Medicare
Information Needed to Assess Adequacy of Rate-Setting Methodology for Payments for Hospital Outpatient Services Gao ID: GAO-04-772 September 17, 2004Under the Medicare hospital outpatient prospective payment system (OPPS), hospitals receive a temporary additional payment for certain new drugs and devices while data on their costs are collected. In 2003, these payments expired for the first time for many drugs and devices. To incorporate these items into OPPS, the Centers for Medicare & Medicaid Services (CMS) used its rate-setting methodology that calculates costs from charges reported on claims by hospitals. At that time, some drug and device industry representatives noted that payment rates for many of these items decreased and were concerned that hospitals may limit beneficiary access to these items if they could not recover their costs. GAO was asked to examine whether the OPPS rate-setting methodology results in payment rates that uniformly reflect hospitals' costs for providing drugs and devices, and other outpatient services, and if it does not, to identify specific factors of the methodology that are problematic.
The rate-setting methodology used by CMS may result in OPPS payment rates for drugs, devices, and other services that do not uniformly reflect hospitals' costs of providing those services. Two areas of the methodology are particularly problematic. The hospital claims for outpatient services that CMS uses to calculate hospitals' costs and set payment rates may not be a representative sample of all hospital outpatient claims. For Medicare payment purposes, an outpatient service consists of a primary service and the additional services or items associated with the primary service, referred to as packaged services. CMS has excluded over 40 percent of multiple-service claims, claims that include more than one primary service along with packaged services, when calculating the cost of all OPPS services, including those with drugs and devices. It excludes these multiple-service claims because, when more than one primary service is reported on a claim, CMS cannot associate each packaged service with a specific primary service. Therefore, the agency cannot calculate a total cost for each primary service on that claim, which it would use to set payment rates. The data CMS has available do not allow for a determination of whether excluding many multiple-service claims has an effect on OPPS payment rates. However, if the types or costs of services on excluded claims differ from those on included claims, the payment rates of some or all services may not uniformly reflect hospitals' actual costs of providing those services. In addition, in calculating hospitals' costs, CMS assumes that, in setting charges within a specific department, a hospital marks up the cost of each service by the same percentage. However, based on information from 113 hospitals, GAO found that not all hospitals use this methodology: charge-setting methodologies for drugs, devices, and other outpatient services vary greatly across hospitals and across departments within a hospital. CMS's methodology does not recognize hospitals' variability in setting charges, and therefore, the costs of services used to set payment rates may be under- or overestimated.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-04-772, Medicare: Information Needed to Assess Adequacy of Rate-Setting Methodology for Payments for Hospital Outpatient Services
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entitled 'Medicare: Information Needed to Assess Adequacy of Rate-
Setting Methodology for Payments for Hospital Outpatient Services'
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Report to the Chairman, Subcommittee on Health, Committee on Ways and
Means, House of Representatives:
September 2004:
MEDICARE:
Information Needed to Assess Adequacy of Rate-Setting Methodology for
Payments for Hospital Outpatient Services:
GAO-04-772:
GAO Highlights:
Highlights of GAO-04-772, a report to the Chairman, Subcommittee on
Health, Committee on Ways and Means, House of Representatives.
Why GAO Did This Study:
Under the Medicare hospital outpatient prospective payment system
(OPPS), hospitals receive a temporary additional payment for certain
new drugs and devices while data on their costs are collected. In
2003, these payments expired for the first time for many drugs and
devices. To incorporate these items into OPPS, the Centers for Medicare
& Medicaid Services (CMS) used its rate-setting methodology that
calculates costs from charges reported on claims by hospitals. At that
time, some drug and device industry representatives noted that payment
rates for many of these items decreased and were concerned that
hospitals may limit beneficiary access to these items if they could not
recover their costs. GAO was asked to examine whether the OPPS rate-
setting methodology results in payment rates that uniformly reflect
hospitals‘ costs for providing drugs and devices, and other outpatient
services, and if it does not, to identify specific factors of the
methodology that are problematic.
What GAO Found:
The rate-setting methodology used by CMS may result in OPPS payment
rates for drugs, devices, and other services that do not uniformly
reflect hospitals‘ costs of providing those services. Two areas of the
methodology are particularly problematic. The hospital claims for
outpatient services that CMS uses to calculate hospitals‘ costs and set
payment rates may not be a representative sample of all hospital
outpatient claims. For Medicare payment purposes, an outpatient service
consists of a primary service and the additional services or items
associated with the primary service, referred to as packaged services.
CMS has excluded over 40 percent of multiple-service claims, claims
that include more than one primary service along with packaged
services, when calculating the cost of all OPPS services, including
those with drugs and devices. It excludes these multiple-service claims
because, when more than one primary service is reported on a claim, CMS
cannot associate each packaged service with a specific primary service.
Therefore, the agency cannot calculate a total cost for each primary
service on that claim, which it would use to set payment rates. The
data CMS has available do not allow for a determination of whether
excluding many multiple-service claims has an effect on OPPS payment
rates. However, if the types or costs of services on excluded claims
differ from those on included claims, the payment rates of some or all
services may not uniformly reflect hospitals‘ actual costs of providing
those services. In addition, in calculating hospitals‘ costs, CMS
assumes that, in setting charges within a specific department, a
hospital marks up the cost of each service by the same percentage.
However, based on information from 113 hospitals, GAO found that not
all hospitals use this methodology: charge-setting methodologies for
drugs, devices, and other outpatient services vary greatly across
hospitals and across departments within a hospital. CMS‘s methodology
does not recognize hospitals‘ variability in setting charges, and
therefore, the costs of services used to set payment rates may be
under- or overestimated.
Number and Percentage of Hospitals that Reported Methods to Mark Up
Drug and Device Charges, 2003:
[See PDF for image]
[a] Percentage of total hospitals does not total 100 percent due to
rounding.
[End of table]
What GAO Recommends:
GAO recommends that the Administrator of CMS collect data on excluded
claims and analyze variation in hospital charge setting to determine
if the OPPS payment rates uniformly reflect hospitals‘ costs of
providing outpatient services, and, if they do not, to make appropriate
changes to the methodology. CMS stated that it will consider GAO‘s
recommendations.
www.gao.gov/cgi-bin/getrpt?GAO-04-772.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact A. Bruce Steinwald at
(202) 512-7119.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Payment Rates Were Generally Lower for Separately Paid Drugs, but
Cannot Be Evaluated for Packaged Drugs and Devices:
No Type of Hospital Provided a Disproportionate Number of Services
Associated with Certain Drugs and Devices:
Payment Rates May Not Uniformly Reflect Hospitals' Costs:
Conclusions:
Recommendations for Executive Action:
Agency and External Reviewer Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Summary of Hospital Charge-Setting Methodologies:
Appendix III: Comments from the Centers for Medicare & Medicaid
Services:
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Acknowledgments:
Tables Tables :
Table 1: Payment Rates for Drug Administration APCs, 2002-2003:
Table 2: Percentage of Medicare Outpatient Services by Type for All
Hospitals and for Hospitals with Various Characteristics:
Table 3: Number and Percentage of Hospitals that Reported Methods for
Setting Base Charges for Clinic Visit Services, 2003:
Table 4: Number and Percentage of Hospitals that Reported Methods to
Mark Up Drug and Device Charges, 2003:
Figures:
Figure 1: Example of a Single-Service Claim with Packaged Services:
Figure 2: Example of a Multiple-Service Claim with Packaged Services:
Letter September 17, 2004:
The Honorable Nancy L. Johnson:
Chairman:
Subcommittee on Health:
Committee on Ways and Means:
House of Representatives:
Dear Chairman Johnson:
Since 2000, hospitals have been paid fixed, predetermined amounts under
a prospective payment system (PPS) for outpatient services delivered to
Medicare beneficiaries. By paying hospitals under a PPS, Medicare seeks
to encourage them to operate efficiently, as they retain the difference
if their payments exceed their costs of providing necessary services.
