NCPA - National Center for Policy Analysis

Medicare Reimbursements and Shortages of Sterile Injectable Pharmaceuticals

June 14, 2012

Over the first half of the last decade, Medicare payments for sterile injectable pharmaceutical drugs were gradually reduced, spurred by stories of massive profits for drug manufactures.  These payment reductions, however, may have had the unintended consequence of discouraging manufacturers from investing optimally in additional maintenance or capacity, thereby causing chronic shortages.

Ali Yurukoglu of Stanford University investigates this relationship closely, taking into account the timeline and degree of payment reductions and the (presumably) resultant increase in shortages.

  • Before January 1, 2005, Medicare paid physicians and hospitals for these drugs proportional to their list price under a regime known as "Average Wholesale Price" (AWP) reimbursement.
  • Starting January 1, 2005, Medicare began to reimburse these drugs at 106 percent of the previous two quarters' Average Sales Price (ASP).
  • A study by the Office of the Inspector General found that the median percentage difference between AWP and ASP was 50 percent.
  • This resulted in decreases on the order of 50 percent of reimbursements for these drugs to providers.

This massive reduction in payments (and consequent reduction in profits), Yurukoglu argues, has resulted in a lack of manufacturer effort to avoid shortages.  This, he says, offers a partial explanation for why drug shortages have increased rapidly in recent years.

  • Yurukoglu compared sterile injectable drugs given to Medicare patients and drugs given to non-Medicare patients in order to glean his statistical conclusions.
  • He concludes that a hypothetical generic sterile injectable drug which served only Medicare patients experienced a 73.92 percentage point larger increase in shortages post-policy change.
  • He also finds that increasing payments by Medicare by 10 percent would decrease the average frequency of shortages by 1.2 percentage points from a mean of 16.06 percent.

Yurukoglu offers two solutions for the problem of persistent shortages.

  • Buyers of pharmaceuticals could sign contracts that impose penalties on manufacturers in cases of shortage, encouraging greater investment in avoiding them.
  • Medicare could unilaterally increase its drug reimbursement rates, discouraging shortages through profit incentives.

Yurukoglu admits that increasing payments may be a weak solution because Medicare administrators can only select an arbitrary reimbursement rate with little understanding of how much will be gained in reduced shortages.

Source: Ali Yurukoglu, "Medicare Reimbursements and Shortages of Sterile Injectable Pharmaceuticals," National Bureau of Economic Research, April 2012.

For text:


Browse more articles on Health Issues