'Episode-Based Payment' Could Rein in US Oncology Drug Costs

Oncology & Biotech NewsApril 2012
Volume 6
Issue 4

With the recent consideration of the 2010 Affordable Care Act by the US Supreme Court, the rising costs of healthcare have appeared, once again, on our radar screens.

Peter B. Bach, MD, MAPP

With the recent consideration of the 2010 Affordable Care Act by the US Supreme Court, the rising costs of healthcare have appeared, once again, on our radar screens.

Under the Act, proposed methods for decreasing US healthcare spending include reducing the unnecessary use of services. But a leading health policy expert says that approach would not significantly lower healthcare costs because the problem is the high cost of each service, rather than the number of services provided.

The expert, Peter B. Bach, MD, MAPP, is a pulmonologist who serves as director of the Center for Health Policy and Outcomes at Memorial Sloan-Kettering Medical Center in New York City. He was the keynote speaker at the 2011 Cancer Center Business Summit held in Chicago, Illinois, which focused on achieving accountability in cancer care.

“Many of the [Affordable Care Act] reforms focus on getting people to use services less often; the idea is that we are overusing MRIs and doing a lot of unnecessary back surgeries. All of these have to do with overutilization,” Bach told Oncology & Biotech News.

“I argue that the primary issue in the United States is that we spend too much for each unit of healthcare compared with other developed countries,” Bach said. “The quantity of healthcare services we use as a benchmark is not meaningfully higher than it is in other countries that spend less. Rather, the cost of each service provided is lower in those countries than the cost of a comparable service here.”

One way to help alleviate that problem, Bach suggested, would be to control the amount spent on drugs by giving oncologists incentives to choose the cheapest effective medications for their patients. Under a plan proposed by Bach and two colleagues, doctors would rely on widely accepted treatment standards, and Medicare would offer flat fees for all care given to a cancer patient during a particular “episode,” or one- to several-month time period. Bach and the colleagues have suggested that the idea, similar to the bundled payment approach recommended under the Affordable Care Act, be tested as a Medicare pilot program.1

According to Bach, people in the United States pay more for healthcare across the board. In 2007, per-capita spending on healthcare in the United States was $7290, and Norway was the next largest spender at $4763, noted Bach, citing data reported by the Organisation for Economic Co-operation and Development.2 Yet that information shows that this spending does not relate to an increase in life expectancy, Bach said, because the United States ranks 50th for life expectancy at birth.

Moreover, while the United States has decreased the amount of time its residents spend in hospitals, the average hospital cost per day is almost twice that in other countries.

At 675 hospital days per year per 1000 people, Americans spent fewer days in the hospital than those in nearly any other developed country, said Bach, citing facts collected by the McKinsey Global Institute.3 Only residents of Denmark (595), Canada (639), and Portugal (639) spent fewer days in the hospital, he said. Nevertheless, in terms of cost, Bach said, the United States is clearly the leader at $2271 per day in the hospital. The next highest level of spending is by Germany at $1639 per day and Iceland at $1569 per day, he said.

Nowhere is the inequity in healthcare costs more apparent than in the area of medications. Further data from the McKinsey Global Institute showed that drug prices in the United States are 50% to 60% higher than those for comparable products in other countries.3

“Drug costs have nothing to do with people in the United States taking more pills,” Bach said. “Same drug, same packaging, the drug is 50% more costly in the United States than in the rest of the developed world. And, we still use branded drugs a lot more often than cheaper generic substitutes. The net effect is that, pill to pill within class or indication, the cost is doubled.”

Bach said that the cost of drugs is a vitally important factor in oncology because it constitutes about 75% of the total cost of cancer care.

It doesn’t help, he said, that the current reimbursement system rewards oncologists for prescribing higher-priced drugs. The payment model, which requires oncologists to buy medications and then sell them to patients, was instituted more than 20 years ago to induce the treatment of cancer patients in community practices, rather than in hospitals, which saved money.

“The system has made the doctor a drug dealer,” Bach said. “He or she buys from one source and sells the drugs to another source, and that results in a profit.”

But as drug prices have risen and reimbursement rates have dropped, that system has become outdated, said Bach. In fact, in 2003, Medicare tried to remove physicians from the process of buying and selling medications by instituting its nowdefunct Competitive Acquisition Program (CAP).

“If a patient needed chemotherapy, the doctor would call or fax an order to an intermediary, who would ship the drugs by overnight delivery to the doctor to give to the patient,” Bach said. “In this system, the intermediary became the drug dealer. He bought the drug and billed Medicare.”

Bach said that the CAP system likely failed for several reasons. He described the system as logistically awkward and explained that, at the time, many oncologists felt they were better off staying in the buy-and-bill system. Part of the problem, he said, was that oncologists were allowed to order drugs through the program only when needed for specific patients, rather than the more typical model of keeping some medications on hand for any patient who might need them.

The need to stockpile cancer medicines is causing financial difficulties for oncology practices under the existing system, too, Bach said.

“The rise in drug prices actually causes trouble because there is a rise in inventory costs,” he said. “Oncologists need $500,000 worth of inventory, and they have to pay that up front. All of a sudden, they are in a business like Best Buy. As a practical matter, they have to finance that inventory and carry that liability because they can’t just order things as needed.”

Many people think the buy-and-bill system steers therapy choices, promotes overuse of products, and offers a disincentive to discussing cheaper alternatives with patients, Bach said.

“There are quite a few people who say, ‘Let’s get the doctor out of the business of buying and selling drugs.’ The problem with that idea is that they have not figured out the rest of the financing for oncology care well enough to make it viable,” Bach said. “There is another contingent that just wants to roll back to five years ago. Oncology stays profitable, they keep making money, and they keep being incentivized to make treatment decisions based on reimbursement.”

Bach said his episode-based payment approach would do more than motivate doctors to choose the cheapest effective medications. It might also push drug manufacturers to control the costs of their products in order to fit within the program’s fee schedules. In the end, Bach feels that a system based on episode-based payments would help standardize and improve cancer care throughout the country.4


  1. Bach PB, Mirkin JN, Luke JJ. Episode-based payment for cancer care: a proposed pilot for Medicare. Health Aff. 2011;30(3):500-509. doi: 10.1377/hlthaff.2010.0752
  2. OECD (2009),Graph HE8.2. Richer countries spend more per capita on health care, 2006, in Society at a Glance 2009. doi: 10.1787/ soc_glance-2009-graphhe8_2-en.
  3. McKinsey Global Institute. Accounting for the cost of US health care: a new look at why Americans spend more. McKinsey & Company. http://www.mckinsey.com/Insights/MGI/Research/Americas/Accounting_for_the_cost_of_US_health_care. Published December 2008. Accessed March 30, 2012.
  4. Luke J, Mirkin J, Bach P. Improving quality and addressing the rising costs of cancer care: two birds, one stone. J Oncol Pract. 2011;7(6):402- 404. doi: 10.1200/JOP.2011.000419.

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