Why We Spend So Much on Drugs

The editors at Bloomberg explain:

prescription-bottleHere’s how the system works: When a doctor administers a drug in his or her office, Medicare pays 106 percent of its average selling price. The doctor keeps the extra as compensation for administering the injection.

What has this got to do with eye doctors? The drug Lucentis, used to treat macular degeneration, cost Medicare almost $2,000 a shot in 2012. Another drug, Avastin, which works just as well, costs about $50. If you were the doctor, faced with a system that pays you 6 percent of the drug’s cost, which would you choose? That Medicare spent a total of about $1 billion on Lucentis in 2012 suggests most ophthalmologists went with the more expensive one.

It gets worse:

This problem goes beyond a single drug. Of the $20 billion Medicare spent on drugs administered by doctors in 2010, 85 percent went to the 55 most expensive ones. In what seems unlikely to be a coincidence, 42 of those drugs also showed an increase in use from 2008 to 2010.

What’s more surprising is the Obama administration’s “solution”:

The Centers for Medicare & Medicaid Services, the agency that runs Medicare, says it’s required to pay for treatment that a doctor deems medically necessary, and it lacks the authority to direct treatment based on cost. All Medicare can do to control costs is tell doctors the price of what they’re prescribing, as well as the alternatives. Which is to say, almost nothing.

To remedy that, President Barack Obama’s latest budget request proposed lowering the administrative fee to 3 percent from 6 percent.

Aaron Carroll explains that under the current system an ophthalmologist gets $3 or $120, depending on which drug he proscribes. The Obama administration “would change the math on this to $1.50 for Avastin and $60 for Lucentis. Think this will fix it?,” he asks.

Comments (15)

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  1. Thomas says:

    “That Medicare spent a total of about $1 billion on Lucentis in 2012 suggests most ophthalmologists went with the more expensive one.”

    Most doctors are going to go with their own self interests first, rather than the patient cost. This is why ophthalmologists make so much money off of Medicare.

    • Matthew says:

      This goes back to the blog post from a few days ago. Its most profitable to be a ophthalmologist in Kansas.

  2. Elisa K says:

    We criticize that one of the problems with the current law is that it doesn’t give choice to the people. Yet, it is being criticized that doctors are choosing to administer the most expensive drug. As an ignorant patient, when offered the option I would choose the more expensive drug (regardless of what studies say, there is the perception that because one drug is more expensive it is inherently better). Especially considering that patient will have to pay only a small portion to receive treatment.
    I don’t understand, it is problematic to have a law that limits choice, but is problematic as well to allow doctors choose. What do you suggest then?

    • Andrew says:

      You have to admit though that more expensive doesn’t necessarily mean a higher quality or better drug. Same issue with generics vs. brand name drugs.

      • Elisa K says:

        It doesn’t, but it is all about perception. If you were presented with the choice of buying a pair of Nike running shoes for $200 or a pair of Kine running shoes which are essentially the same but cost only $50, you would probably buy the Nike shoes because of the brand. This is the same that happens with the Lucentis vs Avastin. You choose the one that is marketed better and that comes from a better pharmaceutical.

  3. Paco H says:

    I will defend the doctors. If they have to receive patients with Medicare, thus receiving less money for their practice, they deserve to get a higher compensation for their practice. I don’t condemn them for asking more in return.

    • James M. says:

      Someone has to defend them. Doctors really do get the short end of the stick on most of these issues.

      • Walter Q. says:

        They get punished for acting in their own self interests while the government enacts these screwed up policies that incentivize them to be self-serving.

    • Diego T says:

      Correct, doctors are not doing anything wrong. They are just prescribing a drug that they consider is better than its generic counterpart and there is nothing wrong with that.

  4. Martin L. says:

    Obama’s solution is no solution at all, but the problem is hard to resolve by itself.

  5. Dave L. says:

    “Aaron Carroll explains that under the current system an ophthalmologist gets $3 or $120, depending on which drug he proscribes”

    For people who argue that docs are getting too greedy, if you had a clinic your running and had to keep open, would you take $120 or $3? Prescribing the brand name medication makes complete business sense for the doctor.

  6. Linda Gorman says:

    These are not exactly the same. This is an off-label use for Avastin, which means that it has to be repackaged. Hopefully in a sterile environment unlike those cases in Florida. It also has a different side effect profile.

    The solution is for Medicare to switch to premium support rather than trying to set thousands upon thousands of prices and getting them all wrong.

  7. rex says:

    Program is Medicare Part B. Medicare Part D, prices are set in a managed care environment. Another problem with medicare part b pricing is that prices are set twice a year. If demand increases or supply decrease, it can take up to six months for prices to adjust, leading to shortages.

  8. dennis says:

    While stories such as this are concerning in terms of the dollars spent, I am always amused by the outrage that follows. No one would be surprised if this involved lawyers, or politicians or nearly any other group. Physicians are human. Basic economics: if you want more of something subsidize it.