Viewpoint: Can CAP program survive?

January 9, 2006

The new competitive acquisition program (CAP) for Medicare Part Bdrugs aims to realign the market forces shaping the distribution ofdrugs and biologics that doctors administer in their offices. Butif it is to survive, CAP must balance market conditions affectingphysicians, vendors, and manufacturers. We believe it does not doso per the implementing regulations published in the Nov. 21Federal Register.

The new competitive acquisition program (CAP) for Medicare Part B drugs aims to realign the market forces shaping the distribution of drugs and biologics that doctors administer in their offices. But if it is to survive, CAP must balance market conditions affecting physicians, vendors, and manufacturers. We believe it does not do so per the implementing regulations published in the Nov. 21 Federal Register.

CAP vendors will receive a national contract to distribute Medicare Part B drugs and become the exclusive distributors for three years to participating physicians. Since there are significant experiential and financial criteria involved in becoming a CAP vendor, many independent pharmacies will not qualify to participate. It is expected that only cash-rich publicly traded organizations will be eligible and will participate.

Even though CMS has revised its rules relating to CAP, many vendors are not happy. National contracts may not be enough to compensate them for financing and running the program. The maximum of 6% margin required by CMS is too tight to generate a reasonable profit, as the average sales price (ASP) of a drug includes the prompt-pay discount offered to wholesalers by manufacturers, effectively reducing the starting reimbursement to a 4% gross margin. Unlike prescription drug plan (PDP) vendors for Part D, CAP vendors will have little negotiating leverage with drugmakers. And inventory rules, which leave them owning unused drugs in physician supply closets, unnecessarily increase their cost of goods and expose them to accounting compliance risk.

It's important to understand vendors' complaints and to see where the system falls short. The problems lie with the structure of the new system, which discourages, rather than supports, the participation of manufacturers, distributors, and physicians. The new system is meant to create cooperation, but it actually pits vendors against the government and will almost certainly pull doctors and drug manufacturers into the fray.

What, exactly, is CAP?

The Medicare Modernization Act (MMA) changes how CMS pays for Part B drugs and biologics, which are typically nonemergency therapies that doctors administer in their offices. Under the old system, doctors typically purchased these drugs from manufacturers or distributors and were reimbursed at a percentage of the average wholesale price.

Since Jan. 1, 2005, CMS has paid for Part B drugs administered in the office setting under the ASP formula, which is calculated using the actual sales prices reported by pharmaceutical companies, instead of AWP, which was essentially a manufacturers' sticker price that could be easily discounted. Under this formula, CMS pays physicians 106% of ASP, regardless of their actual drug acquisition cost. This new rule significantly reduces the amount of money CMS pays for Part B drugs administered in the office setting. Unfortunately, the new payment schedule does not address quality standards and merely seeks to find the lowest reasonable acquisition price of drug products.

In order to offer physicians an alternative, CMS came up with the CAP program.