Medicare:

Comments on CMS Proposed 2006 Rates for Specified Covered Outpatient Drugs and Radiopharmaceuticals Used in Hospitals

GAO-06-17R: Published: Oct 31, 2005. Publicly Released: Oct 31, 2005.

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On July 25, 2005, the Centers for Medicare & Medicaid Services (CMS) in the Department of Health and Human Services (HHS) published its notice of proposed rulemaking (NPRM) entitled "Medicare Program; Proposed Changes to the Hospital Outpatient Prospective Payment System and Calendar Year 2006 Payment Rates." As part of these changes, CMS is proposing Medicare payment rates for certain hospital outpatient drugs classified for payment purposes as specified covered outpatient drugs (SCOD). The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) defined a SCOD as a drug or radiopharmaceutical used in hospital outpatient departments, covered by Medicare, and paid for individually rather than as part of a payment group with other services. With regard to SCODs, the MMA directed CMS to set 2006 payment rates equal to hospitals' average acquisition costs--the cost to hospitals of acquiring a product, net of rebates. In several related requirements, the MMA directed us to provide information on SCOD costs and CMS's proposed rates. First, we were required to conduct a survey of hospitals to obtain data on their acquisition costs of SCODs and provide information based on these data to the Secretary of Health and Human Services for his consideration in setting 2006 Medicare payment rates. We provided information from this survey in two reports--one on drugs and biologicals, and another on radiopharmaceuticals. These reports presented systematic information on hospitals' purchase prices of SCODs and limited information on rebates. Second, we were required to evaluate CMS's proposed rates for SCODs and comment on their appropriateness in light of the survey of SCOD prices we conducted. In response to the second requirement, this report assesses the appropriateness of the Medicare payment rates that CMS has proposed for SCODs, taking into account the purchase prices obtained from the MMA-mandated survey we conducted in 2004 and 2005. Specifically, this report focuses on the appropriateness of CMS's proposed 2006 hospital outpatient rates for (1) drug SCODs and (2) radiopharmaceutical SCODs. To conduct this assessment, we examined the information CMS provided in the proposed rule on the data sources and methodology used to set the 2006 rates, analyzed this information in light of our survey of hospitals' purchase prices, and convened an expert panel to review our findings. Consistent with the MMA, we did not study the issue of hospitals' handling costs for SCODs and do not address these costs in this report. We performed our work according to generally accepted government auditing standards from July through October 2005.

We consider CMS's selection of a data source--average sales price (ASP)--for use in setting Medicare's hospital outpatient rates for drug SCODs to be practical, given available alternatives, but we consider CMS's proposed 2006 rates for drug SCODs to be excessive. CMS proposes to base its 2006 drug SCOD rates on manufacturers' ASP data, setting rates at ASP+6 percent. ASP is a composite measure of the average price of a SCOD--net of discounts, rebates, and other price concessions--paid by all purchasers, not just hospitals. Manufacturers report this information quarterly. In our view, ASP is a practical data source, providing the most timely publicly available data on prices of drug SCODs. However, we have two concerns about setting the proposed drug SCOD rates. As a composite measure, ASP is a black box, lacking the detail CMS needs to validate the reasonableness of the data underlying the reported prices. Without a breakdown of price data showing rebates and other components as well as average prices by purchaser type, CMS cannot ensure that ASPs accurately reflect average acquisition costs by hospital purchasers alone. CMS does not provide a convincing rationale for proposing a rate 6 percent higher than ASP. CMS's analysis indicates that ASP+6 percent will exceed hospitals' acquisition costs. CMS states that the prices reported in our survey--that is, the average prices hospitals paid for drug SCODs (which do not net out rebates received at a later time--equal ASP+3 percent. Logically, acquisition costs, which do net out rebates from purchase prices, would equal an amount less than ASP+3 percent. Therefore, our survey data and CMS's analysis of these data indicate that a rate set at or above ASP+3 percent is not appropriate, given that it would exceed the hospitals' average acquisition cost. Similarly, we are concerned that CMS's proposed 2006 rates for radiopharmaceutical SCODs will, on average, exceed hospitals' acquisition costs. CMS chose to use cost estimates developed from hospital charges rather than survey data on the prices hospitals reported paying for radiopharmaceuticals. However, as we have previously reported, the methodology for estimating costs from charges results in significant imprecision. CMS states that it intends to set rates for radiopharmaceutical SCODs that are consistent with previous years' payment rates, even though the MMA does not establish such a criterion. ASPs are not available for radiopharmaceuticals for 2006 rate setting, but CMS plans to get this information from manufacturers for future years' rates.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: CMS has not changed the level of payment rates--Average Sales Price + 6 percent-- it proposed for drug SCODs in the 2006 Notice of Proposed Rulemaking.

