Tuesday, December 03, 2013

Attention, Hospital Shoppers: Cancer Markup Madness

Ever wonder why cancer care costs so much more in a hospital than in a doctor’s office? A Milliman, Inc., study—Comparing Episode of Cancer Care Costs in Different Settings: An Actuarial Analysis of Patients Receiving Chemotherapy—has an answer. (Free download).

The report compared cancer treatment costs in outpatient hospital departments vs. outpatient physician offices. As we highlight below, hospitals inflate drug expenses far beyond acquisition costs.
  • For treatment in a physician office, total drug costs range from $12,000 to $62,000. 
  • For treatment in a hospital outpatient setting, total drug costs range from $18,000 to $91,000. 
  • The markups are especially egregious for such higher-cost specialty drug therapies as cytotoxic chemotherapies and biologics.
Once again, we see that hospitals can generate more revenue from specialty drug administration than can independent physician-owned clinics. Drug channel intermediaries can add to drug prices, with different markups for different channels.

Read on to see how shopping for cancer drugs in a hospital setting can bag you a very bum deal.


Milliman looked at patients who have any of the 3 major cancers that account for 54% of all cancer-patient chemotherapy: non-small-cell lung cancer, colorectal cancer, and breast cancer. Subjects were identified through Truven MarketScan’s 2009 and 2010 commercial claims data. The patients were aged 18 to 64 with 2 or more infused chemotherapy claims at either a hospital site or a physician-office site (not both). The researchers classified costs for these patients depending on the progression of their disease (adjuvant or metastatic).

The researchers calculated average allowed costs paid by the health plan and through patient cost-sharing. They then categorized each claim into 9 categories: inpatient, targeted biologic chemotherapy, non-biologic chemotherapy, hematopoietic drug, radiology (MRI, CT, PET scans), radiation oncology, lab, Rx, and other. For our total drug cost computation, we summed up the Milliman-reported data for the drug-related categories.


As Table 5 of the Milliman study (below) shows, the drug cost for chemotherapy injection in a hospital setting is at least twice that of the same drug when administered in a physician’s office.

[Click to enlarge]

The largest discrepancy involved cetuximab, which treats metastatic colorectal cancer. When administered in the hospital setting, it is approximately $4,000 more expensive. The drug pemetrexed, which treats non-small-cell lung cancer, is also about twice as expensive in a hospital outpatient setting. As Milliman dryly notes, the cost difference between the hospital and physician settings was driven by “differences in unit cost for chemotherapy products,” not utilization.

How can this be? Unfortunately, the difference is usually not caused by acquisition cost. Dr. Fein’s post How Hospitals Inflate Specialty Drug Prices explains how payers reimburse hospitals based on a negotiated percentage of charges. As Dr. Fein puts it: “[B]asically a hospital marks up a drug to create a stratospheric ‘charge,’ and then discounts the charge to merely outrageous.

In other words, the cost difference is driven by the channel, or the site of care where the drugs are delivered.

To highlight how site of service affects total cancer care drug costs, we made our own chart (below) from Milliman's report data. We summed up all drug-related costs incurred by the payer and patient. As you can see, the differences in unit costs add up quickly for all sessions in an episode of care.

[Click to enlarge]

The differences among the total drug costs are much larger than the differences between unit drug costs. For example:
  • For patients with metastatic colorectal cancer, the cost of care is $30,000 more expensive in a hospital outpatient setting vs. a physician office.
  • For metastatic patients with non-small-cell carcinoma, hospital care costs nearly $20,000 more. 
Surprisingly, patients haven’t yet felt the sting of higher prices. The Milliman report indicates that the average cost-sharing amount for patients in the hospital setting was only approximately $120 more than in the provider’s office.


For the payer, these differences could potentially shift their books of business in the wrong direction. Cancer care costs more at hospitals than in physician offices, due in large part to specialty drug markups.

Ironically, reimbursement changes have significantly hurt physician office providers’ drug administration profits, which has partially been responsible for shifting care to hospital settings. (See page 91 in the 2013-14 Economic Report of Pharmaceutical Wholesalers and Specialty Distributors or review The Economics of Provider-Administered Drugs e-learning module).

The Milliman data also help explain why more payers are interested in white bagging. See Payers Want Specialty Drug Distribution for details.

So come on down! Be the next contestant to try to guess the right price. Isn’t it exciting?