However, unlike most other Medicare PPSs, where each payment amount is
designed to cover the combined costs of a large bundle of services, the
outpatient prospective payment system (OPPS) is more like a fee
schedule and pays a designated rate for each outpatient service
provided to a beneficiary.
By law, the initial 2000 OPPS rates were based on hospitals' 1996
median costs.[Footnote 1] During the development of OPPS, the
anticipated use of 1996 data prompted concerns that the costs of new
technology items, such as drugs, biologicals,[Footnote 2] and devices,
first used after 1996 would not be represented in the 2000 payment
rates and that hospitals might not provide the newest technology
because of a perceived shortfall in payment. Accordingly, Congressional
concerns were raised that beneficiaries might lose access to some of
these items upon implementation of the payment system.
The Centers for Medicare & Medicaid Services (CMS),[Footnote 3] the
agency that administers Medicare, sets OPPS payment rates by using
charges hospitals report to CMS for the outpatient services they
provide. The agency has used this methodology since setting the 2000
rates. CMS converts each hospital's charge to that hospital's cost for
each service using a specific adjustment for each of the hospital's
departments. Under OPPS, an outpatient service consists of a primary
service and its packaged services, the additional services or items
associated with the primary service. For example, the surgical
insertion of a pacemaker, a primary service, includes packaged services
such as operating and recovery room services, anesthesia, and surgical
and medical supplies, including the pacemaker. CMS combines the costs
of the primary service and packaged services to calculate a total cost
for that primary service. It assigns primary services to ambulatory
payment classification (APC) groups and calculates a payment rate from
the costs of the services in that group. An APC may consist of one
primary service, but more often consists of two or more primary
services with clinical and cost similarity. All primary services
assigned to one APC are paid the same rate.
In response to concerns that the 1996 data that would be used to set
the 2000 OPPS payment rates did not include cost data for new drugs and
devices first used after 1996, in 1999, the Congress required that a
payment be made for a temporary period, in addition to the OPPS amount,
for certain drugs and devices used in the delivery of outpatient
services.[Footnote 4] New drugs and devices are eligible to receive
these temporary additional payments, known as pass-through payments,
for 2 to 3 years depending on when their eligibility first began and
when cost data become available to incorporate these items into OPPS as
either a primary or packaged service. These temporary payments for
pass-through drugs generally are equal to 95 percent of the average
wholesale price (AWP),[Footnote 5] and the temporary payments for pass-
through devices are equal to CMS's calculation of the hospital's cost
for the device.
In 2003, the first year for which pass-through eligibility expired for
any drugs or devices, 236 drugs and 95 categories of devices[Footnote
6] were incorporated into OPPS.[Footnote 7] Of these drugs and devices,
CMS designated 115 of the drugs primary services and the remaining 121
drugs and all devices packaged services. While those drugs that became
primary services have assigned payment rates, the packaged drugs and
devices do not. At the time CMS made the designations, some drug and
device and hospital industry representatives noted that in basing the
payment for these items on hospitals' costs, Medicare payments for
many had declined significantly. The drug and device industry
representatives were concerned that if hospitals could not recover
their costs through OPPS payments, hospitals would not purchase these
items--in essence, limiting beneficiary access to the products. Some
hospital association representatives were concerned that certain types
of hospitals may provide a higher number of services associated with
drugs and devices, such as cancer center hospitals providing
chemotherapy services or teaching hospitals performing cardiac
procedures involving devices, and therefore may be disproportionately
affected by payment rate decreases for these items. Furthermore, the
decrease in payment rates for drugs and devices led to broader
concerns about how CMS ensures that OPPS payment rates for all
services reflect hospitals' costs.
You asked us to examine these issues. Specifically, we (1) describe how
payment rates changed for those drugs and devices whose pass-through
eligibility expired in 2003 and 2004, (2) determine whether a
particular type or types of hospitals provide a disproportionate number
of Medicare outpatient services associated with drugs and devices, and
(3) examine whether the OPPS rate-setting methodology results in
payment rates that uniformly reflect hospitals' costs for providing
drugs and devices, as well as all other outpatient services, to
beneficiaries, and if it does not, to identify specific factors of the
methodology that are problematic.
To address these objectives, we analyzed 2003 and 2004[Footnote 8] OPPS
payment rates and the 2003 and 2004 AWPs for former pass-through drugs
that are primary services, which we refer to as separately paid drugs.
The remaining drugs and all devices were packaged. Therefore, no
identifiable 2003 or 2004 payment rate for these items exists and we
could not analyze any payment rate change. We also analyzed the
Medicare hospital claims, the bills hospitals submit to CMS for
payment, that were used to set the 2003 OPPS rates.[Footnote 9] These
claims were the latest data available at the time of our analysis, and
we determined they were reliable for our purposes. From the claims
data, we identified the outpatient services most often associated with
drugs or devices.[Footnote 10] We determined whether any hospital type
provided a disproportionate number of these outpatient services, such
as hospitals with and without an outpatient cancer center or major
teaching status, with major teaching hospitals defined as those having
an intern/resident-to-bed ratio of 0.25 or more. We also analyzed
hospitals by their urban/rural location and by their volume of
outpatient services. We analyzed information from 113 hospitals on how
they set their charges for drugs, devices, and other outpatient
services. Of these hospitals, we interviewed officials from 5, received
information from another 50 through association and industry
representatives who gathered the information on our behalf, and
received information from another 58 who were contacted by 7 state
hospital associations in geographically diverse areas on our behalf.
Because these 113 hospitals are not statistically representative of all
hospitals, we cannot generalize our results to other hospitals.
Finally, we spoke with officials at CMS, individual hospitals, hospital
associations, drug and device manufacturers, and trade associations
representing manufacturers of drugs and devices. We also spoke with
consultants who advise hospitals on setting charges for their services.
Our methodology is detailed in appendix I. We conducted our work from
March 2003 through August 2004 in accordance with generally accepted
government auditing standards.
Results in Brief:
The OPPS payment rates of former pass-through, separately paid, drugs
were generally lower than the pass-through payment rate, but the
payment rates of former pass-through drugs and devices that were
packaged cannot be evaluated, as these items are not assigned a
distinct payment rate. The payment rates for the 115 of 236 former
pass-through drugs that expired from pass-through eligibility in 2003
and became separately paid drugs almost universally decreased from the
pass-through payment rate of 95 percent of AWP. Because the remaining
121 pass-through drugs and the devices in the 95 pass-through device
categories were packaged and are not assigned to an APC, we cannot
evaluate any payment rate changes for these items. In 2003, over 90
percent, and in 2004, 100 percent, of former pass-through drugs that
CMS designated as separately paid drugs had payment rates lower than 95
percent of AWP. In both years, the payment rates were often
considerably lower than AWP, but decreases varied substantially. For
example, although the 2003 median drug payment rate was 55 percent of
AWP, one drug had a 2003 payment rate about 7 percent of AWP, while
another had a 2003 payment rate about 94 percent of AWP.
