American College of Physicians: Internal Medicine — Doctors for Adults ®


Medicare's new office-drug payment policyhas oncologists concerned about access

Because of reduced fees, physicians say office infusion services may be at risk

From the April ACP Observer, copyright 2004 by the American College of Physicians.

By Janet Colwell

To the rest of the country, Louisiana is known for the finer things in life, like great food and music. But cancer experts know the area between Baton Rouge and New Orleans as "Cancer Alley" for its high concentration of cases, in part due to the region's reliance on the petroleum industry. With Louisiana having the tenth highest cancer rate among states in the country, area oncologists say they treat an unusually high number of patients with breast, lung and colon cancers.

Physicians at the state's largest oncology group—Hematology and Oncology Specialists in New Orleans—have always believed that giving patients easy access to services makes for good business and better patient care. That's why the 23-physician group has maintained a decentralized practice, setting up 10 chemotherapy infusion sites in and around the city.

But according to the group's physicians, that strategy has now come up against last year's Medicare reform legislation, which changes the way oncologists and other specialists are reimbursed for providing on-site drug infusion services for Medicare patients.

Because of the government's new reimbursement formula, the New Orleans group said it is anticipating losses of up to 15% this year alone. As a result, the practice earlier this year closed six of its infusion sites and laid off 11 employees, mostly specialized nurses.

"Patient convenience and patient access have always been a critical part of our practice philosophy," said Owen Dahl, the group's chief executive officer. "Now we may have to reconsider even keeping four sites open."

Oncologist William Stein, MD, worries that changes in oncology drug reimbursements next year may affect his ability to treat Medicare patients.


Twenty years ago, cancer care shifted from hospitals to community oncology practices. In part, hospitals were losing money on infusion services. In addition, patients benefited from access to community practices, especially in rural areas. Now, some oncologists are concerned that changes resulting from Medicare's new reimbursement formula may reverse some of that progress.

While the New Orleans practice is unusual in closing so many of its sites, oncologists across the country admit to being troubled. While most are taking a wait and see attitude this year, they say that even bigger Medicare changes in drug reimbursement for 2005 are making them nervous.

"If we didn't make them this year, we would have definitely made changes next year," said Mr. Dahl. "How many more changes we'll have to make, we don't know yet."

Fixing a broken system

For many physicians, the Medicare Prescription Drug Improvement and Modernization Act of 2003, signed into law last December, was a mixed blessing. There was a collective sigh of relief that physician payments would increase 1.5% in 2004 instead of being cut 4.5% as scheduled. And most physicians agreed in principle that Medicare's drug reimbursement formula should be changed to more accurately reflect actual purchase prices. (See "Why Medicare changed its drug reimbursement system.")

Until the Medicare reform legislation took effect, Medicare overpaid physicians for the purchase price of infusion drugs, while underpaying them for the costs associated with administering those drugs.

In reimbursing physicians for drug costs, the government relied on a formula known as the average wholesale price. Critics have long charged that the average wholesale price was inflated and did not accurately reflect what physicians actually paid for drugs used in their office.

Critics charged, for instance, that the average wholesale price did not include rebates or discounts offered by pharmaceutical companies. According to a 2001 report from the General Accounting Office (GAO), most physicians and pharmacies could purchase drugs for between 13% and 86% below what was listed as the drugs' average wholesale price.

Offsetting that largesse, however, the government kept its reimbursement for physicians' practice expenses associated with administering drugs-such as employee salaries, clinic overhead, storage costs or disposal fees-low. Both physicians and officials from the Centers for Medicare and Medicaid Services (CMS) say there was a tacit understanding that physicians could use profits from drug-purchase reimbursements to cover their service expenses.

But last year's Medicare reform bill instituted several changes. First, the bill cut physicians' reimbursement for drug costs from 95% to 85% of the average wholesale price, beginning Jan. 1, 2004.

At the same time, legislators boosted physician reimbursement for practice expenses by 32% for this year, known as the "transitional increase."

But the bill also created changes in store for next year. Beginning in 2005, the average wholesale price will be scrapped in favor of a new formula, known as the average sales price. The government will begin reimbursing physicians for drug-purchase costs at 106% of the average sales price-a formula that as yet has not been defined by the CMS.

