What Is Buy and Bill? Provider Payments Explained

Buy and bill is the process by which a physician or hospital purchases a drug directly, administers it to a patient (usually by injection or infusion), and then bills the patient’s insurance plan for reimbursement afterward. It is the dominant payment model for drugs given in a clinical setting rather than picked up at a retail pharmacy. The model shapes everything from what drugs get prescribed to where patients receive them, and it carries financial incentives that have drawn serious scrutiny over the past two decades.

How the Payment Cycle Works

In a typical retail pharmacy transaction, you hand over a prescription, the pharmacist fills it, and your insurer pays the pharmacy. The provider who wrote the prescription never handles the drug or takes on the cost of stocking it. Buy and bill flips that arrangement. The provider is also the purchaser, the warehouse, and the dispenser. A clinic or hospital buys a drug from a wholesaler or manufacturer at one price, stores it, prepares it, gives it to the patient during an office visit, and then submits a claim to the insurer or Medicare for a higher price. The difference between what the provider paid and what the insurer reimburses is the provider’s margin on the drug itself, separate from any fees charged for the actual administration (the chair time, the IV setup, the nursing staff).

This arrangement exists because many medications cannot be self-administered at home. Chemotherapy infusions, certain biologic drugs for autoimmune diseases, and some vaccines all require clinical supervision. Someone has to have the drug on hand when the patient walks in, and that someone takes on the financial risk of purchasing it in advance.

How Reimbursement Is Calculated

For Medicare Part B, which covers most physician-administered drugs, reimbursement is pegged to a drug’s average sales price plus a percentage markup. That markup has generally been set at 6 percent of the average sales price, though since 2013 the effective rate has been closer to 4.3 percent because of federal budget sequestration cuts.¹ Private insurers often follow a similar structure but negotiate their own rates, which can be higher or lower depending on the plan and the provider’s bargaining power.

The percentage-based formula is the detail that makes buy and bill controversial. A flat dollar fee for administering a drug would give the provider the same payment regardless of which drug was chosen. A percentage-based markup, by contrast, pays more when the drug costs more. A 4.3 percent margin on a $100 drug is $4.30. On a $10,000 drug, it is $430. The provider’s financial interest and the patient’s clinical interest do not always point in the same direction.

The Incentive Problem in Drug Selection

Researchers have been flagging this tension for years. The percentage-based reimbursement creates an incentive for providers to choose more expensive medications when cheaper alternatives with similar clinical outcomes exist.² The concern is sharpest in oncology, where drug costs can be enormous and multiple regimens with comparable effectiveness are often available for the same cancer type.

One study examining breast cancer drug choices found that increasing a physician’s margin by 10 percent produced between an 11 and 177 percent increase in the likelihood of choosing a given drug, depending on the specific medication. The range is wide because drug choice depends on many factors beyond profit, including clinical guidelines, patient characteristics, and side-effect profiles. But the financial signal was clearly detectable.³

This does not mean every oncologist is picking the priciest option to pad revenue. Most physicians weigh clinical evidence heavily, and professional guidelines constrain the range of defensible choices. But when two drugs are genuinely comparable in effectiveness and one generates a larger margin, the system nudges toward the costlier one. Over millions of treatment decisions, that nudge adds up to billions of dollars.

Where You Get the Drug Changes What It Costs

Buy and bill does not produce the same prices everywhere. A drug administered in a community physician’s office and the same drug given in a hospital outpatient department can carry vastly different price tags for the insurer, even though the patient experience is virtually identical. This gap has widened as hospitals have acquired independent oncology and specialty practices, a trend that accelerated over the past fifteen years.

A study of Blue Cross Blue Shield plans found that prices paid for infused cancer drugs in hospital outpatient departments were roughly double those paid in independent physician offices. Biologics, chemotherapies, and other infused cancer drugs ran 99 to 104 percent higher in hospitals, and infused hormonal therapies were about 68 percent higher. If those plans had directed all infusions to physician offices, they would have saved an estimated $1.28 billion per year, roughly a quarter of their total spending on those drugs.⁴

Hospitals can charge more for several reasons. They negotiate higher reimbursement rates with private insurers, they add facility fees that independent offices do not charge, and they benefit from a federal program called 340B that dramatically lowers their acquisition costs on certain drugs. Independent practices typically operate on thinner margins for the same medications.

