Pharmaceutical "charge compression" under the Medicare outpatient prospective payment system

Analysis of the actual acquisition costs of a sample of pharmaceuticals demonstrates that payment rates for pharmaceutical therapies under the Medicare hospital outpatient prospective payment system (OPPS) are systematically biased against fully reimbursing high cost pharmaceutical therapies. Under the Centers for Medicare and Medicaid Services' (CMS') methodology, which assumes a constant markup, a bias in the cost estimate occurs when hospitals apply below average markups in establishing their charges for pharmaceutical products with above average costs. We developed a model of the relationship between product costs and charge markups. The logarithmic model shows that an increase in the acquisition cost per episode can be expected to lead to a reduction in the charge markup multiple. When markups for pharmaceuticals decline as acquisition cost increases, a rate-setting methodology that assumes a constant markup results in reimbursement for higher cost products that can be far below acquisition cost. The incentives in the payment system could affect site of care choices and beneficiary access.