No type of hospital provided a disproportionate number of Medicare
outpatient services associated with certain drugs and devices; in 2001,
these outpatient services as a percentage of total Medicare outpatient
services varied little among different hospital types. For example,
chemotherapy administrations--the outpatient services most frequently
associated with the use of drugs--accounted for an average of 1.8
percent of all hospitals' total number of Medicare outpatient services.
Chemotherapy administration services accounted for an average of 2.0
percent of cancer center hospitals' and 1.8 percent of noncancer center
hospitals' total Medicare outpatient services. Cardiac procedures--the
outpatient services most frequently associated with the use of devices-
-accounted for an average of 0.4 percent of all hospitals' total number
of Medicare outpatient services. Similarly, these cardiac procedures
accounted for an average of 0.4 percent of both major teaching and all
other hospitals' total Medicare outpatient services.
The OPPS rate-setting methodology used by CMS may result in APC payment
rates for drugs, devices, and other outpatient services that do not
uniformly reflect hospitals' costs of providing those services. Two
areas of the methodology are particularly problematic. First, the
claims that CMS uses to calculate hospitals' costs and set payment
rates may not be a representative sample of hospital claims, as CMS has
excluded over 40 percent of multiple-service claims, claims that
include more than one primary service as well as packaged services,
when calculating the cost of all OPPS services, including those with
drugs and devices. It excludes these multiple-service claims because
outpatient claims list all the services delivered during a visit and do
not provide a link between primary and packaged services. Because CMS
cannot associate each packaged service on the claim with one of the
primary services listed on the claim, the agency cannot calculate a
total cost for each primary service on that claim. The data CMS has
available do not allow for the determination of whether excluding a
sizable percentage of the multiple-service claims has an effect on OPPS
payment rates. However, if the types or costs of services on excluded
claims differ from the types or costs of services on included claims,
the payment rates of some or all APCs will not uniformly reflect
hospitals' costs of providing those services. Second, in calculating
hospitals' costs, CMS assumes that, in setting charges within a
specific department, a hospital marks up the cost of each service by
the same percentage. However, many hospitals do not use this
methodology; charge-setting methodologies for drugs, devices, and other
outpatient services vary greatly both across hospitals and departments
of a hospital. CMS's methodology does not recognize hospitals'
variability in setting charges. This may lead to an under or
overestimation of hospitals' costs for certain services. As these costs
are used to set payment rates, payment rates may not uniformly reflect
hospitals' costs.
We recommend that the Administrator of CMS gather the necessary data
and perform an analysis of the types and costs of services on excluded
multiple-service claims to determine if they are different from the
types and costs of services on the claims it includes in setting OPPS
rates. The Administrator should also analyze the effect that the
variation in hospital charge-setting practices has on the rate-setting
methodology. Finally, the Administrator should, in the context of the
first two recommendations, analyze whether the OPPS rate-setting
methodology results in payment rates that uniformly reflect hospitals'
costs of the outpatient services they provide to Medicare
beneficiaries, and, if it does not, make appropriate changes in that
methodology. In commenting on a draft of this report, CMS stated that
it has continued to review and refine its OPPS data collection and
analysis. CMS stated that it is searching for ways to use more data
from multiple-service claims, and it has made efforts in recent rate-
setting analyses to include data from more of these claims. We included
a discussion of these changes in the draft report. In its comments, CMS
stated that we should recognize that its rate-setting methodology that
converts hospital charges to costs using a cost-to-charge ratio does so
at the level of an individual hospital department. The draft report
noted the fact that cost-to-charge ratios were generally calculated on
a department-specific basis; however, we have revised the report to
highlight that information throughout. CMS stated that it will consider
our recommendations as it continues to assess and refine the rate-
setting methodology. Industry representatives who reviewed a copy of
this draft generally agreed with the findings, conclusions, and
recommendations.
Background:
Medicare beneficiaries receive a wide range of services in hospital
outpatient departments, such as emergency room and clinic visits,
diagnostic services such as x-rays, and surgical procedures. To receive
Medicare payment, hospitals report the services they provided to a
beneficiary on a claim form they submit to CMS along with their charge
for each service. For Medicare payment purposes, an outpatient service
consists of a primary service and packaged services, the additional
services or items associated with that primary service. CMS assigns
each primary service to an APC, which may include other similar primary
services, and pays the hospital at the designated APC payment rate,
adjusted for variation in local wages. A hospital can receive multiple
APC payments for a single outpatient visit if more than one primary
service is delivered during that visit.
CMS Methodology for Determining APC Payment Rates:
On outpatient claims, hospitals identify the primary services they
provided using a Healthcare Common Procedure Coding System
(HCPCS)[Footnote 11] code, while they identify packaged services by
either specific HCPCS codes or revenue codes that represent general
hospital departments or centers, such as "pharmacy," "observation
room," or "medical social services." In addition to claims, hospitals
submit annual cost reports to CMS that state their total charges and
costs for the year and the individual hospital department charges and
costs.
As a first step in calculating the OPPS payment rate for each APC, CMS
obtains hospital charge data on each outpatient service from the latest
available year of outpatient claims. It calculates each hospital's cost
for each service by multiplying the charge by a cost-to-charge ratio
that is computed from the hospital's most recent cost report, generally
on an outpatient department-specific basis. In those instances when a
cost-to-charge ratio does not exist for an outpatient department in a
given hospital, CMS uses one from a related outpatient department or
the hospital's overall cost-to-charge ratio for outpatient department
services. The cost of each primary service is then combined with the
costs of the related packaged services to calculate a total cost for
that primary service. On single-service claims, claims with one primary
service, CMS can associate packaged services with the primary service
and calculate a total cost for the service (see fig. 1). However, in
the case of multiple-service claims, claims with more than one primary
service, packaged services and their costs listed on the claim cannot
be associated with particular primary services, as the costs of a
packaged service may be associated with one or a combination of primary
services (see fig. 2). For this reason, CMS excluded all multiple-
service claims from rate setting prior to 2003. Beginning with the 2003
payment rates, CMS identified several methods that allowed it to
convert some multiple-service claims into single-service claims, and
therefore include them in its rate-setting calculations.[Footnote 12]
Figure 1: Example of a Single-Service Claim with Packaged Services:
[See PDF for image]
[End of figure]
Figure 2: Example of a Multiple-Service Claim with Packaged Services:
[See PDF for image]
[End of figure]
After calculating the cost of each primary service assigned to an APC
for each hospital claim, CMS arrays the costs for all claims and
determines the median cost. To calculate the APC's weight relative to
other APCs, CMS compares the median cost of each APC to the median cost
of APC 0601, a mid-level clinic visit, which is assigned a relative
weight of 1.00. For example, if the median cost of APC 0601 is $100 and
the median cost of "APC A" is $50, CMS assigns APC A a relative weight
of 0.50.
