, doctors can't afford to administer chemotherapy, they said. 'You're taking away the profit we need. We can't afford to get $15 to give someone chemotherapy. We can't pay the nurse for that," Zeitler said.

Dr. John Gillespie, vice president and medical director for Blue Cross and Blue Shield of Western New York, said the company has hired a third party to provide chemotherapy drugs directly to doctors and also has increased the reimbursement that doctors receive for administering the drugs.

"The profit margin for physicians in buying the drugs made up for their being underpaid for the cost of infusion," Gillespie said. "What became accepted is that the profit for the drug supported the office setting."

Gillespie said the Blues disliked the potential conflict of interest, however. "It brings up an ethical question if a doctor has the choice between two equal drugs, but one has a higher profit margin. We started supplying our own injectables to remove doctors from buying drugs."

The Blues' new system, which has been in place for about a year, has pleased smaller doctors' offices which have been saved from paying for the drugs up front. But not all doctors are happy with it, Gillespie said.

"For frequent users, you have removed an income stream and not replaced it. We've established an infusion rate as a separate fee that should adequately reimburse doctors, but will it be as much as they made off the medicine?" Gillespie said.

Although the Blues' reimbursement plan is "mandatory" there are doctors refusing to use the Blues' third-parry provider for drugs. "Theoretically, it's a mandatory program. I'd say we have a soft mandatory program. I wouldn't say we have widespread acceptance," Gillespie said. "It's a fight."

Gillespie said many doctors are waiting to see what the government does to the reimbursement system before complying. "A lot of people are holding out for Medicare and Medicaid to make a decision. There's a lot of pressure on them. But what if Medicare makes a bad decision?" Gillespie said.

Zeitler said if the reimbursement for the drugs is cut without a significant increase in the reimbursement for the cost to administer the drugs, doctors will stop delivering chemotherapy from their offices.

"Our real fear is that if they go to invoice billing--if we pay $5 for a drug, and they pay us $5 for the drug, it is over. We'll have to close the door. And that's very frightening. It would be the end of oncology," Zeitler said.

Unique Drugs, Unique Situation

While many prescription drugs are dispensed directly to patients from pharmacies, chemotherapy drugs have always been handled differently due in part to their poisonous nature and the complexity of administering them.

About 15 years ago, most cancer patients probably received their chemotherapy treatments while staying in hospitals, because the drugs often resulted in severe side effects that required a high level of medical attention. But with the development of new anti-nausea drugs and other drugs that made receiving chemotherapy less invasive to patients, the practice of administering the drugs moved from in-patient hospital settings to outpatient hospital settings and doctors' offices. The move has ultimately saved money for Medicare, patients and private insurers, but the funding mechanism hasn't been adjusted to reflect that change, according to the American Society for Clinical Oncologists.

Besides lowering the cost of delivering the drugs, patients often find doctors' offices more comforting and less stressful than the hospital environment. But delivering the medications still comes with a cost.

Chemotherapy requires intravenous administration, often over a period of two to six hours, so the patient needs to have a comfortable place to sit for that long.

The mixture of the drugs used in treatment can vary depending on the patient's blood count on the day of treatment, so doctors have had to hire pharmacists to handle the mixing of the drug. The drugs themselves are toxic, and must be handled carefully, stored correctly and dispensed in a controlled way. The fumes are toxic, so pharmacists mixing the drugs must work in a specially equipped room to protect themselves from vapors.

Trained oncology nurses supervise the administration of the drugs, and must be available in case there are problems with the treatment. For instance, some chemotherapy drugs have been known to damage flesh if they leak from an TV A patient could potentially lose a hand if the drug was administered incorrectly and allowed to corrode away the flesh, ASCO said.

In Zeitler's office of 10 oncologists, there's a certified laboratory with 10 lab technicians to do blood work for patients, and a special area for two staff pharmacists to mix chemotherapy drugs. Because the margin between the correct dose and a fatal dose is very narrow, the pharmacists check one another's work, which is checked again by one of the 15 to 16 oncology nurses on staff who administer the drugs to patients.

ASCO admits that Medicare is overpaying for the drugs, but says it's under-paying doctors by as much as 75% for the service of providing the drugs. "We believe the system should be reformed. Drugs should be reimbursed for what they cost and services should be reimbursed at what they cost," said Dr. Paul A. Bunn Jr., president of ASCO.

ASCO, which represents 20,000 cancer specialists, said it hopes that the increased public attention on the issue will result in lawmakers making changes.

