Bustin' a CAP: The Competative Acquisition Program

The new Competitive Acquisition Program (CAP) for Medicare Part B drugs aims to align market forces with the distribution of drugs and biologics that doctors administer in their offices. But the nascent bureaucracy may be unable to overcome a big downside for vendors, despite real advantages for physicians, manufacturers, and especially the government.

Obviously there is a great deal to gain, particularly for the Centers for Medicare and Medicaid Services (CMS). Instead of reimbursing thousands of individual physicians for drugs, CMS intends to contract with two to five national vendors who deliver drugs to doctors and bill the government. Physicians, whose buy-and-bill reimbursement requires them to sink their own money into patient medications and then wait 40 to 60 days for Medicare reimbursement, can cut their capital cost of doing business. These benefits are significant, when one considers that the the average community oncologist spends about $2 million per year on drugs.

CAP vendors must be willing to absorb this capital cost, as well as the vast bookkeeping chores of Medicare paperwork, in exchange for a national contract to distribute Medicare Part B drugs. Presuming that doctors sign on to the voluntary plan, CAP vendors become exclusive distribution channels for three years at a time.

Medicare patients get cheaper drugs and greater access to expensive injectable treatments and biologics, not least because vendors must be able to deliver most drugs to doctors on very short notice—often 24 hours. In addition, relieved of the capital costs of drug procurement by CAP, doctors may be more likely to prescribe Part B medications instead of referring patients to an outpatient hospital for those drugs, which may be an upside for pharma as well.

All of these changes are fueled by market forces. But the benefits accrue only if each party's rational pursuit of self-interest benefits the goals of all. But instead of a smooth-running engine, the complicated, interlocking relationships prescribed by CMS resemble a vast Rube Goldberg machine, whose every part must dovetail with the next if the gratuitously complicated apparatus is to perform its simple chore. And in fact, the gears do not seem to mesh. The sluggish responses of one key CAP constituency, the vendors, brought the cumbersome mechanism to a halt before it was launched. Vendors argue that national contracts do not compensate them for the cost of capitalizing and running the program: The six-percent mark-up required by CMS is just too tight for easy profitability.

Some vendors plan to participate anyway for strategic or defensive reasons, but others will remain on the sidelines. AmerisourceBergen Specialty Group, for example, the largest oncology distributor in the nation, notified CMS this past summer—two days before final bids were due—that it would not bid. On the same day, August 3, CMS suspended the bidding process. Even so, CMS plans to issue a Final Rule for CAP before the end of this year, and to launch the system next summer.

Conflicts between doctors and vendors may emerge when the system is launched, but for now it is important to understand vendors' complaints, and to see where market forces have stalled the machinery instead of helping it hum along in the service of all. The problems lie with the Goldberg structure of the new system, which, in many important ways, discourages rather than supports the participation of pharma, the established drug distributors, and many physicians who prescribe Part B drugs. Market forces were supposed to bring efficiency and order to the Medicare distribution and billing process. But in fact, the pursuit of economic self-interest—the bedrock of a market-driven system—may prevent stakeholders from working together. The new system is meant to create cooperation, but in reality, it pits vendors against the government, and will almost certainly pull doctors and pharma manufacturers into the fray.

CAP Defined

The Medicare Prescription Drug Improvement and Modernization Act (MMA) of 2003 is best known for the Medicare Part D prescription drug benefit, with its doughnut holes and the dizzying array of plans to fill or ignore them. But the MMA also changes how CMS pays for Part B drugs and biologics, which are therapies that doctors administer in their offices. Under the old system, doctors purchased these drugs from pharma companies or distributors, and were reimbursed at a percentage of the average wholesale price (AWP), which was essentially a manufacturers' sticker price that could be easily discounted and, until recently, was seldom challenged by payers.

Since January 1, 2005, CMS has paid for Part B drugs under a different formula called average sales price (ASP), calculated using the actual sales prices reported by pharma companies, instead of AWP. Under this formula, CMS pays physicians 106 percent of ASP, regardless of their actual drug-acquisition cost. This new rule significantly reduces the amount of money that CMS pays for Part B drugs.

In order to offer physicians a way out of buy-and-bill, CMS developed a new distribution model for Part B drugs, so providers would not have to tie up large sums of their own funds in the purchasing and reimbursement cycle. Under CAP, doctors obtain drugs directly from national vendors that deliver to doctors and then bill Medicare, the patients' insurance companies, and the patient for the deductible and co-pay.

Doctors selecting CAP will need only the capital to float a buy-and-bill operation for non-Medicare patients. Furthermore, they will not need to chase drug reimbursements from Medicare for their patients. But physicians will continue to receive income for services provided during periodic patient visits, including services related to drug administration.

