Thursday, October 21, 2010

UnitedHealthcare: Cost-Plus for Cancer Drugs

UnitedHealthcare Employer & Individual, a UnitedHealth Group (NYSE:UNH) company, announced a new pilot program that will reimburse physicians on a cost-plus basis for chemotherapy drugs. Here’s the official press release: New Cancer Care Payment Model by UnitedHealthcare Employer & Individual to Focus on Best Treatment Practices and Better Health Outcomes.

This pilot program shows a prominent payer experimenting with pharmaceutical reimbursement in the non-retail drug channel. While not as novel as the media coverage would have you believe, it's another signal of change for payers, physicians, manufacturers, and wholesalers. Some observations:

  • The cost-plus revolution is accelerating. This announcement should be no surprise if you’ve been following recent developments in retail drug reimbursement. My comments in Industry Impacts of Cost-Plus Reimbursement apply equally well to the physician model. Payers are unbundling drug price and professional fees because existing reimbursement models can provide inappropriately high profits on drugs and create inappropriate financial incentives. UnitedHealth claims that drug mark-ups account for 65% of an oncologist's income. Their vice president of oncology referred to physicians as "drug dealers” (huh?) in yesterday’s Wall Street Journal. Hmmm, time for some media training?
  • A computed average price benchmark has many uses. Despite media hype, this model is not really new for office-administered drugs because it relies on a familiar benchmark. The press release states that “chemotherapy drugs will be reimbursed at the manufacturer’s cost.” UnitedHealthcare confirmed to me that “cost” will be Average Sales Price (ASP), which is the basis for reimbursement for Medicare Part B drugs and already used by many commercial payers. ASP data are freely available on a public Center for Medicaid and Medicare Services (CMS) webpage: More on ASP below.
  • Will this model affect generic substitution and drug wholesalers? The two-quarter data lag baked into the Part B ASP model allows very high physician profits early in the generic life cycle, thereby creating powerful incentives for rapid generic substitution. (See Generic Drug Profits: Too High or Appropriate Incentive?) Could UnitedHealthcare’s plan inadvertently reduce substitution speed for soon-to-launch generic oncology drugs such as Gemzar and Taxotere? AmerisourceBergen (NYSE:ABC) and McKesson (MYSE:MCK) get a huge financial benefit from generic oncology drugs, so any reduction in substitution rates due to new payment models will be negative for the drug wholesalers, too.

The New York Times published United Healthcare’s Cancer Care Payment Program Pilot Key Facts. Here’s a key paragraph describing the program:
UnitedHealthcare calculates the cancer care payment based on the amount of money the oncology group would make on chemotherapy drug profits, using the difference between the group’s current fee schedule and the drugs’ costs. A case‐management fee is also added to reflect the time and resources that the oncologist’s office spends in managing the patient relationship. As part of the pilot, office visits, chemotherapy administration and other ancillary services like laboratory tests are paid based on fee‐for‐service rates. The oncologist will be paid the same fee regardless of the drugs administered to the patient ‐‐ in effect, separating the oncologist’s income from drug sales while preserving the ability to maintain a regular visit schedule with the patient. Patient visits will continue to be reimbursed and chemotherapy drugs will be reimbursed at the manufacturer’s cost.
So as I understand the pilot, the physician’s compensation will shift from earning a majority of compensation via a mark-up on pharmaceuticals to earning primarily professional fees. During the pilot, physician’s will apparently be “made whole,” but I presume that professional fees could be ratcheted down over time once the program is rolled out more broadly.

This description unambiguously shows UnitedHealthcare's intent to unbundle drug prices (revenues to the manufacturer) from the costs of the distribution and dispensing (revenues to pharmacies, wholesalers, PBMs, and providers).


Note that UnitedHealthcare will rely on the government-computed ASP benchmark to compute cost.

For those who don’t know, ASP equals the volume-weighted per-unit average of manufacturer sales prices for each product that falls within a single Medicare HCPCS billing code. ASP is computed using actual sales revenues to a manufacturer, i.e., list price minus all price concessions (volume discounts, prompt pay discounts, cash discounts, free goods, chargebacks, rebates, etc.). Thus, ASP is not a list price like Wholesale Acquisition Cost (WAC) or Average Wholesale Price (AWP).

Sound familiar? Average Manufacturer Price (AMP) is an average sales price for the subset of products distributed to one category of providers (“retail community pharmacy”).

In 2005, Medicare Part B switched to an ASP-based reimbursement method for physician-administered injectable drugs as well as some self-administered drugs such as oral anticancer drugs and immunosuppressive drugs. As the chart below shows, this switch slowed the growth of Medicare Part B drug spending by reducing the healthcare provider’s profits from dispensing these drugs rather than reducing the costs of the drugs themselves. (The dip in 2008 is partly due to declining sales of anemia-related drugs.)

One major research study found that ASP-based reimbursement lowered physician payments—and probably income—for certain specialties, but did not significantly affect the site of drug administration for patients. See ASP Lessons for Pharmacy’s AMP Future.

Many commercial payers are already adopting the ASP benchmark. According to the most recent EMD Serono Specialty Digest, 36% of commercial payers reimburse oncologists using an ASP-based rate. The average rate is ASP + 9% (range: +5% to +21%), whereas the UnitedHealthcare pilot implies ASP + 0%.

I presume UnitedHealthcare expects a similar slowdown in drug costs. I'll be very interested to see the results of this pilot.


If you are interested in new commercial models for specialty drugs, be sure to check out November's Specialty Pharma Commercial Excellence conference, a Drug Channels sponsor.


  1. Actually, prompt pay discounts are NOT excluded when a manufacturer calculates the ASP. (They are excluded in AMP.)

  2. Correct. They are deducted from list price. I clarified teh text to avoid any misunderstanding. The AMP treatment of prompt payment was included in PPACA.


  3. Any updates on AMP. Oct 1 came and went. Does CMS expect that manufacturers are reporting AMP according to PPACA? Do you expect them to suddenly post wted average AMP and Medicaid's to implement the new FUL calc?


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