"The third-party payers follow CMS [The Centers for Medicare & Medicaid Services] and Medicare and Medicaid. If Congress can reform the system, it will be much better for everyone," Bunn said.

Adding to the confusion is the uniqueness of the situation, Bunn said. Chemotherapy drugs are not only delivered through physicians and not directly from pharmacies, but also, they are administered in doctors' offices by medical personnel who aren't doctors. Typically Medicare's payment methods are based on procedures done by physicians. Chemotherapy is a procedure done by a nurse. "It doesn't fit in very well with the typical procedures that Medicare uses," ASCO said.

Also, oncologists offer other services--such as emotional counseling for patients and family and nutritional counseling--that are not reimbursed adequately, Bunn said. "To imply that the doctor is more interested in greed than taking care of patients is not helpful" Bunn said.

Zeitler said a surgeon may do a 15-minute procedure and be paid $1,500. "That's a week's worth of work for me," Zeitler said. "We're kind of stuck that way. The government and insurance companies don't see the administration of chemotherapy as a procedure."

Robert M. Hayes, president of the Medicare Rights Center, a nonprofit consumer group, said it's difficult for nonprofits to evaluate doctors' claims that they aren't adequately compensated for their services. "But what I do know is if they aren't getting paid enough, address that. Don't create a scheme to overpay them for drugs," Hayes said.

Discounts for Some Medicare-Covered Drugs Billed by Physicians, 2001

Pharmaceutical companies sell oncologists chemotherapy drugs at various
discounts from the average wholesale price.


                            Speciality most
                            frequently
Drug Name                   billing for drug  Average AWP *

Docetaxel                   oncology                $313.51
Irinotecan                  oncology                $141.32
Leucovorin calcium          oncology                 $18.44
Ondansetron HCI, injection  oncology                  $6.41

                                      Average
                             Widely available
                            discount from AWP
Drug Name                     (Percentage) **

Docetaxel                                22.0
Irinotecan                               22.9
Leucovorin calcium                       85.6
Ondansetron HCI, injection               12.8

* Average of the average wholesale price of each National Drug Code for
that product adjusted to the dosage defined by the Health Care Financing
Administration common procedure coding system.

** Each discount was calculated by determining the average widely
available price for each NDC for that drug, determining the percentage
difference between the average widely available price and the AWP for
each NDC for that drug, and averaging the percentage differences for all
NDCs for that drug.

Source: General Accounting Office, "Payments for Covered Outpatient
Drugs Exceed Providers' Cost"

RELATED ARTICLE: States Call for Price Check

Oncologists aren't alone in being accused of profiting from drugs. So far, at least eight states have filed suits against several of the largest drug manufacturers accusing them of setting higher prices for patients covered by Medicare, the federal program that provides insurance for the aged, and Medicaid, the federal program that provides coverage for the poor.

The pharmaceutical companies said they've complied with all laws and regulations, and argue that individual companies shouldn't be blamed for following a system they didn't create. The lawsuits target a myriad of drugs, not just chemotherapy drugs.

"We have sued them to recover money for the state and consumers and to end the practice of distorting and inflating the average wholesale price," said Richard Blumenthal, Connecticut attorney general, who filed the suit in March. "We've sued seven companies, which indicates this practice is widespread."

While the individual charges, companies and drugs cited in the lawsuits may differ, all the lawsuits are similar at their root: how manufacturers set prices. At issue is the industry practice of reporting the "average wholesale price" of drugs, on which the government and many private health insurers base their reimbursement levels. The actual prices charged to doctors and pharmacies, however, is often significantly lower than the AWP. This allows the pharmaceutical companies to exploit the "spread" to market their drugs and improperly induce doctors to prescribe drugs and increase the companies' market share, Blumenthal said.

Connecticut has filed suit against seven companies, including Aventis, the maker of Anzemet, a chemotherapy drug. According to Blumenthal, the AWP of the drug is $166.50 per dose, but the actual price is $90.45.

New York State recently filed suit against three companies for conducting "elaborate schemes to inflate the price of prescription drugs for consumers and government health plans." The lawsuit accuses the drug makers of consumer fraud, commercial bribery and making false statements to government health plans.

For instance, Adriamycin, which is a chemotherapy drug made by Pharmacia, may be sold to a doctor for just $7.40 for 10 milligrams. But based on the AWP, Medicare reimburses the doctor $34.42, and a Medicare patient in New York also would make a copayment of $8.60 for the dose. So the doctor would receive a total of $35.62 more than he or she paid for the dose, according to the New York attorney general.

