Medicare pays hospitals for drugs that beneficiaries receive as part of their treatment in hospital outpatient departments. Specifically, the Centers for Medicare & Medicaid Services (CMS) in the Department of Health and Human Services (HHS) uses an outpatient prospective payment system (OPPS) to pay hospitals fixed, predetermined rates for services. These services include drugs given to beneficiaries in outpatient settings. When OPPS was first developed as directed by the Balanced Budget Act of 1997, the rates for hospital outpatient services and drugs were based on hospitals' 1996 median costs. However, these rates prompted concerns that payments to hospitals would not reflect the cost of newly introduced pharmaceutical products--drugs, biologicals, and radiopharmaceuticals--used to treat, for example, cancer, rare blood disorders, and other serious conditions. In turn, congressional concerns were raised that beneficiaries might lose access to some of these products if hospitals avoided providing them because of a perceived shortfall in payments. In response to these concerns, the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999 authorized pass-through payments, which are a way to augment, on a temporary basis, the OPPS payments for newly introduced pharmaceutical products first used after 1996. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) modified this payment method for some of these pharmaceutical products. As part of the modification, the MMA defined a new payment category--specified covered outpatient drugs (SCOD)--which includes many of these newly introduced pharmaceutical products. The MMA defined a SCOD as a drug or radiopharmaceutical used in hospital outpatient departments, covered by Medicare, and for which CMS has established a separate ambulatory payment classification (APC) group. In addition to these criteria, the MMA required that, for a drug to be a SCOD, it must have been paid for on a pass-through basis on or before December 31, 2002. The MMA established a methodology for CMS to follow in setting payment rates for SCODs in 2004 and 2005. The MMA excluded, among other drugs, orphan drugs--certain drugs or biologicals that are used for rare diseases and conditions--from being paid as SCODs for 2004 and 2005 and was not explicit about whether orphan drugs will be SCODs after 2005. CMS defines SCODs by their Healthcare Common Procedure Coding System (HCPCS) codes, which CMS assigns to products, supplies, and services for billing purposes. Drug HCPCS are categories that include one or more component drugs with similar chemical entities. These drugs within a HCPCS can vary by manufacturer, strength, and package size. The MMA directed us to collect data on hospital acquisition costs of SCODs and to provide information based on these data to the Secretary of Health and Human Services for his consideration in setting 2006 Medicare payment rates. The MMA directed us to collect these data by surveying a large sample of hospitals.
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