According to the latest version of CAP—the Interim Final Rule (IFR) published in the Federal Register on July 6— prospective vendors must prove that they can deliver the 181 drugs and biologics covered by CAP in all 50 states. They can engage subcontractors that meet the general safety requirements of CAP, but they must show a three-year history of distributing drugs nationwide. Then, for each of the 181 drugs, the vendor must bid a specific price that includes the cost of shipping, and any management fees related to delivering the drug. Finally, vendors must create a composite bid that weights each drug's share of total volume of the contract (based on the most recent available utilization data). This composite bid may be no higher than 106 percent of the weighted ASP for all of the drugs in the contract. CMS will choose between two and five vendors, and award three-year contracts.

After the bids are accepted and contracts awarded, CMS will set a single price for each drug based on the median price for all selected vendors, so that a vendor could find itself with a contract requiring it to accept a lower price than it bid for some drugs. Vendors will be told the median price calculation before signing the contract, and may, at that point, decline to sign because the median price is lower than their bid, according to a CMS response in a vendor Q&A. Contracts will be adjusted on an annual basis for vendors' actual product acquisition costs.

Doctors must re-enroll in CAP and select an authorized vendor each year. Although CAP is voluntary for physicians, ASP reimbursement for Medicare patients is not. Doctors who choose to continue their buy-and-bill-practice may do so, but they will be reimbursed at ASP plus six percent for each drug they buy. Smaller group practices may be more likely than larger ones to elect CAP, since they will have less leverage to negotiate discounts on drug purchases. In fact, the vast majority of oncology practices, which are major buyers of Part B drugs, are not expected to enroll in CAP. However, it is possible that physicians in specialties other than medical oncology will choose CAP, because drug income represents a much smaller portion of their overall revenue.

What's the Problem?

One big problem plagues the CAP program: the tight profit margin. Vendors say the six-percent mark-up is too narrow. Cost plus six percent might work in a perfect world, where nothing ever went wrong, but the worlds of medicine and government contracts are far from perfect. Vendors can expect to take losses on many transactions.

First, CAP vendors are likely to lose money on small orders—those for $800 or less comprise more than 80 percent of CAP drugs—including, for example, generic oncolytics, such as cyclophosphamide, etoposide, vinblastine, leucovorin, and vincristine. A single CAP order for $800 would yield a gross margin of $48, assuming the vendor buys the drug at ASP and CMS reimburses at ASP plus six percent. Although those cheaper drugs make up more than 80 percent of the product units in the CAP market basket, their aggregate cost comes to just 53 percent of the dollar value in the basket. Only about a third of the CAP drugs are single-source branded products, but they represent the lion's share on a dollar basis.

The $48 gross margin on an $800 order roughly covers the vendor's cost to pick, pack, and ship a product (including standard second-day delivery). In other words, $48 approximates the CAP vendors' breakeven point before considering CMS denials, payment reductions based on Least Costly Alternative (LCA) policies, vendors' unused drugs in physicians' office inventory, collection delays, or co-pay-related bad debt. Depending on the size of the CAP vendor and the shipping zone of the parcel, freight charges and next-day-delivery costs could reduce profit margins even more.

Now, take into account that CAP vendors must pay for emergency deliveries and other urgent shipments without additional compensation from CMS. The IFR states that in an emergency, the CAP vendor must supply the prescribed CAP drug by 5 p.m. provider local time the following day, if it receives an order by 3 p.m. vendor local time.

Ordinarily, a large national vendor could approach its suppliers and demand discounts. This does not look like an option for CAP vendors for two reasons. First, if a pharmaceutical manufacturer reduces a price for a CAP vendor, the company must report the price reduction to CMS, which in turn will factor the reduction into subsequent ASP calculations. This erodes pharma's incentive for granting discounts, since any discount will contribute to a lower ASP. The more pharma discounts drugs, the further ASP drops.

Smaller doctor groups that don't elect CAP will get hurt if they are reimbursed ASP plus six percent, since they probably need to pay more than ASP to acquire the drug. ASP is an average price, after all, so some physicians will pay more than the average. CMS has yet to address this issue. Second, CMS recalibrates the vendor's reimbursement each year to maintain a weighted six-percent margin. So any price reductions CAP vendors achieve this year will benefit CMS—not the vendors—next year. CMS changes reimbursement levels for vendors each year based on the average price charged by pharma the year before.

