Medicare Hospital Pharmaceuticals:

Survey Shows Price Variation and Highlights Data Collection Lessons and Outpatient Rate-Setting Challenges for CMS

GAO-06-372: Published: Apr 28, 2006. Publicly Released: Apr 28, 2006.

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In 2003, the Medicare Modernization Act required the Centers for Medicare & Medicaid Services (CMS) to establish payment rates for a set of new pharmaceutical products--drugs and radiopharmaceuticals--provided to beneficiaries in a hospital outpatient setting. These products were classified for payment purposes as specified covered outpatient drugs (SCOD). The legislation directed CMS to set 2006 Medicare payment rates for SCODs equal to hospitals' average acquisition costs and included requirements for GAO. As directed, GAO surveyed hospitals and issued two reports, providing information to use in setting 2006 SCOD rates. To address other requirements in the law, this report analyzes SCOD price variation across hospitals, advises CMS on future surveys it might undertake, and examines both lessons from the GAO survey and future challenges facing CMS.

Analyzing pharmaceutical price data collected from its 2004 survey of hospitals, GAO found that prices hospitals paid for SCOD products varied across hospitals. Certain factors--namely, whether the hospital had a major teaching program or not, was in an urban or rural area, and had a large or small hospital outpatient department--were associated with whether hospitals paid higher or lower prices for SCOD products. Major teaching hospitals paid prices that were an estimated 3.2 percent lower than those paid by nonteaching hospitals for drug SCODs; rural hospitals paid prices an estimated 4.4 percent higher than those paid by urban hospitals for radiopharmaceutical SCODs; and large hospitals paid prices an estimated 1.4 percent lower than those paid by small hospitals for drug SCODs and 3.1 percent lower for radiopharmaceutical SCODs. Combining these factors, GAO found that large, urban, major teaching hospitals--compared with other hospitals--generally paid lower prices, on average, for all SCOD products. From conducting its hospital survey, GAO learned a key lesson that CMS could use in the future: such a survey would not be practical for collecting the data needed to set and update SCOD rates routinely but would be useful for validating, on occasion, CMS's rate-setting data. GAO's survey produced accurate hospital drug price data, but it also created a considerable burden for hospitals as the data suppliers and considerable costs for GAO as the data collector. Nonetheless, the benefit of collecting actual prices paid by hospitals could make such surveys advantageous for occasionally validating CMS's proxy for SCODs' average acquisition costs--the average sales price (ASP) data that manufacturers report. CMS will face important challenges as it seeks to obtain accurate data on hospitals' acquisition costs for drug and radiopharmaceutical SCODs. Regarding drugs, CMS lacks the detail on manufacturers' ASP data needed to determine if rates developed from these data are appropriate for hospitals. Manufacturers report ASP as a single price paid by all purchasers, making it impossible to distinguish the price paid by hospitals alone. CMS instructs manufacturers to report ASP net of rebates but does not specify how to allocate individual product rebates when several products are purchased. Regarding radiopharmaceuticals, GAO found that the diversity of forms in which they can be purchased--ready-to-use unit doses, multidoses, or separately purchased radioactive and non-radioactive substances--complicates CMS's efforts to select a data source that can provide reasonably accurate price data efficiently. Efficiency as well as accuracy is a factor in selecting a data source because radiopharmaceuticals account for only 1.5 percent of Medicare hospital outpatient spending. GAO's experience suggests that the best option available to CMS, in terms of accuracy and efficiency, is to collect price data on radiopharmaceuticals purchased in ready-to-use unit doses, the form in which an estimated three-quarters of hospitals purchase these products.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: CMS has no plans to implement a survey of hospitals to validate manufacturers' reported drug average sales price (ASP) as a measure of hospitals' acquisition costs. Instead, CMS has chosen another approach, using hospital claims data as a measure of hospital acquisition costs combined with pharmacy overhead costs. CMS compares aggregate expenditures for separately payable drugs and biologicals to the ASP-based payment rates (weighting these HCPCS codes by their OPPS volumes) to calculate an equivalent average ASP-based payment rate for drugs and biologicals provided in the hospital outpatient setting. CMS updates its ASP-based payment rates quarterly, if necessary, to reflect market changes. CMS was considering this approach when we drafted our report; our assessment at that time was that it might be a more efficient but less accurate means of obtaining price estimates than obtaining price data directly from manufacturers or from hospitals' invoices.

    Recommendation: To ensure that Medicare payments for SCOD products are based on sufficiently accurate data, the Secretary of Health and Human Services should validate, on an occasional basis, manufacturers' reported drug ASPs as a measure of hospitals' acquisition costs using a survey of hospitals or other method that CMS determines to be similarly accurate and efficient.

    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, rather than following our recommendation to collect data on the prices paid by hospitals. (However, in response to this recommendation to use unit-dose prices, CMS noted that most hospital charges for radiopharmaceuticals are for a unit-dose, because most of the HCPCS code descriptors indicate that the code is per study or treatment dose.) 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. The Medicare Improvements for Patients and Providers Act further delayed implementation of these prospective rates through December 31, 2009.

    Recommendation: To ensure that Medicare payments for SCOD products are based on sufficiently accurate data, the Secretary of Health and Human Services should use unit-dose prices paid by hospitals when available as the data source for setting and updating Medicare payment rates for radiopharmaceutical SCODs.

    Agency Affected: Department of Health and Human Services


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