Summer 2011
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Reimbursement Dynamics: A Discussion with Judith Baker
Judith J. Baker, PhD, CPA
Partner and Executive Director
Resource Group, Ltd.
Pickton, TX

What are the current and 2006 regulatory imperatives for the management of ambulatory injectable drugs?
The short answer is that Medicare reform legislation required additional changes to the way Medicare pays for drugs. The major changes commenced in 2004 for physician practices, and change will occur for separately covered hospital outpatient drugs beginning in 2006.

How do you keep current?
In multiple ways. We subscribe to a commercial service that provides weekly updates on all aspects of governmental reimbursement and related legislation. We also subscribe to an array of newsletters that provide updates on the commercial payor and managed care aspects. (We don't endorse any particular newsletter publication. But our reading stack at present includes these relevant examples: Managed Care Week, Part B Insider, Specialty Pharmacy News, Disease Management News, APC Advisor, Pharmacy Practice News, The AIS Report on Blue Cross and Blue Shield Plans, Inside Consumer-Directed Care and Current Concepts In Pharmacy Management.)

Of course, we communicate with providers all the time and hear about current problems from their viewpoint, which is very helpful. We listen to the Centers for Medicare and Medicaid Services (CMS) Open Door Forums for hospitals and pharmaceuticals. We belong to and participate in a number of health care organizations such as American Society of Health-System Pharmacists (ASHP) and Healthcare Financial Management Association (HFMA). And we subscribe to listservs for CMS, General Accounting Office (GAO), the Federal Register, etc.

What are the good governmental and non governmental websites?

  • CMS drug home page at
  • CMS hospital info home page at hospital.asp
  • Medicare Learning Network (MedLearn) at medlearn/matters
  • CMS listserv (free subscriptions)
  • CMS Open Door Forum (conferences) at
  • Federal Register main page (published rules) at
  • Library of Congress (legislative info) at
  • ASHP home page at
  • HFMA home page at
  • American Hospital Association (AHA) home page at
  • American Medical Association (AMA) home page at

We must be absolute in preventing Medicare Fraud and Abuse. What are the pitfalls and how do you manage them?

For pharmacists, the primary pitfalls lie in billing, coding and related documentation. For example, I've found just about any pharmacy we go into can improve its documentation on wastage. Also the interface between the pharmacy inventory information system and the billing information system is often a weak link that results in number-of-unit errors on claims.

Managing these pitfalls means taking prompt action when errors are discovered. Reacting promptly to detected offenses and then developing corrective steps is key. Remember, there is a distinction between "erroneous" (innocent ) and "fraudulent" billing errors. Your compliance program is your shield against fraud. Management must have written policies, procedures and standards of conduct. (In the past the Office of the Inspector General has viewed the existence of an effective compliance program as a mitigating factor in fraud and abuse cases.) But two more things are vital. Operations should be monitored on a regular basis for compliance, and when violations are discovered, swift effective action must be taken and well documented.

What is ASP?
Technically speaking, the average sales price, or ASP, is the manufacturer's sales to all purchasers (with certain exclusions), divided by the total number of units sold. Exclusions include sales exempt from best price and sales at nominal charge. The computation also has to deduct volume discounts, prompt pay discounts, cash discounts, free goods contingent on any purchase requirement, charge backs and certain rebates. Manufacturers are now required to report ASP to CMS on a quarterly basis.

How does ASP relate to AWP?
There isn't a straightforward relationship between the two. The average wholesale price, or AWP, while not defined by laws or regulations, is self-reported manufacturer data, intended to represent the average price at which wholesalers sell drugs to pharmacies, physicians, and other customers. Commercial publishers compile and sell this drug pricing data. Over time, AWP has become an important prescription drug pricing benchmark for payors, although payments are typically based on AWP minus some percentage.

What are the financial implications of AWP?
In 2005 (and, generally speaking, in the recent past), Medicare had been paying for most separately-paid covered outpatient drugs and biologicals provided under Outpatient Prospective Payment System (OPPS) at some percentage of AWP. Now in 2006, Medicare proposes to pay ASP+6% for most of these drugs and biologicals.

And beginning in 2006, Medicare also proposes that the ASP+6% payments be updated every quarter. (Previously, since OPPS was implemented on August 1, 2000, the usual update for drug payments has been an annual adjustment on a calendar-year basis.)

The financial implications will vary depending on the mix of drugs and biologicals in your pharmacy department. Generally, AWP tends to be higher because ASP must be computed taking a series of reductions into account. But in recent years, most payments have tended to be at a percentage of AWP, not the full rate of 100%. So your own mix of drugs, volume of each drug, and payor mix will all affect your particular financial situation. For example, payors other than Medicare may well still pay by methods other than ASP, such as a percentage of AWP.