CMS has stated that CAP vendors may not implement a formulary. Thus, CAP vendors may not limit coverage to preferred drugs, and may not implement enforcement tools, such as prior authorization or step-therapy protocols, which often encourage doctors to prescribe the least expensive option first. From a CAP physician's point of view, this means that the vendor will supply CAP drugs as prescribed. However, from a manufacturer's point of view, this is one more reason not to discount a drug. If vendors have no formulary to encourage prescribing one medication over another, they also have no leverage to change doctors' prescribing and to move market share from one drug to another. So manufacturers have no reason to make their products more financially attractive than their competitors'.

Vendors may also take a loss if a drug is only available through manufacturer-designated distribution channels. For example, Xolair (omalizumab) is currently only available through Genentech's Specialty Pharmacy Network, which consists of five specialty pharmacies—Caremark, Curascript, NovaFactor, OptionCare, and Priority Healthcare. CAP vendors are obligated by their CMS contract to supply all CAP drugs, but manufacturer-authorized distributors have no incentive to adjust their prices to accommodate CAP's ASP pricing or the vendors' six-percent gross margins. As the only source of these products, such specialty pharmacies can afford to drive hard bargains—further driving down vendors' profits.

Seeds of Conflict

Some of the CAP rules seem destined to create friction between vendors, doctors, and the government. Drugs that are supplied to doctors but not administered cannot be billed. They may stay in the doctor's medicine closet, but they remain the property of the vendor. At best, this results in logistics problems both for CAP vendors and CAP physicians. Doctors have little incentive to use the drug immediately, and they may worry about a drug diversion violation if they administer it to a patient for whom it was not ordered. Meanwhile, the CAP vendor sustains minor losses due to delay in payment, or potentially larger ones from misplaced inventory or spoilage. And then come the vendors' headaches associated with tracking, repurposing, returning, or disposing of CAP drugs that are wasted or unused.

What ultimately happens with waste and unused drug is unclear. In a CMS response in a vendor Q&A, the agency offered hope for relief: "We expect that vendors will be able to bill the program for unused drugs under the CAP program in a similar fashion if physicians and vendors act in good faith with respect to the ordering and use of drugs." However, it is not clear how this will translate into the final CAP regulations, nor how good-faith consideration conforms to state and federal drug diversion laws, particularly if a physician administers a prescription product labeled for one patient to another. But this system of dealing with waste, returns, and unused drug creates a rich environment for potential fraud, abuse, and kickback arrangements.

If the vendor is publicly traded, the ownership of unused drugs could threaten its compliance with Sarbanes-Oxley. The vendor owns the drug, but doesn't know whether to post it as revenue. This situation could easily lead to manipulation by management (much the way channel-stuffing has in the past).

No Compensation for Clerical Burden

CAP is supposed to make life easier for physicians. They no longer have to finance a Medicare buy-and-bill operation, but they must still order, handle, and bill for drugs—a time-consuming and uncompensated job. Physicians who choose CAP have significant clerical responsibilities. They must submit a written prescription order to the CAP vendor for every drug ordered for each patient, including complete patient information as specified by CMS. Within 14 days after administering the drug, doctors must submit a bill for the drug to a regional administrator hired by CMS. If the drug is not administered as ordered, they must notify the CAP vendor. Each physician must maintain a separate electronic or paper inventory of CAP drugs, and participate in the payment appeals process.

Healthcare professionals expect the clerical burden to be high, but CMS does not. In the IFR, the agency writes: "[We do] not believe that the clerical and inventory resources associated with participation in the CAP exceed the clerical and inventory resources associated with buying and billing drugs under the ASP system...[W]e proposed not to make a separate payment to physicians for the clerical and inventory resources associated with participation in the CAP program."

Co-pay Collection Nightmares

Submitting CAP claims is hard work. Adjudicating disputes is worse. And even before things go wrong, there are plenty of reasons for everyone involved in a CAP transaction to worry.

The CAP vendor, for example, may not bill the patient co-pay until CMS has paid its share of the drug claim, and in the event of a denial, the CAP vendor may not bill the co-pay at all.

Physicians are nervous about co-pay collection under CAP. Their patients will receive a bill for the co-payment from the CAP vendor, a company they do not know. Physicians also worry that CAP vendors may not offer payment terms, and that they are unlikely to forgive a co-pay for patients who have trouble paying. (This was a common practice among physicians, at least in buy-and-bill practices under AWP, when margins were frequently high.) That said, even physicians remaining under buy-and-bill can't easily forgive co-pays for Medicare patients, because they have the same six-percent gross margin, while co-pays reach 20 percent.

CAP vendors may indeed refuse to supply drugs to a patient with outstanding co-pays. The IFR allows vendors to refuse to supply a drug to a CAP physician on behalf of a patient, if a patient invoice goes unpaid. After 45—or in some instances 60—days, the CAP vendor may stop shipments for the patient. However, the bad debt may not be added to CAP vendors' pricing offer to CMS.