Proponents of the new formula say it will be tied more closely to physicians' actual acquisition costs. However, community oncology groups are worried that their reimbursement under the new formula may not cover the costs they'll have to pay for drugs.

Another concern? In 2005, according to the new Medicare law, physicians' transitional increase for practice expenses will drop from 32% to 3%. (Click here to see annual changes.)

CMS officials are quick to point out that the reform bill also included significant increases in the physician fee update schedule. Even without the 2004 transitional increase, they say, Medicare payment for the first hour of intravenous infusion therapy (code 90780) jumped from $42.67 to $89.23, a 109% increase. With the transitional increase in place, physicians this year will receive $117.79 for the service, according to CMS officials.

"We used ASCO [American Society of Clinical Oncology] survey data to determine how to increase practice expenses for the 2004 fee schedule," said Leslie Norwalk, the CMS' acting deputy administrator and chief operating officer. "We expect that there won't be a decrease in [oncologists'] pay this year."

Oncologists, however, say reimbursement under the new law for 2005 may fall far short.

"We have long advocated for reimbursement reform that would appropriately reimburse for services and cover the cost of drugs," said Margaret A. Tempero, FACP, ASCO's president and a practicing oncologist in San Francisco. "The Medicare bill came part way, but it's not well thought out in terms of the overall dollars. There's a lot of concern now that there's been enough taken out of the overall cancer care budget that it will be impossible for many community physicians to deliver essential cancer care."

Access problems?

In New Orleans, William Stein, MD, one of the founders of Hematology and Oncology Specialists, anticipates losing money in 2005 under the average sales price formula. He is considering no longer seeing Medicare patients after the end of this year.

"I can no longer afford to subsidize government programs," Dr. Stein said, "by doing work for free."

Despite his frustration with the CMS, he is concerned how that decision would hurt patients' access to care. Already as a result of the group's decision to close infusion sites, some patients now have to travel from five to 20 miles more to be treated at one of the practice's remaining centers. For many patients, that means more difficulties arranging transportation, child care and time away from work.

If the practice stops accepting Medicare patients, many more patients would have to travel much farther to be treated at hospitals. And they will receive less efficient care, Dr. Stein added.

"If something happens in my office while a patient's getting chemotherapy, I'm there," Dr. Stein said. "That's not true in the outpatient oncology unit of a hospital. If something happens there, the patient is shipped to the emergency room."

More patients getting infusion at oncology practice centers. shown here, may have to switch to community hospitals for chemotherpay services.


The likely alternative for many patients—Louisiana's Charity Hospital system, which already cares for 85% of the state's poor and uninsured patients—is ill-equipped to handle the overflow, particularly as state budget cuts take hold.

At Charity Hospital in New Orleans, for instance, the largest facility in the 10-hospital system, staff nurses say their schedules are already packed. "We have no down time," said Colleen Lemoine, APRN, a clinical nurse specialist for oncology. "Our three full-time nurses might be giving chemo to 30 to 35 patients a day."

Charity is already struggling with cost-containment efforts triggered by funding cutbacks, which recently forced the system to lay off 350 employees. Ms. Lemoine is worried that Charity's problems will only worsen if community physicians start referring cancer patients to the hospital system for chemotherapy. Making matters worse, Charity would lose out if patients who receive infusion at one of its facilities go elsewhere for follow-up care, which is more adequately reimbursed by insurers.

"There's a possibility that Charity will be forced to provide all the uncompensated aspects of their care," Ms. Lemoine said. "The hospital has to make decisions about what services we can provide and what services we cannot. It may be that one day we don't provide oncology care."

John M. Rainey, FACP, part of the five-physician Louisiana Oncology Associates in Lafayette, La., is also concerned about maintaining infusion services. His group fears it may have to close some of its satellite infusion sites.

"As far as we can tell, 2004 is pretty much a wash," said Dr. Rainey, who is also president of the Louisiana Oncology Society. "But 2005 and on is a completely different story. At this point, it appears that we'll take anywhere from a 30% to 50% cut in revenue."

National concerns

Oncologists around the country agree they are troubled by the prospect of falling reimbursements next year.

