Manufacturers and providers have “perverse incentives” to set higher drug prices and pick pricier therapies for patients due to Medicare’s current payment structure, and the system isn’t suitable for expensive modern therapies, said Centers for Medicare and Medicaid Services Administrator Seema Verma at the American Hospital Association’s annual meeting in Washington, D.C.

Medicare’s current payment structure for part B providers — which awards them money for drugs at an amount equal to the drug’s average price plus six percent — is outdated, Verma said “While this system may have made sense when it was designed, in today’s world, with some therapies costing over a half a million dollars, adding 6 percent to the sales price doesn’t make sense,” she said.

In addition, Medicare pays different amounts for high-cost products depending on the site of service, and whether a patient receives Part B therapy in a hospital or in the hospital’s outpatient clinic may be influenced by differing prices that the program pays for each site, Verma said, adding “Whether a patient receives a therapy in one setting or another should be based on which setting is safest and most clinically appropriate, not based on arbitrary payment.”