A physician office working under buy-and-bill may offer extended payment terms to patients who have trouble making co-payments, even if it does not forgive them. But it is likely that CAP vendors, who rely entirely on drug income, will take a harder line. Doctors are understandably worried that CAP bill collectors may disturb their relationships with patients. But CAP vendors have strong motives to collect, whether or not the doctors like it. A CAP vendor that cannot collect a copay may not break even on the transaction.

Dispute Resolution: Worse Than Conflict

Conflict with a doctor is bad for the vendor, since doctors may choose another vendor every year. But dispute resolution may be worse. If a vendor loses a dispute with the doctor, the doctor is likely to choose another vendor. If the vendor "wins," the doctor may be censured or suspended from CAP. So in all likelihood, the customer is lost either way. Any dispute resolution is likely to take a long time. A CAP vendor's first step in dispute resolution is to ask the regional CMS administrator to counsel the responsible CAP physician. If the problem is not resolved, the administrator will investigate and make a recommendation to CMS. CMS will then review the recommendation, investigate further, and may ultimately suspend the physician from CAP for up to 15 months.

In either case, doctors and vendors are at one another's throats. And patients are caught in the middle. The supply of drugs that may keep them alive is threatened. And CMS, which is in the business of providing benefits for the nation's seniors, is instead enlisted to adjudicate claims.

What could push the system this far? Perhaps the market forces that were enlisted to save it. In a system of competitive pricing and tight margin control, the market may not move business forward smoothly. When things go wrong, all parties who could solve a dispute may dig in to preserve their own economic self-interest. The market, intended to streamline and stabilize the delivery of Part B drugs, may instead be the force that brings the giant Rube Goldberg machine to a standstill. CAP would be wonderful if it worked, but like any system of complex interlocking mechanisms, it may prove easier to knock it off kilter than to keep it running smoothly.

Are CAP Vendors Distributors or Pharmacies?

Should CAP vendors be licensed as pharmacies, with the incumbent restrictions on labeling, handling, and reusability of prescribed drugs? Or should they be licensed as distributors, with fewer regulations and greater flexibility in shipping, receiving, and reallocating orders?

Distributors and pharmacies have very different professional responsibilities when it comes to handling drugs. If CAP vendors' activities involve receiving and dispensing prescriptions, these fall under different regulations that govern everything from labeling and handling to the pharmacist's responsibility to actively participate in patient care, as well as their legal liability for dispensed products.

What will work best for the CAP program as a whole? A dispensed prescription cannot be returned to pharmacy stock and dispensed to another patient. But an unused, intact prescription drug supplied to a physician office may be taken back and reissued to another buyer, if it has not yet expired.

Some CAP-vendor drugs are highly toxic agents that, in many cases, must be supplied in quantities greater than will be administered, due to a requirement in the interim final rule (IFR) that only unopened product be supplied to physicians. If the vendors are pharmacists, they and their employers may be party to cases of accidental drug overdose, and thus face significant professional liability.

CMS has not resolved these questions: "We believe that vendors must operate as distributors in order to participate in the CAP," the agency states in the IFR. "And we recognize that a natural outgrowth of participating in this program may be that those distributors also will need to be licensed as a pharmacy." This statement shows a fundamental misunderstanding in that a distributor cannot act as a pharmacy.

The Long and Winding Claim

It is a long road from drug delivery to payment.

• The CAP vendor submits a claim to its regional CMS administrator, often called a local carrier, with the prescription number assigned to that shipment. The carrier will pass the claim to CMS' central claims-processing system.

• The CAP physician files a claim for the drug and for the physician's professional service with the local carrier, using the prescription number provided by the CAP vendor. This must happen within 14 days after the doctor administers the drug to the patient.

• The physician's local carrier will review the CAP physician claim for correctness, and check it against coverage and payment policies.

• The local carrier will pass the claim to CMS' central claims processing system, with a notation that it did or did not pass all local-carrier policies.

• Using the prescription number, CMS will check the local carrier claim and then approve or deny payment.

• The CAP vendor may not bill the patient for the co-pay until CMS has paid its share of the drug claim. If CMS approves a lesser amount than claimed, the vendor may bill only a proportionately lesser co-pay than it otherwise would have. In the event of a denial, the vendor may not bill the co-pay at all. Vendor bad debt may not be added to the CAP vendor's pricing offer to CMS.

Elan Rubinstein (ebra@pacbell.net) is partner of EB Rubinstein Associates, and David Galardi (davidg@ponionline.com) is senior vice president of marketing and development for Physicians Oncology Network.