Another anticancer drug, Taxotere, is made by Aventis and can cost a doctor $238.86 a dose, although the doctor would receive a $226.92 reimbursement for the drug from Medicare plus a $56.73 copayment from the patient for a total "profit" of $44.79, or 19%.

Aventis has complied "frilly with the laws and regulations governing the Medicare and Medicaid systems," said Christine Kirby, a spokeswoman for the company. "The issue is broader than the pharmaceutical industry, and the issues that have been raised cannot be resolved by the industry, or by a particular pharmaceutical company alone."

She said the AWP remains undefined by the government agencies that use it to set reimbursements, and notes different departments of government use the AWP in different ways at different times.

"We base our reported AWP on our real list prices to wholesalers," although Aventis stopped reporting AWP altogether in August 2001 as a means to "eliminate some of the confusion over the real meaning of AWP," Kirby said.

"Historically, the system for reimbursing prescription medicines has been fraught with complexities, confusion and inconsistencies, and long-standing efforts on a national basis to reform the system have so far been fruitless," Kirby said. "The need remains for a legislative solution to the AWP reimbursement system."

U.S. Rep. Clay Shaw, R-Fla., has introduced a bill that would adjust how Medicare reimburses doctors for chemotherapy drugs, and hopes Congress will discuss it this year along with the Medicare reform bills. The bill calls for doctors to be reimbursed the actual cost for administering chemotherapy drugs.

California, Texas, West Virginia, Nevada, Montana and Minnesota also have ified lawsuits against drug makers.

Other similar lawsuits include the following:

* Bayer Corp. agreed to pay $14 million to the United States and 47 states in September 2000 to resolve allegations that it falsely inflated its AWPs of certain drugs.

* TAP Pharmaceutical Products Inc. agreed to pay $875 million in October 2001 to settle allegations that it had set the AWP of a prostate cancer drug called Lupron far higher than the price for which the drug was actually sold to distributors and wholesalers. TAP agreed to report its average sales price for all of its products reimbursed by the government on a quarterly basis.

* A coalition of consumer groups filed suit in December 2001 against 28 drug companies for allegedly manipulating the AWP of drugs covered by Medicare. The plaintiffs estimate that Medicare and individual consumers were overcharged $800 million in 2000 alone.

It begins with Medicare

Medicare is the federal program that spends $200 billion annually to provide health care to 40 million Americans who are over age 65 or disabled. While Medicare does not offer a comprehensive outpatient drug benefit, it does cover drugs if they cannot be self-administered and are related to a physicians' services, such as cancer chemotherapy or are provided in conjunction with durable medical equipment, such as some inhalation drugs. It also covers certain drugs for immunization (related to organ transplants) or blood-clotting factors (related to hemophilia). Medicare spending for these drugs totaled $4 billion in 1999; the Medicare program paid 80%, or $3.2 billion, while the patients paid the remaining 20%.

A major portion of Medicare drug spending relates to chemotherapy treatments, which are given through injections or intravenously. According to a study by the General Accounting Office, just 35 drugs accounted for 82% of total Medicare drug spending and 95% of total drug units.

The Centers for Medicare & Medicaid Services, which runs Medicare, has acknowledged the level of reimbursement for chemotherapy drugs is higher than the actual cost to doctors. Medicare bases its reimbursement on the "average wholesale prices," also called the "list prices" or "sticker prices," set by drug manufacturers. Those costs are not representative of the actual costs of these drugs to providers, according to a report by the General Accounting Office. Medicare reimburses at 95% of the AWP, but physicians were able to receive an average discount from the AWE of 13% to 34%. Two drugs had discounts of 65% and 85%.

"Our study shows that Medicare's method for establishing drug payments is flawed," William J. Scanlon, director of health care issues for the GAO, said in testimony before the U.S. House of Representatives subcommittee on health. "Medicare pays 95% of the average wholesale price, which, despite its name, may be neither an average nor what wholesalers charge. It is a price that manufacturers derive using their own criteria; there are no requirements or conventions that AWP reflect the price of any actual sale of drugs by a manufacturer.

Scanlon said, based on estimated discounts, Medicare paid at least $532 million more than the actual cost to doctors to obtain the drugs in 2000. This has outraged some consumer groups.

"The average wholesale price program is something we think should be discarded," said Robert M. Hayes, president of the Medicare Rights Center, a nonprofit consumer group. The average wholesale price is a fictitious number."

He said one of the glaring abuses of the program is that physicians have a financial incentive to distribute chemotherapy drugs. "Any system that creates these kinds of incentives at a minimum raises suspicion between patients and doctors, and that's not good," Hayes said.