Understanding drug reimbursement is vital for pharmacy staff, finance leaders and billing personnel. As drug prices soar and insurance policies become increasingly complex, hospitals and other healthcare facilities must learn how they are compensated for the drugs they administer.
Drug reimbursement varies depending on inpatient and outpatient settings as well as use of commercial insurance or Medicare.
Watch this three-minute intro to learn more:
Defining Drug Reimbursement
It’s necessary to clarify what we mean by drug reimbursement. In this context, we are referring to how hospitals, outpatient facilities, clinics and other healthcare settings receive payments from insurance for drugs billed to a patient’s medical benefit.
Inpatient Drug Reimbursement
When it comes to inpatient hospital stays, drug reimbursement operates under a bundled payment system. Typically, hospitals don’t receive separate payments for each individual drug administered during a patient’s stay. Instead, they receive a bundled payment based on a Diagnosis-Related Group (DRG). Each patient admission is assigned a DRG, which determines a fixed payment reflecting the resources typically required to treat patients with that diagnosis.
However, there’s an exception to this rule: the New Technology Add-On Payment (NTAP) status. Drugs that qualify for NTAP must meet three criteria: they must be new, their costs must significantly exceed the DRG payment rate, and they must offer substantial clinical improvement over existing alternatives. Drugs with active NTAP status are listed annually in the CMS Inpatient Prospective Payment System (IPPS) rule.
Outpatient Drug Reimbursement
In contrast to inpatient settings, outpatient facilities and clinics receive separate payments for drugs. Under Medicare, specifically Medicare Part B, a drug is considered “separately payable” if its cost exceeds a set threshold, which CMS updates annually in the Outpatient Prospective Payment System (OPPS) Final Rule. For instance, the threshold for 2024 is $135. Drugs below this threshold have their payment bundled with other associated services and supplies.
For separately payable drugs, reimbursement is based on the drug’s Average Sales Price (ASP) plus a percentage-based add-on payment. The ASP reflects the average price at which manufacturers sell a drug, including commercial prices, discounts and rebates. ASP calculations combine all branded and generic versions of a molecule under a single Healthcare Common Procedure Coding System (HCPCS) code, and CMS publishes an ASP file quarterly.
The standard add-on payment for most drugs is 6%, meaning the total reimbursement is ASP + 6%. However, biosimilars are an exception; their add-on payment is based on the ASP of the reference biologic, a policy designed to encourage the use of lower-cost biosimilars.
Commercial Insurance Reimbursement
Commercial insurance reimbursement rates vary by health system contract but generally follow one of two methods. The first method bases the commercial rate on the Medicare rate, sometimes up to three times the Medicare rate. For example, instead of ASP + 6%, the reimbursement might be ASP times three. The second method calculates reimbursement as a percentage of the drug’s acquisition cost, often exceeding 100% to cover storage and handling costs.
Final Takeaways
Understanding drug reimbursement is essential for effectively managing healthcare costs and ensuring that patients receive the medications they need. Healthcare professionals can better navigate the financial aspects of drug administration after learning the differences in reimbursement between inpatient and outpatient settings and the nuances of Medicare and commercial insurance.
There are two main takeaways:
- Inpatient Drug Reimbursement: Payment for drugs is included in a bundled payment based on the DRG assigned to the patient. The exception is drugs that receive NTAP status, which are reimbursed separately.
- Outpatient Drug Reimbursement: Medicare reimburses drugs separately if they meet the cost threshold, with reimbursement based on ASP plus a percentage-based add-on payment. Commercial insurance rates are typically a factor of the Medicare rate or a percentage of the drug’s acquisition cost.
To learn more, connect with the HealthTrust Pharmacy team or reach out to Grant Teague, PharmD, MBA, Sr. Manager Pharmacy Strategic Market Access & Reimbursement at grant.teague@healthtrustpg.com.
Share Email