How 340B Amplifies the Margin

The 340B Drug Pricing Program requires pharmaceutical manufacturers to offer steep discounts to certain hospitals and clinics that serve a high proportion of low-income patients. The program was originally designed to stretch limited resources at safety-net institutions. In the buy-and-bill context, though, 340B creates an unusually large gap between what an eligible hospital pays for a drug and what it bills the insurer.

Research on the immunotherapy drug pembrolizumab (Keytruda) illustrates the scale. Price markups averaged 173 percent at hospitals eligible for 340B discounts, compared with 78 percent at hospitals without 340B eligibility and just 16 percent at community-based physician practices. Translated into dollars, each Keytruda patient at a 340B-eligible hospital was associated with about $102,680 in annual revenue after adjusting for various organizational and market factors.⁵

A broader analysis using private insurance data found that after adjusting for drug type, patient characteristics, and geography, markups at 340B-eligible hospitals were about 6.6 times as high as those in independent physician practices. Non-340B hospitals still charged markups roughly 4.3 times as high as independent practices. Hospitals eligible for 340B discounts retained about 64 percent of total insurer drug expenditures as profit on the drug itself, compared with about 19 percent at independent physician practices.⁶

The financial incentives here are powerful enough that critics argue 340B has drifted from its original safety-net purpose into a revenue engine for large hospital systems. Supporters counter that the revenue funds charity care and community health programs that would otherwise go unfunded. Either way, the interaction between 340B and buy and bill is one of the biggest cost drivers in physician-administered drug spending.

Why Practice Consolidation Matters

When a hospital acquires an independent oncology practice, the same doctors treating the same patients in the same building can suddenly bill at hospital outpatient rates instead of office rates. This site-of-care shift has been a major concern for payers and policymakers. Two explanations are commonly cited for the wave of oncology practice acquisitions: a 2005 Medicare Part B payment reform that cut reimbursement for chemotherapy drugs in office settings, and expanded hospital eligibility for 340B under the Affordable Care Act.

Interestingly, a study using difference-in-differences methods to test both explanations found little evidence that either policy directly drove consolidation. Areas with greater exposure to the Medicare payment cuts and areas with more 340B expansion did not consolidate faster than other areas.⁷ That suggests broader forces in healthcare consolidation, such as electronic health record costs, negotiating leverage with insurers, and physician burnout, may be more important than drug payment policy alone. The price gap between hospital and office settings is real and large, but the reasons it keeps growing are not as straightforward as the most popular policy narratives suggest.

Medical Benefit Versus Pharmacy Benefit

Whether a drug falls under buy and bill depends partly on how the patient’s insurance plan classifies it. Most health plans split drug coverage into two channels: the medical benefit (which covers drugs administered in a clinical setting) and the pharmacy benefit (which covers drugs dispensed at a retail or specialty pharmacy). Buy and bill lives on the medical benefit side.

For many drugs, the distinction is clear-cut. An IV chemotherapy infusion goes through the medical benefit. A daily oral pill goes through the pharmacy benefit. But a growing number of specialty drugs can be given either way, or have both injectable and oral forms, and that creates inconsistency. A study examining eight commercial health plans found that 14 percent of drug coverage policies were discordant between the medical and pharmacy sides of the same plan. The most common source of disagreement was whether step therapy protocols applied, followed by which prescribers were authorized and which patient subgroups were covered. When discordance existed, the pharmacy benefit was more restrictive slightly more than half the time.⁸

For you as a patient, this means the same drug could require different prior authorization steps, different cost-sharing amounts, and different provider restrictions depending on which benefit channel it flows through. If your plan shifts a drug from medical to pharmacy benefit, your out-of-pocket costs and even your access to the drug could change, even though the medication itself is identical.

Payer Workarounds and Alternative Distribution Models

Insurers have developed several strategies to claw back control over drug costs in the buy-and-bill system. The most prominent are white bagging, brown bagging, and site-of-service policies.

White bagging: The insurer’s specialty pharmacy ships the drug directly to the provider’s office or hospital, pre-labeled for a specific patient. The provider administers it but never purchases or marks up the drug.
Brown bagging: The specialty pharmacy ships the drug to the patient’s home, and the patient brings it to their appointment for the provider to administer. This is the most controversial model because of concerns about drug integrity during transport and storage.
Clear bagging: An internal hospital or health-system pharmacy dispenses the drug for on-site administration, bypassing the buy-and-bill cycle while keeping the drug within the institution’s own supply chain.
Site-of-service steering: The insurer directs patients to lower-cost settings, such as independent physician offices or home infusion, through differential cost-sharing or network restrictions.

