Coming on the heels of Medicare Part D and the new Part B drug-pricing schema based on Average Sales Price (ASP), the new Competitive Acquisition Program (CAP) for Medicare Part B drugs and biologics represents yet another major change to the pharmaceutical supply chain. While it is too early to reliably predict the impact or even viability of CAP, it’s critical for players to understand the initiative. Ultimately, CAP may have a dramatic impact on drug manufacturers, distributors, physicians, and beneficiaries.

Road to Average Sales Price (ASP):

While Medicare Part B drug coverage is complex, generally speaking Part B drug coverage is limited to physician-administered drugs and therefore primarily injectibles. Prior to the Medicare Modernization Act of 2003, Medicare reimbursed physician offices for Part B drugs based on percentages of Average Wholesale Price (AWP). Physicians would buy what they need, administer drugs to patients as necessary, charge beneficiaries for their deductible and 20% Part B co-payment, and bill Medicare for the drug and the office visit.

This approach was widely criticized by MedPAC, GAO, and the OIG as well as outside experts. Under the AWP-based system, Medicare drug payments were far higher than other payors. It also meant higher patient co-payments. However, in fairness to physicians, in many ways the higher drug reimbursement helped make up for Medicare’s below-market office visit rates.

Under MMA, Congress changed that way Medicare reimburses physicians for drugs and biologics covered under Medicare Part B. Since January 2005, Medicare reimburses physicians using a new formula based on Average Sales Price (ASP). For most Part B drugs, physician offices are now paid 106% of ASP.

In brief, ASP is what a pharma or biotechnology company makes on a given product, net of rebates and other price concessions. The Centers for Medicare and Medicaid Services (CMS) calculates ASP using net sales data provided by drug makers. Medicare adds 6% to help cover physicians’ costs of buying, storing, and billing. The new ASP-based payment system results in substantial savings to Medicare but of course also lower revenues for physicians.

Basics of the Competitive Acquisition Program (CAP):

Starting in July 2006, physicians will have an alternative to buying and billing for Part B drugs and ASP-based payment. The upcoming Competitive Acquisition Program (CAP) will give physicians the option of obtaining most Part B drugs needed by Medicare patients from vendors selected by CMS. Medicare physicians may elect to participate in CAP on an annual basis.

The CMS-approved vendors, selected through competitive bidding, will negotiate with manufacturers, buy and distribute supplies to physicians, bill beneficiaries for any applicable deductible and coinsurance, and bill Medicare’s designated national carrier for drug costs. The carrier will pay the CAP vendor after verifying that the physician administered the drug. To do this, the carrier will match the CAP vendor’s claim for the drug with the corresponding physician claim for drug administration. Following this verification, the CAP vendor will bill the beneficiary (or the beneficiary’s Medigap policy or other third party insurance) for applicable cost sharing.

For the Part B drug categories they have selected, physicians opting for CAP will receive all of those drugs (used for Medicare patients) from the approved CAP vendor. Physician offices participating in CAP will continue to bill Medicare as usual for the drug administration fee and other office fees.

Under certain conditions, a participating CAP physician may provide a drug to a Medicare beneficiary from his or her own stock and obtain the replacement drug from the CAP vendor. There is also an exception for “furnish as written” situations when the physician specifies that a certain brand of a drug is medically necessary and that drug is not available from the CAP vendor. In those cases, the participating CAP physician may buy the drug, administer it to the beneficiary, and bill Medicare using the ASP system.

CAP Bidding and Contracting:

Every three years, CMS will solicit bids from qualifying vendors – primarily major distributors and specialty pharmacy shops. MMA gives CMS the authority to select drugs or categories of drugs that will be included in the program. Drugs may be excluded from the CAP if competition will not result in significant savings compared to the ASP system or when necessary to avoid disruption in access to a drug.

In April, CMS is expected to announce the CAP vendors for the program’s July 1, 2006 start.

Market Implications of CAP:

In an upcoming story, I will comment on the implications of CAP for drug manufacturers, drug distributors, and physicians.