FILE - This April 21, 2010 file photo shows an exterior view of the Amgen Inc. offices and its logo in Fremont, Calif. Amgen Inc. is expected to report quarterly earnings Thursday, July 29, 2010, after the market close. (AP Photo/Paul Sakuma, file) (Paul Sakuma/AP)

The U.S. health-care system is vastly overspending for a single anemia drug because Medicare overestimates its use by hundreds of millions of dollars a year, according to an analysis of federal data. The overpayment to hospitals and clinics arises because Medicare reimburses them based on estimates rather than the actual use of the drug.

The government for years has tried to rein in spending on the prescription drug, Epogen, which had ranked some years as the most expensive drug to taxpayers through the Medicare system.

Medicare’s current estimates are based on Epogen usage in 2007 for dialysis treatments. But since then, use of the drug has fallen 25 percent or more, partly because of Food and Drug Administration warnings about its perils and partly because Congress removed the financial incentives for clinics and hospitals to prescribe the drug. Because Medicare continues to reimburse health-care providers as if the dosing levels haven’t changed, the significant savings in doses has not translated into savings for the U.S. Treasury.

The amount of the overspending is more than $400 million annually, according to calculations done separately by The Washington Post and experts.

“I think we probably left money on the table,” said Rep. Pete Stark (D-Calif.), a critic of the way the drug had been used who helped shepherd through legislation that removed the financial incentives for bigger doses beginning in 2011.

Incentives for providers

The overpayment for Epogen reflects both the promise and difficulty of large-scale government reform of health-care spending.

For years, Epogen was one of a trio of anemia drugs — all manufactured by Amgen, a California biotech firm — that cost Medicare as much as $3 billion annually. Overall U.S. sales of the drugs exceeded $8 billion.

Nearly two decades after the drugs were first approved in 1989, their purported benefits were found to be overstated, and the FDA issued a series of stern warnings about their potentially deadly side effects, such as cancer and heart attacks.

At least some of their popularity stemmed from the fact that hospitals and clinics made lots of money using them: The spread between what they paid for a dose and what Medicare paid them to administer one reached as high as 30 percent, according to the Medicare Payment Advisory Commission.

The incentives drove up usage. By 2007, about 80 percent of dialysis patients were getting the drugs at levels beyond what the FDA now targets as safe.

Congress pushed Medicare to revise its payment system to remove the incentives for larger doses. Under the new system for dialysis patients, Medicare pays a set fee for a bundle of dialysis services and drugs.

With the change, hospitals and clinics make more money if they use the drugs more frugally. To guard against providers using too little, Medicare makes quality checks measuring patient condition.

Sales of Epogen have fallen more than 20 percent since the imposition of the new payment system, according to Amgen reports, and on a per-patient basis have fallen more than 25 percent. (The sales of the other related anemia drugs, Aranesp and Procrit, have fallen about 65 percent since their peak levels.)

In a statement, Amgen said it “long supported” the new payment system. However, just a year before Congress passed the legislation calling for the new system, the company cautioned against it. It told Congress that “there does not appear to be a compelling policy or clinical rationale to make fundamental changes” to the payment system.

The overpayment for the drugs doesn’t directly benefit Amgen. Instead, it benefits the company’s customers, the nation’s dialysis providers to whom Amgen sells the drug.

Using drug more efficiently

At the root of the overpayment is Medicare’s estimates for how much an “average” dialysis patient uses the drug.

In calculating the reimbursement figure, Medicare assumed that patients would receive just about the same amount of Epogen as they were receiving in 2007, before the financial incentives were changed, and before the FDA’s sternest warnings about their dangers.

In 2007, Medicare paid for about $1.9 billion in Epogen for dialysis patients, the single costliest drug in their care. Bureaucrats divided this figure by the number of patient treatments to arrive at the reimbursement figure.

Members of Congress did anticipate some savings from the new payment method: They took 2 percent off anticipated costs.

“When we developed legislation to bundle dialysis payments, I was confident that providers would find ways to more efficiently use Epogen, and we lowered payments accordingly,” Stark said.

But Epogen’s use has dropped much more than 2 percent. Moreover, those savings have already been eclipsed by the government’s agreement to make annual adjustments for inflation and other factors. Last year, the Medicare bundle payment rose 2.2 percent, and last month Medicare proposed raising it again next year by 2.5 percent.

“Medicare is now discouraging hospitals and clinics from overusing a risky drug; that’s the good news,” said Dennis Cotter, president of the Medical Technology and Practice Patterns Institute, a Bethesda-based nonprofit think tank. “But to accomplish this, they’ve simply given them the money that they would have earned while they were overdosing patients. Taxpayers lose.”

Cost of treating patients

Medicare spokesman Brian Cook said that Epogen use dropped because the drug is being used more efficiently under the new payment method and that the agency is going to assess whether the current payment rates are appropriate.

Representatives of the nation’s two largest dialysis companies, DaVita and Fresenius Medical Care, warned that the Medicare dialysis payments are already too low to cover their costs.

“Our hope is that the government will take into account the true costs across the board,” said Robert Sepucha, senior vice president of government affairs at Fresenius Medical Care.

Some analysts, however, believe that other costs for treating dialysis patients — not just those related to Epogen — have shrunk under the new payment system.

Richard Hirth, a University of Michigan health economist who co-wrote the studies leading to the bundling program, said the use of Epogen, vitamins and other injectable drugs have dropped about 20 percent with bundling.

When the bundle was calculated based on the 2007 figures, Medicare was spending about $2.7 billion on Epogen, vitamins and the other injectable drugs. If their usage has dropped 20 percent, the potential savings amount to more than $500 million annually, according to Hirth.

Hirth said he expects to present Medicare with a full report of his findings this fall.

“With Medicare’s finances nearing bankruptcy, every step should be taken to ensure that the Medicare program is appropriately and efficiently paying for services,” said Rep. Wally Herger (R-Calif.), chairman of the Ways and Means subcommittee on health. “If independent analysis concludes that seniors and taxpayers are overpaying for dialysis services, then Congress will revisit this issue.”