To obtain a payment rate for each APC, CMS multiplies the relative
weight by a factor that converts it to a dollar amount. In addition,
CMS annually reviews and revises the services assigned to a particular
APC and uses the new APC assignments and the charges from the latest
available outpatient hospital claims to recalibrate the relative
weights, and therefore the payment rates.
Expiration of Drug and Device Pass-Through Eligibility:
New drugs and devices are eligible to receive temporary pass-through
payments for 2 to 3 years, depending on when each drug and device's
eligibility began. January 1, 2003 was the first time that pass-through
eligibility expired for any drugs or devices. Once pass-through
eligibility for these items expires, CMS determines whether they will
be considered a primary service and assigned to a separate APC or a
packaged service and included with the primary services with which they
are associated on a claim.
On January 1, 2003, 236 drugs and on January 1, 2004, 7 drugs expired
from pass-through eligibility. For those drugs expiring in 2003, CMS
designated any drug with a median cost exceeding $150 (115 drugs) as a
primary service, and each was assigned to its own, separately paid APC.
The remaining drugs (121 drugs), those with a median cost less than
$150, were designated as packaged services, that is, their costs were
included with the costs of the primary service they were associated
with on the claim. CMS stated that many of these latter drugs were
likely present on claims with a primary service of drug administration
and were therefore packaged with the services assigned to the six drug
administration APCs, that is, the three chemotherapy administration and
three drug injection and infusion APCs.[Footnote 13] For these packaged
drugs, although hospitals had previously received two payments, one for
the administration of the drug or other primary service and an
additional pass-through payment for the drug itself, when eligibility
expires, hospitals receive only one payment for both the administration
or other primary service and the packaged drug. In 2004, all 7 drugs
for which pass-through eligibility expired were designated as primary
services and assigned to their own, separately paid APCs.
On January 1, 2003, the devices in 95 device categories, and on January
1, 2004, the devices in 2 device categories, expired from pass-through
eligibility; in both years, the devices in all device categories were
designated as packaged services and their costs were included with the
costs of the primary service they were associated with on the claim.
Although hospitals had previously received two payments, one for the
procedure associated with the device and an additional pass-through
payment for the device, hospitals then received only one payment for
both the procedure and its associated device.
Payment Rates Were Generally Lower for Separately Paid Drugs, but
Cannot Be Evaluated for Packaged Drugs and Devices:
The OPPS payment rates of former pass-through, separately paid drugs
were generally lower than the pass-through payment rate, but the
payment rates of former pass-through drugs and devices that were
packaged cannot be evaluated, as these items are not assigned a
distinct payment rate. In 2003, the payment rates for the 115 of 236
former pass-through drugs that were designated as separately paid drugs
almost universally decreased from the pass-through payment rates. In
2004, for all 7 former pass-through drugs were designated as separately
paid drugs and the payment rates for all 7 decreased. In 2003, for the
remaining 121 pass-through drugs and the devices in 95 pass-through
device categories and, in 2004, the devices in 2 device categories, all
of which were packaged, we cannot evaluate the payment rate changes
because individual payment rates were not assigned for these items when
they expired from pass-through eligibility.
Payment Rates Generally Decreased For Separately Paid, Former Pass-
Through Drugs:
In 2003, about half of all drugs for which pass-through eligibility
expired (115 of 236) were assigned to their own APC and paid
separately. For these drugs, we determined that over 90 percent had
payment rates lower than 95 percent of AWP, the pass-through payment
rate; the median payment rate was 55 percent of AWP.[Footnote 14]
Individual payment rates were often considerably lower than AWP, but
decreases varied substantially. For example, 1 drug had a payment rate
of about 7 percent of AWP, while another had a payment rate of about 94
percent of AWP. However, 10 drugs had a payment rate of more than 100
percent of AWP. In addition, payment as a percentage of AWP varied by
drug source. The majority of the 113 separately paid drugs that we
analyzed were sole-source (70 percent), followed by multi-source (19
percent), and generic (10 percent).[Footnote 15] Generic drugs, which
were paid the highest percentage of AWP of the three categories, had a
median payment rate of 74 percent of AWP, multi-source drugs had a
median of 56 percent of AWP, and sole-source drugs had a median of 53
percent of AWP.
In 2004, all seven drugs for which pass-through eligibility expired
were assigned to separate APCs. The individual payment rate of each
drug was lower than the pass-through rate of 95 percent of AWP, with a
median payment rate of 69 percent of AWP. All drugs were sole-source.
Although the decreases in payments for these drugs were often
substantial and varied greatly across individual drugs, some level of
decrease is expected when pass-through eligibility expires and payments
become based on hospital costs instead of AWP, which often exceeds
providers' acquisition costs. In 2001, we reported that certain drugs
purchased by individual physicians were widely available at costs from
66 to 87 percent of AWP.[Footnote 16]
Packaged Drugs and Devices Do Not Have Distinct Payment Rates:
In 2003, the costs of 121 former pass-through drugs and devices in 95
former pass-through device categories were packaged. Because CMS
combines the costs of these items with the costs of the primary
services with which they are associated on each claim, a specific
payment rate for each of these drugs and devices does not exist.
However, to indirectly assess the payment rates of packaged drugs and
devices, we reviewed the payment rates of the APCs with which CMS
stated they were likely packaged. CMS stated that, in 2003, former
pass-through drug costs were most likely packaged with the six drug
administration APCs. The payment rates for five of the six APCs
decreased in 2003, when the costs of packaged former pass-through drugs
were included, compared to 2002, when the costs of these drugs were not
considered in the rate-setting calculations (see table 1). We are
unable to determine why the costs of these APCs decreased because
fluctuations in costs for any of the primary or packaged services in
these APCs, in addition to the costs of the packaged drug, could have
affected the payment rates. However, we would have expected that
combining the costs of up to $150 of packaged former pass-through drugs
with the costs of the primary services in these APCs would have
increased the 2003 payment rates for more of these APCs as more than
half of them are less than $150.
Table 1: Payment Rates for Drug Administration APCs, 2002-2003:
APC: 0116;
Description: Chemotherapy administration by other technique except
infusion;
2002: $46.32;
2003: $40.43;
Difference: -$5.89;
Percent change: -13%.
APC: 0117;
Description: Chemotherapy administration by infusion only;
2002: $205.14;
2003: $187.98;
Difference: -$17.16;
Percent change: -8%.
APC: 0118;
Description: Chemotherapy administration by both infusion and other
technique;
2002: $214.81;
2003: $286.02;
Difference: $71.21;
Percent change: 33%.
APC: 0120;
Description: Infusion therapy except chemotherapy;
2002: $157.80;
2003: $113.70;
Difference: -$44.10;
Percent change: -28%.
APC: 0352;
Description: Level I injections;
2002: $20.87;
2003: $11.62;
Difference: -$9.25;
Percent change: -44%.
APC: 0359;
Description: Level II injections;
2002: $91.63;
2003: $59.12;
Difference: -$32.51;
Percent change: -35%.
Source: GAO analysis of APC payment rates (67 Fed. Reg. 9,556, 9,569,
9,572 (2002); 67 Fed. Reg. 66,815, 66,818 (2002)).