    Recommendation: To better approximate hospitals' acquisition costs of SCODs, the Secretary of Health and Human Services should reconsider the level of proposed payment rates for drug SCODs, in relation to survey data on average purchase price, the role of rebates in determining acquisition costs, and the desirability of setting payment rates for SCODs at average acquisition costs.

    Agency Affected: Department of Health and Human Services

  2. Status: Closed - Not Implemented

    Comments: CMS has continued to use cost estimates developed from hospital charges to pay for radiopharmaceutical SCODs. Although CMS proposed to begin collecting average sales price (ASP) data in 2007 to set prices for separately payable radiopharmaceuticals in future years (see notice of proposed rulemaking, July 25, 2005), the agency dropped this proposal due to broad opposition from stakeholders. In both 2006 and 2007, CMS paid for radiopharmaceuticals based on the hospital's charge for each radiopharmaceutical adjusted to cost using the hospital's overall cost-to-charge ratio. In 2007, CMS finalized a policy to package payment for diagnostic radiopharmaceuticals in 2008 and to set separate prospective payment rates for therapeutic radiopharmaceuticals based on mean estimated costs from hospital claims -- the same general methodology used to pay for separately payable drugs and biologicals. Subsequently, in the Medicare, Medicaid & SCHIP Extension Act of 2007, signed into law on December 29, 2007, Congress delayed implementation of these prospective rates and directed CMS to continue using the "charges to cost" methodology to pay for therapeutic radiopharmaceuticals for the first 6 months of 2008 and this delay was extended through December 31, 2009 in the Medicare Improvements for Patients and Providers Act of 2008.

    Recommendation: To better approximate hospitals' acquisition costs of SCODs, the Secretary of Health and Human Services should reconsider the decision to base payment rates for radiopharmaceutical SCODs exclusively on estimated costs, in light of the availability of data on actual prices paid for key radiopharmaceuticals.

    Agency Affected: Department of Health and Human Services

  3. Status: Closed - Not Implemented

    Comments: CMS has not taken steps to collect information on ASP components and ASP by purchaser type as we recommended. Instead, the agency has taken a different approach to validate the reasonable of ASP-based payment as a measure of hospital acquisition costs. Beginning in 2006, payment for drugs and biologicals under the OPPS was made at average acquisition cost. In the CY 2006 OPPS final rule, CMS began using ASP as a proxy for average acquisition cost and pharmacy overhead costs. Each year, during its rulemaking cycle, CMS compares the aggregate hospital costs from claims data for separately payable drugs and biologicals to the ASPs for the products, weighting these HCPCS codes by their OPPS volumes, and calculates an equivalent average ASP-based payment rate for separately payable drugs and biologicals that provides the basis for future OPPS payment. CMS maintains that because this comparison is performed using costs from hospital claims data and the equivalent average ASP-based payment is set to equal the aggregate cost,this validates the reasonableness of ASP-based payment as a measure of hospital acquisition costs. This does not solve the problem that we addressed in our recommendation: how providers calculate and report the components of drug prices (such as rebates) for different purchaser types.

    Recommendation: To better approximate hospitals' acquisition costs of SCODs, the Secretary of Health and Human Services should collect information on ASP components and ASP by purchaser type to validate the reasonableness of reported ASPs as a measure of hospital acquisition costs.

    Agency Affected: Department of Health and Human Services

 

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