At a time when the national deficit is a growing problem, Medicare could have saved $111 million on more than a dozen Part B outpatient drugs, but its system for identifying prices for lower-cost generics is inefficient, according to a new report from the Office of Inspector General at the US Department of Health and Human Services.

Here’s how it works: Drugmakers must submit average sales price (ASP) data to the Centers for Medicare & Medicaid Services within 30 days after the close of each quarter, and the data are used to calculate amounts to be paid for the following quarter. But this causes a two-quarter lag between when sales occur and payments reflect the sales, which the OIG says is “especially problematic.”

That’s because the OIG found Medicare paid “significantly higher” prices for an extended period for newly available generics. “In other words, generic versions of these drugs were being administered or dispensed to beneficiaries, but Medicare was still paying brand prices…our findings demonstrate that the Part B reimbursement system fails to capture these potential savings for at least two quarters.”

The OIG analysis, by the way, noted that the $111 million savings during the period studied would have accounted for 25 percent of total expenditures for the 16 drugs examined. Of course, beneficiaries would have also gained had the reimbursement lag not existed, because of cost sharing. The problem, however, is likely to get worse.

Why? The OIG notes FDA data indicating 26 of the 48 brand-only drugs with the highest Part B expenditures in 2008 could have first generic versions approved in the next several years. This means the “vulnerability posed by the two-quarter lag likely will continue to grow.” Morever, nearly half of the pricey Part B drugs are available only as brand-name biologics, but may become available as generics over the next few years thanks to healthcare reform and efforts to create a biosimilar roadmap. These 26 meds, by the way, had combined Part B expenditures of more than $2.8 billion in 2009 - and Part B spending on the top 22 biologics that year totaled over $5.3 billion.

What to do? The OIG recommends that CMS work with Congress to require ASP data for first generics to be submitted monthly by manufacturers, and perhaps extend the requirement to all Part B covered meds. CMS, however, argues that the two-month lag works both ways by protecting Medicare beneficiaries from sudden price increases. CMS also contends the $111 million savings may not be an annualized figure and that the methodology for biosimilar pricing may be ultimately be different (you can read the report and the CMS response here).