Each of these approaches aims to break the link between the provider’s purchasing decision and the drug’s price to the insurer. Clear bagging, for instance, has been adopted by some health systems specifically to reduce claim denials and write-offs that occur when vaccines and other drugs administered during clinic visits are billed through the standard buy-and-bill model under medical insurance.⁹

Providers often push back against white and brown bagging. Hospitals argue that receiving a drug from an external pharmacy introduces safety risks: they cannot verify storage conditions during shipping, the drug may arrive late and delay treatment, and pharmacists on site cannot easily adjust doses. The tension between cost control and clinical workflow is genuine, and neither side has a clean solution. An analysis by the Institute for Clinical and Economic Review evaluated the risks and advantages of these policies, finding trade-offs on both sides rather than a clear winner.¹⁰

What Changed After Medicare Part B Payment Reform

Before 2005, Medicare reimbursed physician-administered drugs based on the average wholesale price, a figure that was widely acknowledged to be inflated well above what providers actually paid. The gap between acquisition cost and reimbursement was large enough that drug margins effectively subsidized other aspects of practice operations, particularly in oncology. The Medicare Modernization Act of 2003 switched the reimbursement basis to average sales price plus a percentage, which brought payments much closer to what providers actually spent.

The effect was visible in specialty drug spending patterns. Research on rheumatoid arthritis biologics, for example, showed that total Medicare payments for infliximab rose from $357 million in 2002 to $492 million in 2006. The biggest single-year jump, a 31 percent increase in per-patient payments, happened between 2002 and 2003, before the reform took effect. After the payment formula changed, per-patient spending growth slowed, and from 2004 to 2005 spending per patient actually fell as reimbursement rates dropped further.¹¹

The reform did compress margins in office-based practices. But it did not eliminate the fundamental incentive baked into percentage-based reimbursement. As long as the markup is a proportion of the drug’s cost rather than a flat fee, more expensive drugs still generate more revenue. And the shift pushed some independent practices toward hospital employment, where facility fees and 340B eligibility offered new revenue streams to replace the margins they lost.

The Operational Burden on Providers

Buy and bill is not just a reimbursement model; it is a logistics operation. A provider stocking physician-administered drugs has to manage purchasing, cold-chain storage for biologics, expiration tracking, waste disposal, and a billing apparatus to submit claims accurately. If a claim is denied, the provider has already purchased and administered the drug. The financial risk sits with the provider, not the insurer.

For small practices, this operational overhead can be crushing. A single vial of a specialty biologic can cost thousands of dollars, and if a patient’s insurance denies the claim after the drug has been given, the practice absorbs the loss. Multi-dose vials present their own headaches: if a vial is opened for one patient and the remaining doses expire before another eligible patient comes in, that waste is the provider’s loss too. Larger hospital systems can spread these risks across a bigger patient volume and a more sophisticated revenue cycle operation, which is one more factor driving consolidation.

Group purchasing organizations help providers negotiate better acquisition prices from wholesalers, but the landscape of restricted distribution channels has added complexity. Some manufacturers limit which distributors can carry their drugs, meaning a provider may not be able to source a drug through their usual wholesaler at all. Health-system pharmacists have called for more dialogue with group purchasing organizations to address the financial and logistical challenges created by these restricted distribution networks.¹²

What This Means for Your Out-of-Pocket Costs

If you are receiving a physician-administered drug, buy and bill affects your wallet in ways that are not always obvious. Your cost-sharing is typically calculated as a percentage of the billed price, not the provider’s acquisition price. That means the same drug given in a hospital outpatient department could cost you twice as much in coinsurance as it would in an independent doctor’s office, even though your clinical experience is essentially the same.

Asking where you can receive your infusion is worth doing. Some insurers now offer lower copays or coinsurance for patients who choose a freestanding infusion center or physician office over a hospital outpatient setting. If your plan has site-of-service incentives, you could save hundreds or thousands of dollars per treatment cycle by getting the same drug in a different chair.

Prior authorization requirements also vary depending on whether the drug comes through the medical or pharmacy benefit. If your provider’s office handles the buy-and-bill process, they typically manage the prior authorization on the medical side. If your insurer switches the drug to pharmacy benefit or implements white bagging, the authorization process may route through a specialty pharmacy instead, potentially adding steps and delays. None of this changes the medication itself, but it changes the paperwork and the timing, which for someone waiting on a cancer treatment or a biologic for a flaring autoimmune condition is not a trivial distinction.