[End of table]
To indirectly assess the payment rates of the devices in the 95 device
categories expiring from pass-through eligibility in 2003, we reviewed
APCs for which CMS determined that device costs made up at least 1
percent of the APC's total cost.[Footnote 17] We found that the payment
rates of these APCs varied substantially between 2002 and 2003, when
the former pass-through device costs likely were included. For example,
the payment rate of APC 0688 (Revision/Removal of Neurostimulator Pulse
Generator Receiver) decreased by 48 percent, while the payment rate of
APC 0226 (Implantation of Drug Infusion Reservoir) increased by 94
percent. However, we cannot attribute these fluctuations solely to the
packaging of pass-through devices, because changes between 2002 and
2003 in the costs of the primary services and other packaged services
assigned to the APCs also could have affected the payment rates.
In 2004, the devices in two device categories expired from pass-through
eligibility. The devices in one category were associated with services
in one APC--APC 0674 (Prostate Cryoablation). The payment rate for this
APC almost doubled. We were unable to examine the change in payment for
the APC or APCs associated with the devices in the other expired pass-
through device category because CMS did not identify the APC or APCs
into which the costs of the devices in this device category were
packaged.
No Type of Hospital Provided a Disproportionate Number of Services
Associated with Certain Drugs and Devices:
No type of hospital provided a disproportionate number of Medicare
outpatient services associated with certain drugs and devices, as these
services, as a percentage of total Medicare outpatient services, varied
little among hospitals with differences in characteristics such as the
presence of an outpatient cancer center, teaching status, urban or
rural location, or outpatient service volume.[Footnote 18]
In 2001, outpatient drugs were most often associated with APCs for
chemotherapy administration services, and devices in pass-through
device categories were most often associated with APCs for cardiac
services.[Footnote 19] We found that chemotherapy administration and
cardiac services composed only a small proportion of total Medicare
outpatient services for all hospitals (see table 2). In addition, these
proportions varied little among different types of hospitals.
Table 2: Percentage of Medicare Outpatient Services by Type for All
Hospitals and for Hospitals with Various Characteristics:
All hospitals;
Number of hospitals: 4,034;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 1.8%;
Cardiac services as a percent of total Medicare outpatient services:
0.4%.
Cancer center hospitals;
Number of hospitals: 555;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 2.0%;
Cardiac services as a percent of total Medicare outpatient services:
0.5%.
Noncancer center hospitals;
Number of hospitals: 3,479;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 1.8%;
Cardiac services as a percent of total Medicare outpatient services:
0.3%.
Major teaching hospitals;
Number of hospitals: 288;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 2.4%;
Cardiac services as a percent of total Medicare outpatient services:
0.4%.
Hospitals without major teaching hospital status;
Number of hospitals: 3,746;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 1.7%;
Cardiac services as a percent of total Medicare outpatient services:
0.4%.
Urban hospitals;
Number of hospitals: 2,493;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 1.7%;
Cardiac services as a percent of total Medicare outpatient services:
0.5%.
Rural hospitals;
Number of hospitals: 1,541;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 2.3%;
Cardiac services as a percent of total Medicare outpatient services:
0.2%.
Small volume hospitals;
Number of hospitals: 1,258;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 1.0%;
Cardiac services as a percent of total Medicare outpatient services:
0.1%.
Medium volume hospitals;
Number of hospitals: 1,840;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 1.3%;
Cardiac services as a percent of total Medicare outpatient services:
0.3%.
Large volume hospitals;
Number of hospitals: 936;
Chemotherapy administration services as a percent of total Medicare
outpatient services: 2.2%;
Cardiac services as a percent of total Medicare outpatient services:
0.5%.
Source: GAO analysis of CMS data.
Notes: We used hospital outpatient claims from April 1, 2001 through
March 31, 2002, the claims CMS used to set the 2003 OPPS rates, applied
to hospital categories defined in 2003. We defined "cancer center
hospitals" as those hospitals that were members of the Association of
Community Cancer Centers as of February 28, 2003, the latest data
available when we performed this analysis. We defined a major teaching
hospital as a hospital with an intern/resident-to-bed ratio of 0.25 or
more and a hospital without major teaching hospital status as a ratio
of less than 0.25. We defined the urban or rural location of a hospital
using Medicare's classification of that hospital under OPPS. We defined
volume based on the number of outpatient services a hospital provided.
Small volume hospitals were those with fewer than 11,000 services,
medium volume hospitals were those with at least 11,000 services but
fewer than 43,000 services, and large volume hospitals were those with
at least 43,000 services.
[End of table]
Payment Rates May Not Uniformly Reflect Hospitals' Costs:
The OPPS rate-setting methodology used by CMS may result in APC payment
rates for drugs, devices, and other outpatient services that do not
uniformly reflect hospitals' costs. Two areas of CMS's methodology are
particularly problematic. First, the claims that CMS uses to calculate
hospitals' costs and set payment rates may not be a representative
sample of hospital claims, as CMS excluded many multiple-service claims
when calculating the cost of OPPS services, including those with drugs
and devices. The data CMS has available do not allow for the
determination of whether excluding many multiple-service claims has an
effect on OPPS payment rates. However, if the types or costs of
services on excluded claims differ from the types or costs of services
on included claims, the payment rates of some or all APCs may not
uniformly reflect hospitals' costs of providing those services. Second,
when calculating hospitals' costs, CMS assumes that, in setting charges
within a specific department, a hospital marks up the cost of each
service by the same percentage. However, not all hospitals use this
methodology, and charge-setting methodologies for drugs, devices, and
other outpatient services vary greatly across hospitals and across
departments within a hospital. CMS's methodology does not recognize
hospitals' variability in setting charges, and, therefore, the costs of
services used to set payment rates may be under or overestimated.
CMS May Not Be Using a Representative Sample of Claims to Set Payment
Rates:
The claims CMS uses to calculate hospitals' costs and set payment rates
may not be a representative sample of hospital claims. When calculating
the cost of all OPPS services, including drugs and devices, to set
payment rates, CMS excluded over 40 percent of all multiple-service
claims because CMS could not associate particular packaged services
with a specific primary service on these claims.[Footnote 20] Drug and
device industry representatives we spoke with raised concerns that
certain drugs and devices are often billed on multiple-service claims
that are largely excluded from rate setting. For example, they stated
that chemotherapy administration and the drugs themselves are typically
billed on a 30-day cycle; therefore, one claim likely includes
chemotherapy administration and other primary and packaged services and
is likely excluded from CMS's rate-setting calculations.[Footnote 21]
Device industry representatives we spoke with also asserted that
multiple-service claims represent more complex, and therefore,
potentially costlier, outpatient visits and excluding them from the
rate-setting calculations underestimates the actual cost of a service.
Because of the structure of the outpatient claim, the data CMS has
available do not allow for the comparison of single-service claims and
multiple-service claims to determine whether excluding many multiple-
service claims has an effect on OPPS payment rates. It is possible that
excluding many multiple-service claims has little or no effect on OPPS
payment rates. However, if the types or costs of services on excluded
claims differ from the types or costs of services on included claims,
the payment rates of some or all APCs may not uniformly reflect
hospitals' costs of performing these services.
