Chemotherapy Payment Reform: Medicare Is Missing the Elephant in the Room

cigarettes-2Last May I wrote about the uproar over Medicare’s proposed changes to how it will pay doctors who inject drugs in their offices. This largely concerns chemotherapy. Currently, physicians buy the drugs and Medicare reimburses them the Average Sales Price (ASP) plus 6 percent. The proposed reform would cut the mark-up to 2.5 percent and add a flat fee of $16.80 per injection.

I did not think the reform would have a positive impact, but I also thought criticism was overblown. Well, Medicare has managed to irritate all the affected interest groups to such a degree that it is likely to toss the proposal and go back to the drawing board.

A new analysis published by Memorial Sloan Kettering Cancer Center explains where Medicare went wrong, politically. It irritated both drug makers and physicians because the reform would have cost both groups money. If Medicare had raised the flat fee to $24.66, 55 of 100 most prescribed chemotherapy drugs would have been more profitable for doctors and 45 would have been less profitable. The higher the flat fee, the more likely oncologists would embrace the reform.

However, here is the kicker: The high cost of chemotherapy is not driven by the current reimbursement, rather, it is driven by an increasing share of injections taking place in hospital outpatient wards, rather than doctors’ offices. Hospitals have a different Medicare reimbursement scheme.

A 2013 study by Milliman, Inc., a firm of consulting actuaries, found that chemotherapy infused in hospital outpatient wards cost 36 percent to 53 percent more than in doctors’ offices. Perhaps unsurprisingly, a 2016 Milliman study found infused chemotherapy drug spending had shifted significantly from doctors’ offices to hospital outpatient wards from 2004 to 2014. For Medicare, the proportion had dropped from over 80 percent in doctors’ offices to less than 60 percent. For commercial payers, the proportion had dropped from over 90 percent to less than 50 percent.

Squeezing reimbursement to doctors’ offices is more likely to accelerate the shift to hospital outpatient wards than actually cut chemotherapy costs.


Fitch, Kathryn, et al., Comparing Episode of Cancer Care Costs in Different Settings: An Acctuarial Analysis of Patients Receiving Chemotherapy, client report commissioned by Genentech (New York, Milliman, Inc., August 29, 2013).

Fitch, Kathryn, et al., Cost Drivers of Cancer Care: A Retrospective Analysis of Medicare and Commercially Insured Population Claim Data: 2004-2014, client report commissioned by Community Oncology Alliance (New York, Milliman, Inc., April 2016).

Jain, Raina H., et al., Part B Payment for Drugs in Medicare: Phase 1 of CMS’ Proposed Pilot and Its Impact on Oncology Care, report of the Evidence Based Drug Pricing Project (New York: Memorial Sloan Kettering Cancer Center, April 11, 2016).

Comments (5)

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  1. Barry Carol says:

    It sounds like we need site neutral payment to me. If a chemotherapy drug can be safely and effectively administered in a doctor’s office, why should a hospital outpatient facility be paid more for the same service just because it has inherently higher fully allocated costs? It doesn’t make any sense.

  2. Devon Herrick says:

    A physician injecting a $100 drug would earn $19.20 for their efforts, while a physician injecting a $1,000 drug would earn $41.80 under the proposed system. By contrast, the respective fees would be $6.00 and $60.00 under the current system. A $500 injection would be about equal ($29.30 vs. $30.00).

    I agree the real danger is not the proposed fee schedule, but the increasing move from outpatient to hospitals for oncology infusions and other injections.

  3. Adam Fein says:

    It’s even worse than CMS thinks. Hospitals already massively cost shift and overcharge the commercial payer. See “New Data: How Outrageous Hospital Markups Hike Drug Spending” (

    • Devon Herrick says:

      Interesting! So hospitals charge $20 for an aspirin and give insurers a 50% discount. What a bargain! 🙂

      • Within the next couple of years, hospitals will charge $100 for an aspirin and give insurers a 90 percent discount. Then, we will know health reform has succeeded!