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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Highlights

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.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Department of Health and Human Services 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.
Closed – Not Implemented
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.
Department of Health and Human Services 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.
Closed – Not Implemented
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.

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