Rate-Setting Methodology Does Not Account for Variation in Hospital
Charge-Setting Practices:
The costs of drugs, devices, and other outpatient services that CMS
calculates from hospital charges and uses to set payment rates may not
uniformly approximate hospitals' costs. CMS multiplies charges by
hospital-specific cost-to-charge ratios to calculate hospitals' costs,
which decreases the charges by a constant percentage. This methodology
is based on the assumption that each hospital marks up its costs by a
uniform percentage within each department to set each service's charge.
However, we found that not all hospitals use this methodology to
establish their charges, and that drug, device, and general charge-
setting methodologies vary greatly among hospitals and even among
departments within the same hospitals.
We received information from 113 hospitals, although not all hospitals
responded to each question. Of the 92 hospitals responding, 40 reported
that they mark up all drug costs by a uniform percentage to establish
charges, but 33 reported that they mark up low-cost drugs by a higher
percentage and high-cost drugs by a lower percentage. Of 85 hospitals
responding, 39 reported that they mark up all device costs using a
uniform percentage, but 39 reported that they mark up low-cost devices
using a higher percentage and high-cost devices using a lower
percentage. In addition, 19 hospitals reported using other methods to
set drug charges and 7 reported doing so for devices, such as a lower
percentage markup for low-cost drugs and devices than for high-cost
drugs and devices. (See appendix II for a more detailed description of
hospital charge-setting methodologies.)
Because CMS uses the same rate-setting methodology to determine drug
and device payment rates as it uses for all other OPPS services, we
also asked hospitals about more general charge-setting practices and
found that they varied as well. To set base charges for clinic visits,
hospitals reported using a wide variety of prices and methods,
including cost, market comparisons, and the rates Medicare pays for
outpatient services as well as payment rates for other benefit
categories. To mark up clinic visits, 29 of the 45 hospitals responding
used a uniform percentage increase; the remaining 16 hospitals reported
using a variety of other methods, including using a higher percentage
markup for low-cost visits than for high-cost visits.
In addition to variation in charge-setting methodologies among
hospitals, variation also can exist within an individual hospital.
Hospital consultants told us that a single item can be assigned
different charges if it is provided through more than one department
within the same hospital.
All 58 hospitals responding reported that they update their charges for
inflation; 40 reported they did so annually, 12 did so at other times,
and 6 did so both annually and at other times. Of the 58 hospitals that
reported updating their charges for inflation, 25 reported that they
apply a uniform, across-the-board percentage increase to all their
charges, and 4 hospitals reported using both a uniform percentage and
another type of increase. The remaining 29 hospitals reported using
another method, such as applying an increase only to selected
departments within the hospital. In addition, 33 of the 57 hospitals
reported that they excluded some charges from these updates. The type
of charges they excluded varied widely, but included drug and
laboratory charges. The variation in methods hospitals use to update
their charges reduces the likelihood that charges will uniformly
reflect costs.
Conclusions:
CMS's rate-setting methodology may result in OPPS payment rates that do
not uniformly reflect hospitals' costs of providing services. We
identified two areas of this methodology that are of particular concern
because not enough data are currently available to assess their impact.
First, CMS excludes many multiple-service claims from its rate-setting
calculations. To the extent that the types and costs of services on
these claims are different from services on the claims included in the
analysis, OPPS payment rates may not reflect hospitals' costs. The
current structure of the outpatient claims does not allow for an
analysis to determine the effect of these exclusions. Second, in its
rate-setting calculations, CMS assumes that each hospital uses a
uniform markup percentage to set its charges within each department,
although we found that hospitals use a variety of markup methodologies.
Therefore, CMS's application of a constant cost-to-charge ratio may not
result in an accurate calculation.
Recommendations for Executive Action:
We recommend that the Administrator of CMS take the following three
actions. First, the Administrator should gather the necessary data and
perform an analysis that compares the types and costs of services on
single-service claims to those on multiple-service claims. Second, the
Administrator should analyze the effect that the variation in hospital
charge-setting practices has on the OPPS rate-setting methodology.
Third, the Administrator should, in the context of the first two
recommendations, analyze whether the OPPS rate-setting methodology
results in payment rates that uniformly reflect hospitals' costs of the
outpatient services they provide to Medicare beneficiaries, and, if it
does not, make appropriate changes in that methodology.
Agency and External Reviewer Comments and Our Evaluation:
We received written comments on a draft of this report from CMS (see
app. III). We also received oral comments from external reviewers
representing seven industry organizations. They included the Advanced
Medical Technology Association (AdvaMed), which represents
manufacturers of medical devices, diagnostic products, and medical
information systems; the American Hospital Association (AHA); the
Association of American Medical Colleges (AAMC), which represents
medical schools and teaching hospitals; the Association of Community
Cancer Centers (ACCC); the Biotechnology Industry Organization (BIO),
which represents biotechnology companies and academic institutions
conducting biotechnology research; the Federation of American Hospitals
(FAH), which represents for-profit hospitals; and the Pharmaceutical
Research and Manufacturers of America (PhRMA).
CMS Comments and Our Evaluation:
In commenting on a draft of this report, CMS stated that it has
continued to review and refine its OPPS data collection and analysis.
In responding to our recommendation that CMS gather the necessary data
and perform an analysis comparing the types and costs of services on
single-service claims to those on multiple-service claims, CMS stated
that it is searching for ways to use more data from multiple-service
claims, and it has made efforts in recent rate-setting analyses to
include data from more of these claims. We noted these efforts in the
draft report. CMS noted that there are continuing challenges and costs,
to both the federal government and hospitals, to expanding its efforts
in this area. In its comments, CMS suggested that an analysis could be
done using an algorithm to allocate charges among multiple-service
claims, but noted that such an approach could create further
distortions in the relative weights. Our recommendation to CMS,
however, is that the agency should gather additional data on the
relative costs of services on single and multiple-service claims,
rather than continuing to analyze existing data.
In response to our recommendation that CMS analyze the effect of
hospital charge-setting practices on the OPPS rate-setting methodology,
CMS stated that we should recognize that its rate-setting methodology
that converts hospital charges to costs using a cost-to-charge ratio
does so at the level of an individual hospital department. The draft
report noted the fact that CMS generally calculates cost-to-charge
ratios on a department-specific basis; however, we have revised the
report to highlight that information throughout. CMS also said that the
application of cost-to-charge ratios to charges of a hospital has long
been the recognized method of establishing reasonable costs for
hospital services and was an important component of the cost-based
reimbursement system that was used by Medicare to pay for hospital
outpatient services before OPPS was implemented. While we agree that it
was an important component of the prior payment system, we believe the
implementation of the current payment system has changed the relevance
of applying cost-to-charge ratios to determine hospitals' costs. OPPS,
rather than reimbursing individual hospitals on the basis of their
costs of providing outpatient services, uses costs from individual
hospitals to construct a prospective payment system that sets rates for
individual services that apply to all hospitals. Finally, CMS stated
that the Medicare Prescription Drug, Improvement, and Modernization Act
of 2003 specified that cost-to-charge ratios would be used to set
payment amounts for brachytherapy sources; however, a discussion of
brachytherapy payment is outside of the scope of this report.
In response to our recommendation that CMS analyze whether the OPPS
rate-setting methodology results in payment rates that uniformly
reflect hospitals' costs of the services they provide to Medicare
beneficiaries and make any appropriate changes in the methodology, CMS
stated that it will consider our recommendations as it continues to
assess and refine the rate-setting methodology. CMS said that it
believes it has made great strides on this issue and is continuing to
pursue the analyses necessary to create means by which all claims can
be used to set the OPPS relative payment weights and rates.
