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How to Rein in Medicare's Runaway Costs

Among the surprises nestled in the recent release of Medicare payment data was this head-scratcher: Of the 50 physicians who got the most Medicare money in 2012, almost half were ophthalmologists. Part of the reason for that may be questionable billings. But it also results from Medicare doctors’ perverse incentive to choose more expensive drugs than necessary.

Here’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.

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. 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.

President Obama’s latest budget request proposed lowering the administrative fee to 3 percent from 6 percent. This would save Medicare an estimated $7 billion over 10 years. Another approach would be to impose a dollar cap on doctors’ administrative fees—or, alternatively, give them a larger one if they choose less expensive generic drugs. Beneficiaries could be charged lower co-payments when they use generics. Sensible options all.

To read Mohamed El-Erian on investing and Albert R. Hunt on good news and bad news for Democrats, go to:

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