How does billing from private physicians differ?
Physicians in private practice had already been billing and receiving payment for separately paid covered outpatient drugs on the basis of ASP+6% for all of 2005. (In 2004, they were paid at 85% of AWP, reduced from 95% in 2003.)

How might we support physician groups if they are affiliated with our system?
Some physician groups may seek to have the hospital outpatient department handle the administration of outpatient drugs for their patients. It's probably too early to judge how much support may be needed, but we know many systems are concerned about this issue.

Some hospitals have completed a cost survey. What does this mean?
Medicare reform legislation required the GAO to conduct a survey of hospital acquisition costs of specified covered outpatient drugs and to furnish the survey results to CMS for consideration in setting 2006 drug payment rates. The GAO sent surveys to 1,400 acute care Medicare-certified hospitals, received 1,157 responses with usable information, and reported information to CMS about 55 drugs and biologicals. (These 55 drugs represented the major portion of Medicare spending under OPPS.)

The bottom line, however, is that CMS ended up not using the GAO cost survey results in setting drug payments for 2006. CMS said the survey costs were from an earlier period, did not fully account for manufacturer rebates or group purchasing organization (GPO) payments to hospitals, and would be difficult to update for future years. Consequently, CMS proposed to use the ASP+6% payment method instead.

How do we document costs for dispensing, procurement, storage, etc.?
The payment system seems to be moving toward future reimbursement for handling costs on a per-dose basis for outpatient drugs. (While CMS ultimately decided not to pay the proposed 2% for pharmacy handling costs in 2006, the agency indicated that it will continue to solicit input about methods to capture pharmacy overhead costs, and that payments to hospitals for these services may be provided in the future.) There are many different ways to arrive at costs, but it is probably wise document your costs on a per-dose basis-if only to arrive at a figure you can compare to any potential future per-dose compensation.

Consider dividing your departmental costs into buckets representing different types of tasks (dispensing, procurement, storage, etc.) Then try to arrive at a series of average per-dose costs for each bucket. Keep track of your assumptions, because you will want to refine your first efforts. This information may serve you well in the future.

What do fee codes mean and how do we manage them?
Medicare reform legislation required MedPAC to study whether OPPS drug payment rates should be adjusted to account for overhead and related expenses, such as pharmacy services and handling costs. MedPAC concluded that such handling costs were "nontrivial" and recommended that such a payment adjustment be made.

This left CMS with a dilemma. How could they set these rates? Their solution was in two parts. First, they proposed to require, beginning in 2006, that pharmacies report handling fee charges. They then expected to set future handling rates, probably beginning in 2008, using these fee charges as you would have reported them in 2006. Second, they proposed an interim solution: to pay pharmacies for handling charges during 2006 and 2007 at 2% of ASP. (This 2% will be adjusted slightly for budget neutrality.)

CMS then proposed three categories of drug handling charges, basically representing low, medium and high levels of per-dose drug handling. The three proposed drug handling fee codes were designated by type of preparation, from orals to cytotoxic agents. To manage them, you would have had to set appropriate charges and make sure these charges appeared on your Medicare claims. But there won't be any fee codes for 2006 after all, because CMS won't be paying the additional 2% that would have required fee code tracking.

What do we do if we are losing money on these drugs and services? Our costs are increasing with USP 797, etc. How do we correct for billing errors and problems?
Here are three suggestions: First, your pharmacy department management should actively participate in how charges are recorded for the pharmacy department. Second, plan to work closely with the pharmacy charge master coordinator when changes and/or problem-solving are necessary. The charge master is the master computer file of charges (thus "charge master," charge description master or CDM). Generally, it controls what information gets onto the claim form. Third, put a procedure in place to make sure drug codes (such as J codes) are updated on a routine basis. And fourth, routinely request a sample of your bills and review them for billing errors. To get involved and stay involved in how the billing process works means extra effort, but you'll find the outcome is worth it.

What suggestions do you have for developing business plans or at least the pharmacy section of them?
The pharmacy section of business plans needs to account for and justify both operating expenditures and capital expenditures for the pharmacy department. Business planning is a complex process, and this response is of necessity very general and generic.

Our suggestions include the following: The plan generally should cover a 3-year span. (Some plans use 5 years, but going 5 years out in this industry is problematic.) A basic business plan should include an executive summary, an organizational plan, a marketing plan, a financial plan and an appendix containing back-up information. Include implementation strategy for finance, marketing and interaction/communication between departments. Project the impact of ongoing Medicare reform legislation and commercial payor contracting on volume and staffing. Make a case for support staff. Account for USP 797 impacts. Take changes in service lines in your facility into account when preparing projections. And finally, beware of templates. Create your own plan, instead

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