Arnold Wax, FACP, for instance, is president of the medical oncology division at Comprehensive Cancer Centers of Nevada, a Las Vegas-based practice with 12 medical oncologists and five radiation oncologists. He predicted that changes in Medicare reimbursement in 2005 will cost the practice about $2 million in lost revenue, just on Medicare patients alone—at least a 20% loss of income for the medical oncology division.

While the group's physicians have considered sending certain groups of patients to hospitals for infusion therapy, they worry about the liability such a move could bring.

"Sending patients to the hospital creates an environment of liability without any reimbursement," explained Dr. Wax, a former Governor for the College's Nevada Chapter. "I can't bill for the administration of chemotherapy at a hospital, but I'm liable for any error that occurs." So far, the practice plans to keep its four infusion sites open, but may add more radiology services to diversify its revenue base.

Pushing for change

The CMS' Ms. Norwalk said she thinks some oncologists are reacting to rhetoric before they've done a thorough financial analysis of how they will be affected.

"I think a lot of this is scare tactics," she said, "instead of [groups] really taking a look at what is available in terms of payments."

In the meantime, ASCO is conducting surveys and gathering more data on practice expenses before 2005. At the same time, "we would like to see the resources in the system in 2004 stabilized for another two years," said Deborah Kamin, ASCO's senior director for cancer policy and clinical affairs.

That stabilization could take one of several forms, she continued: the CMS could keep the 32% transitional increase in place through "some administrative action or interpretation of the law," she said. Or the CMS could develop new codes to begin to reimburse physicians for some of the social services—such as nutrition counseling—that oncology groups often provide to patients but aren't paid for.

Another group gathering anecdotal evidence and conducting studies is the National Patient Advocate Foundation, a Washington-based patient advocacy group. According to Nancy Davenport-Ennis, the foundation's chief executive officer, the group has launched a Web site to record concerns from patients. As of the end of February, she said, the foundation had heard anecdotal evidence of changes in cancer services resulting from Medicare reimbursement changes from patients in 17 states.

The group has also commissioned several studies to gauge the effect of reimbursement changes on practice services and charity care in oncology practices, among other issues. "We want to be certain that as the [Medicare reform] bill is implemented, there are no unintended consequences that would result in reduced access for cancer patients in the community setting," Ms. Davenport-Ennis said.

ASCO's Dr. Tempero said she is optimistic that Congress will address reimbursement problems this year. In fact, Congress has directed the CMS to re-evaluate practice expenses periodically and to increase payments to physicians if necessary. In addition, payment changes for certain specialties, including oncology, will not be subject to budget neutrality requirements for the next two years. That means that legislators can bump up pay for one specialty without taking any payments away from another.

"If the information provided [by oncologists] were to show that we were not giving sufficient reimbursement for practice expenses, we would be able—outside of budget neutrality—to increase the practice expenses for certain specialties," Ms. Norwalk said. "It is not Medicare's desire to have patients with cancer treated in the hospital if they can be treated in a physician office setting, so we'll continue to look at the data."

ACP also believes that the CMS will make adjustments, if necessary. "We supported the oncologists' overall policy," said Robert B. Doherty, the College's Senior Vice President for Governmental Affairs and Public Policy. "Going forward, we believe the CMS has clear direction from Congress to review any new data presented by the oncologists."

At this point, analysts say that it is too soon to say whether oncologists' warnings about access problems are justified. Fortunately, analysts say, it may still be early enough in the formula-changing process to prevent major problems.

"If in fact there are people driving 200 miles to a hospital instead of 10 minutes to an oncologist on more than an occasional basis, there's no way politically that that will be sustained," observed Robert A. Berenson, FACP, a senior fellow specializing in health care at the Washington-based Urban Institute, a nonpartisan think tank. "If the CMS is at all sensitive to the politics of this, it will figure out a way to administer payment rates that at least initially make the physicians whole."


Why Medicare changed its drug reimbursement system

While some physicians are baffled and frustrated by Medicare's new drug reimbursement policy, the original goal seemed simple enough: Create a fair system based on market prices.

The old payment system was a constant target of criticism, in large part because it didn't directly link physicians' reimbursement to their actual costs. Over the last decade, a number of government studies found that Medicare was paying providers far more for drugs than physicians were spending. In some cases, according to the Centers for Medicare and Medicaid Services (CMS), beneficiaries' co-insurance payments alone exceeded the purchase prices physicians were paying.