CMS also made technical comments, which we incorporated where
appropriate.
Industry Comments and Our Evaluation:
Industry representatives generally agreed with the findings,
conclusions, and recommendations in the draft report. Comments on
specific portions of the draft report centered on three areas: payment
rates of former pass-through drugs and devices, provision of services
associated with drugs and devices, and CMS's rate-setting methodology.
Several industry representatives commented on our analysis of Medicare
payment for former pass-through drugs and devices. AHA stated that
although when drugs have expired from pass-through status their payment
rates may have decreased, they are now more consistent, relative to
costs, with the payment rates for other OPPS services. PhRMA agreed
with our finding that the payment rates for former pass-through drugs
and devices that are packaged cannot be evaluated and suggested that we
recommend that CMS specifically address this problem.
Industry representatives commented on our analysis of the provision of
services associated with drugs and devices among different types of
hospitals. ACCC agreed with the percentages of Medicare outpatient
services related to chemotherapy administration and cardiac services in
the draft report; however, it stated that it believed that these
percentages demonstrated that large hospitals provided a
disproportionate share of chemotherapy administration. ACCC and AAMC
stated that these percentages also demonstrated that major teaching
hospitals provided a disproportionate share of chemotherapy
administration services. In addition, both groups suggested that we
perform other analyses by type of hospital, such as the proportion of
total payments, proportion of total services excluding clinic services,
or absolute number of services for which chemotherapy administration
and cardiac services accounted.
Many of the reviewers addressed our finding that CMS's rate-setting
methodology may result in OPPS payment rates that do not uniformly
reflect hospitals' costs. Representatives from AAMC, ACCC, AdvaMed,
BIO, and PhRMA agreed with our conclusion that CMS may not be using a
representative sample of claims to set payment rates and that CMS's
rate-setting methodology does not account for variation in hospital
charge-setting practices. Several of these representatives suggested we
analyze and discuss other factors that could further skew CMS's
calculation of hospital costs, such as its use of incorrect or
incomplete claims in rate setting.
Regarding the suggestion that we specifically recommend that CMS
address the issue that the payment rates for former pass-through drugs
that are packaged and former pass-through devices cannot be evaluated,
we believe that our more general recommendation allows the agency the
flexibility to determine the most appropriate analyses for examining
the rate-setting methodology.
With respect to the comment that the percentages of Medicare outpatient
services accounted for by chemotherapy administration demonstrate that
certain types of hospitals provide a disproportionate share of these
services, we disagree. As noted in the draft report, we found that
these percentages differ by type of hospital, but the differences are
not substantial, as all types of hospitals provided a relatively small
proportion of these services. No type of hospital provided a
disproportionately large number of these services. We analyzed the
proportion of services, rather than payments as industry
representatives suggested, because we believe that is the better
analysis for determining whether a certain type of hospital provides a
disproportionate share of these services. We did not analyze the
proportion of total services except for clinic services or the absolute
number these services made up, as we do not believe such an analysis
would accurately and comparably reflect potential differences between
hospitals for all outpatient services they perform.
The industry representatives also made technical comments, which we
incorporated where appropriate.
We are sending a copy of this report to the Administrator of CMS. The
report is available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov]. We will also make copies available to others on
request.
If you or your staff have any questions, please call me at (202) 512-
7119. Another contact and key contributors to this report appear in
appendix IV.
Sincerely yours,
Signed by:
A. Bruce Steinwald,
Director, Health Care--Economic and Payment Issues:
[End of section]
Appendixes:
Appendix I: Scope and Methodology:
We analyzed Medicare claims data used by the Centers for Medicare &
Medicaid Services (CMS) to set the 2003 outpatient prospective payment
system (OPPS) payment rates. In addition, we analyzed drug average
wholesale prices (AWPs), drug sources (sole-source, multi-source, or
generic), and OPPS payment rates obtained from CMS. We interviewed
officials at CMS and representatives from the American Hospital
Association, Association of American Medical Colleges, Association of
Community Cancer Centers (ACCC), Federation of American Hospitals,
Greater New York Hospital Association, as well as from one large
hospital system, one large hospital alliance, and five individual
hospitals. In addition, we spoke with representatives from the Advanced
Medical Technology Association, Biotechnology Industry Organization,
California Healthcare Institute, Pharmaceutical Research and
Manufacturers of America, as well as from seven drug manufacturers and
three device manufacturers. We also spoke with consultants that advise
hospitals on setting their charges.
To compare payment for drugs to previous pass-through payments, we
relied on information provided by CMS on drug sources and 2003 and 2004
drug payment rates, and on CMS's calculations of the AWPs for these
drugs, which we supplemented with our own calculations. From CMS, we
obtained the drug source and the payment rate for the 115 drugs and the
7 drugs whose pass-through eligibility expired as of January 1, 2003
and January 1, 2004, respectively, that were assigned to separate
ambulatory payment classification (APC) groups. We used Medicare's
January 2003 and January 2004 Single Drug Pricer files to determine the
2003 and 2004 AWPs, respectively, for most of the drugs. For the 37
drugs that were not included in the 2003 Single Drug Pricer file, we
used the 2002 Drug Topics Red Book, published by Thomson Medical
Economics, to calculate their AWPs. For the 2 drugs that were not in
the 2004 Single Drug Pricer file, we used the 2003 Drug Topics Red
Book, published by Thomson PDR, to calculate their AWPs. We calculated
payment rates as a percentage of AWP for all drugs in 2003 and 2004.
From our 2003 analysis, we excluded 1 multi-source drug for which we
calculated an AWP from the 2002 Drug Topics Red Book that was
inconsistent with the 2002 AWP CMS provided to us and another multi-
source drug with an AWP of $0.34, but a payment rate of almost 29,000
percent of that amount.
To determine whether a particular type or types of hospitals provide a
disproportionate number of outpatient services associated with drugs
and devices, we used the outpatient claims file that CMS used to
calculate the 2003 OPPS payment rates.[Footnote 22] To perform our own
data reliability check of this file, we examined selected services to
determine the reasonableness of their frequency in the data set, given
the population of the beneficiaries receiving services and the setting
in which they are delivered. We determined the data were reasonable for
our purposes.
Using the claims, we determined which outpatient services were most
often associated with drugs and devices and found that drugs were most
often associated with chemotherapy administration services and devices
were most often associated with cardiac services. Then, also using the
claims, we compared proportions of chemotherapy administration and
cardiac services for all hospitals, as well as for cancer center and
noncancer center hospitals, major teaching and other hospitals, urban
and rural hospitals, and hospitals with different outpatient service
volumes.[Footnote 23] We included only those hospitals identified in
CMS's 2003 OPPS impact file, a data file CMS constructs to analyze
projected effects of policy changes on various hospital groups, such as
urban and rural hospitals. We excluded hospitals with fewer than 1,100
total outpatient services, or approximately 3 outpatient services per
day, as we believe such hospitals are not representative of most
hospitals with outpatient departments. We defined cancer center
hospitals as those hospitals that were members of ACCC as of February
28, 2003, the latest data available when we performed this analysis. We
obtained the membership list from the ACCC. Using the September 2002
Medicare Provider of Services file and information obtained directly
from the ACCC, we determined the Medicare provider numbers of ACCC
members to identify claims billed by these hospitals. We defined major
teaching hospitals as those hospitals having an intern/resident-to-bed
ratio of 0.25 or more. We defined the urban or rural location of a
hospital based on the urban/rural location indicator in the Medicare
hospital OPPS impact file from calendar year 2003. We defined volume
based on the number of services a hospital provided, also as indicated
in the impact file. Small volume hospitals were those with fewer than
11,000 services, medium volume hospitals were those with at least
11,000 services but fewer than 43,000 services, and large volume
hospitals were those with at least 43,000 services.
