Paying for Drug Administration - Medicare's crumbs make a gigantic cake

“Just imagine that a bond is a slice of cake, and you didn’t bake the cake, but every time you had somebody a slice of the cake a tiny little bit comes off, like a little crumb, and you can keep that. […] If you pass around enough slices of cake, then pretty soon you have enough crumbs to make a gigantic cake.

That was a description of Sherman McCoys’ job, bond trading, and how the little crumbs he made on each trade soon amounted to a gigantic cake. In our tale, the little crumb is 6%. Physicians provide drug infusions to patients, antibiotics, chemotherapy and other medications not taken orally. Medicare pays doctors 106% of the average cost of the drug; the 6% to cover administering the drug, you know the necessary equipment, placing an intravenous line, etc. Fair enough, but did you spot the crumb? The crumb lies in the phrase 106% of the average cost of the drug. Even though administering a drug is a relatively fixed cost, more expensive drugs give you higher and higher administrative costs – they are more profitable.

Solomon Melgen recognized the crumb. If his name sounds familiar, it's because he was Medicare’s "star performer" in 2012, receiving $21 million in payments. Melgen treated patients who had a serious eye condition called wet macular degeneration (WMD) with an injectable drug called Lucentis. But, Lucentis is far more expensive than Avastin, its therapeutic equal. So instead of collecting about $26 in administration costs for Avastin, he received about $96 by using Lucentis instead. And he did that more than 21,000 times in 2013, during which time he earned approximately $1.4 million from this substitution alone.

See how the crumbs grow into a gigantic cake? Before leaving Dr. Melgen here is one other fact, that may help to explain his indictment for fraud. Let’s say it takes 10 minutes per patient to provide this care. When multiplied by the 21,000 injections he gave and billed for, that comes to more than 70 hours a week for a 50 week year.  And we haven’t even considered the time involved in seeing patients or doing eye surgery. Dr. Melgen is “the hardest working man” in Medicine (apologies to James Brown). [1]

Dr. Melgen is not alone in finding the crumb; Lucentis is used for more than 140,000 patients. But for Dr. Melgen’s economics to work, he requires enablers. They are not hard to find. The first enabler is Medicare itself, which pegs a fixed cost of administering a drug to a variable cost item – drug prices. The cost of administering a drug is essentially the same for every drug; the cost is fixed. Drug prices, on the other hand, can vary quite a bit, what with discounts and coupons. But Medicare is explicitly not permitted to negotiate drug prices, it must use the average sale price (this is why drug companies keep prices as high as possible). As a result, there is profit to be made by administering more expensive drugs; you get greater payment for administering a drug even though the cost is unchanged. In 2014 this drug cost us slightly more than $1.2 billion. So one way to stop the hemorrhage of our money is to change the payment method. 

The second enabler is the drug manufacturer, Genentech which interestingly enough produces both Lucentis and Avastin. Lucentis is a breakthrough drug for WMD. But, Avastin, originally a drug for treating colon cancer, was also found to work and is now used off-label (2). Even though we know it is both safe and efficacious, Genentech cannot, by law, promote its off-label use. To get approval for Avastin to be labeled for WMD would involve costly clinical trials, which would only further erode the sales of its more profitable Lucentis. Lucentis does have a coupon program for patients with one exception – “Patients are not eligible if you have government insurance such as Medigap, Medicare, Medicaid, Veterans Affairs (VA), Department of Defense (DoD), and TRICARE.” 

The recipe for a Lucentis Cake (treats 72 patients)

Lucentis*        $1,760,000

6% crumbs*    $100,000

Sherman McCoy was right collecting crumbs creates a gigantic cake.

*No costs or harm were incurred by the government, insurers, or healthcare providers in making this cake.

[1] He also did 15,000 examinations I would assume while giving the 21,000 injections otherwise he would be working up to 140 hours a week.

[2] Off-label use is the practice of using an FDA-approved drug for an indication for which it was not approved. Off-label use is legal and commonly done. It is illegal for drug companies to promote off-label uses for their drugs.