Problems centered on a list used by Medicare known as the average wholesale price index. While Medicare accepted that list as the standard for reimbursing physicians for the cost of drugs, the index was notoriously inaccurate, and well-documented abuses of this system put added pressure on Congress for reform.

In a June 2003 report to Congress, for example, the CMS cited a 2001 report from the General Accounting Office (GAO). The GAO concluded that in 2000, Medicare overpaid $587 million for the 24 most commonly reimbursed drugs. It further concluded that those overpayments were passed onto patients, who would have saved $400 million in co-payments if the drugs had been reimbursed at cost.

In a report issued last June, the CMS took that argument one step further, saying that Medicare gave physicians an incentive to inflate costs. Manufacturers could raise the average wholesale price for a product, for instance, without ever increasing the price they charged physicians, resulting in higher profits for providers.

Said Robert A. Berenson, FACP, a senior fellow at the Washington, D.C.-based Urban Institute: "CMS had to deal with the perverse economic incentives [of the average wholesale price system], which rewarded drug companies for marking up their drugs, not competing to lower their prices."


Other subspecialties weigh in on reimbursement changes

It's not surprising that oncologists have been the most vocal critics of reimbursement changes ushered in by the 2003 Medicare reform bill. That's because chemotherapy makes up a large percentage of the typical oncology practice's revenue.

According to the American Society of Clinical Oncology, chemotherapy services can account for at least 50% of revenue at most cancer clinics, with about 80% of all cancer patients receiving chemotherapy at community oncology offices. In addition, cancer drugs are among the highest-priced drugs on the market.

"No other medical physician carries the overhead and amount of drugs that we do," said John M. Rainey, FACP, an oncologist practicing in Lafayette, La. "We do close to a $1 million a month in drugs. That's a substantial amount I'm putting out for drugs and then trying to collect from patients."

But any specialist who provides on-site infusion services will be affected to some extent by the reimbursement changes included in the 2003 Medicare reform bill. Many rheumatologists, urologists and infectious disease specialists are also worried that their revenues will fall in 2005.

While they generally supported an overhaul of Medicare reimbursement, rheumatologists say they are lobbying to change the codes associated with infusion drugs for rheumatoid arthritis. The procedure is no less complicated than chemotherapy, they point out, but it is reimbursed at a much lower rate.

"We just want access to the same kind of complexity as our colleagues" for similar services, said David G. Borenstein, FACP, chair of the American College of Rheumatology's government affairs committee. The lower reimbursements are affecting practice revenues now, and greater losses are likely in 2005 when the service reimbursement rate is cut, if the codes stay the same.

"What will happen when rituximab [used to treat non-Hodgkin's lymphoma] is approved for rheumatoid arthritis, which will likely happen?" Dr. Borenstein asked. "Will we not be able to use the oncology code when we are giving the same medicine, but for a different illness?"

While infusion typically accounts for a smaller slice of practice revenue for rheumatologists than for oncologists, most physicians can't afford to provide a money-losing service, he added.

"Infusion is a small part of our practice, but we still have to decide whether it costs us money to provide it," said Dr. Borenstein, who is part of a private practice with 11 rheumatologists in Washington. "Up to this point, we've made a profit [on infusion], but we have to make calculations as to whether we will or not in the future."

Infectious disease specialists are less affected by the changes than oncologists because most of the antibiotics they use are much cheaper than chemotherapy drugs, said Larry Martinelli, ACP Member, partner in a small specialty practice in Lubbock, Texas, and chair of the outpatient parenteral antimicrobial therapy task force for the Infectious Diseases Society of America (IDSA). However, he said that 2005 is cause for concern.

An hour of infusion costs physicians about $135, according to IDSA data. That amount is far beyond what Medicare allows, Dr. Martinelli explained, but it is manageable with this year's transitional increase.

But the loss will be much harder to absorb when the reimbursement rate drops to $89 next year. Physicians will no longer be able to count on an "overflow" from drug payments to make up the difference.

"At that point, it becomes a real loss," he said. "We're working with CMS to try to get this corrected, but it's difficult in an election year. CMS may come back and say, 'Look, we just gave you this huge raise'. We're saying, 'Thanks, we really appreciate it. You almost reached the point of covering our costs.' "


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