We interviewed representatives from hospitals, hospital associations,
and drug and device manufacturers and the associations that represent
them to obtain information about hospital charging practices. We
received information on charge-setting practices from 5 hospitals whose
officials we interviewed. We indirectly received information from 50
other hospitals through association and industry representatives with
whom we spoke. Finally, we contacted seven state hospital associations
in geographically diverse areas not well represented in our previous
sample to identify their members' charging practices. Some hospitals
responded directly to us and others responded to their state
association, which forwarded the responses to us. We received responses
from 58 hospitals. The 113 hospitals from which we received information
are not a statistically representative sample of all hospitals.
We conducted our work from March 2003 through August 2004 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: Summary of Hospital Charge-Setting Methodologies:
We received information from 113 hospitals, although not all hospitals
responded to each question. Hospitals reported using a variety of
methods to set the base charges for their clinic visit services (see
table 3). To set the base charges for drugs, 25 of 57 hospitals
responding reported that they used acquisition cost, 30 used the drug's
average wholesale price (AWP), and 2 used a combination of acquisition
cost and AWP. To set the base charges for devices, 55 of 57 hospitals
responding reported that they used acquisition cost. After setting base
charges, 29 of 45 hospitals responding reported that they marked up all
of their clinic visit services by the same percentage increase,
although they reported using a variety of other methods as well. To
mark up base charges for drugs and devices, most hospitals responding
used either the same percentage for all drugs and for all devices, or
used a graduated percentage markup, marking up low-cost items by a
higher percentage (see table 4).
Table 3: Number and Percentage of Hospitals that Reported Methods for
Setting Base Charges for Clinic Visit Services, 2003:
Cost of visit;
Number: 13;
Percentage: 29.
Comparable charges in market;
Number: 10;
Percentage: 22.
Medicare physician fee schedule;
Number: 8;
Percentage: 18.
Cost of visit and comparable charges in market;
Number: 4;
Percentage: 9.
Unspecified Medicare payment;
Number: 3;
Percentage: 7.
Outpatient prospective payment system amount with an adjustment;
Number: 1;
Percentage: 2.
Cost of visit and Medicare physician fee schedule;
Number: 1;
Percentage: 2.
Unspecified Medicare payment and comparable charges;
Number: 1;
Percentage: 2.
Other;
Number: 4;
Percentage: 9.
Source: GAO.
[End of table]
Table 4: Number and Percentage of Hospitals that Reported Methods to
Mark Up Drug and Device Charges, 2003:
Same percentage for all items;
Drugs: Number: 40;
Drugs: Percentage: 43;
Devices: Number: 39;
Devices: Percentage[A]: 46.
Graduated percentage, higher for low-cost items;
Drugs: Number: 33;
Drugs: Percentage: 36;
Devices: Number: 39;
Devices: Percentage[A]: 46.
Graduated percentage, lower for low-cost items;
Drugs: Number: 6;
Drugs: Percentage: 7;
Devices: Number: 4;
Devices: Percentage[A]: 5.
Other;
Drugs: Number: 13;
Drugs: Percentage: 14;
Devices: Number: 3;
Devices: Percentage[A]: 4.
Source: GAO.
[A] Percentage of total hospitals responding does not total 100 percent
due to rounding.
[End of table]
In addition, 24 of the 57 hospitals responding reported that they
include nonproduct costs as a portion of their drug charges, and 25 of
57 responding reported that they include nonproduct costs as a portion
of their device charges. The most common nonproduct costs included were
administrative and overhead costs. Of the 24 including nonproduct costs
in drug charges, 12 reported that they do so by adding an additional
percentage of the drug acquisition cost to the drug charge. Of the 25
including nonproduct costs in device charges, 16 reported that they do
so by adding an additional percentage of the device acquisition cost to
the device charge. However, the amount of the nonproduct costs as a
percentage of the charges varied widely among hospitals. Of the 24
hospitals including nonproduct costs in drug charges, 16 reported that
the amount varied by the route of administration for the drug, such as
intravenous or intramuscular administration.
Of the 58 hospitals responding, all reported that they update their
charges for inflation; 40 reported they did so annually, 12 did so at
other times, and 6 did so both annually and at other times. While many
used a standard across-the-board percentage increase to update their
charges, the majority used other methods. In addition, 33 of the 57
hospitals responding reported that they exclude certain charges from
these updates. The types of services whose charges they excluded, such
as drug, laboratory, and room charges, varied widely. Finally, 49 of 58
hospitals responding reported that they periodically review all their
charges.
[End of section]
Appendix III: Comments from the Centers for Medicare & Medicaid
Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Centers for Medicare & Medicaid Services:
Administrator:
Washington, DC 20201:
DATE: AUG 19 2004:
TO: A. Bruce Steinwald:
Director, Health Care-Economic and Payment Issues:
FROM: Mark B. McClellan, M.D., Ph.D.
Administrator:
SUBJECT: Government Accountability Office (GAO) Draft Report: MEDICARE:
Information Needed to Assess Adequacy of Rate-Setting Methodology for
Payments, for Hospital Outpatient Services (GAO-04-772):
Thank you for the opportunity to review and comment on the draft
report. We appreciate the interest of the House of Representatives
Subcommittee and the efforts of GAO in the methodology used to set
rates under the Medicare Outpatient Prospective Payment System (OPPS).
As required by the Balanced Budget Act of 1997, the Centers for
Medicare & Medicaid Services (CMS) implemented in August 2000 a new
prospective payment system to pay for most types of Medicare services
provided in hospital outpatient departments. The new system is based on
ambulatory payment classifications (APCs) that are groupings of
clinically similar services that require similar resources. The
relative weights and payments assigned to the APCs for the first
several years of the OPPS were based on an analysis of hospital
outpatient claims under the prior reasonable cost-based methodology.
Beginning with the update for calendar year 2003, the relative weights
for most APCs have been based on hospital claims submitted and paid
under the new system. The CMS establishes a median cost for each APC by
applying a cost-to-charge ratio derived from hospital cost reports to
the charges on the claims. The median cost for each APC is then
compared to the median cost for the mid-level clinic visit, one of the
most frequently performed OPPS services, in order to establish the
relative weight for each APC. Excluded from payment under the OPPS,
and, therefore, excluded from consideration in setting OPPS rates are
such services as services provided under Medicare's physician fee
schedule, and clinical laboratory services paid under the clinical
laboratory fee schedule.
Since the implementation of the OPPS, CMS has continued to review and
refine its data collection and analysis. For example, in the first
year, CMS did not have the capability to analyze multiple procedure
claims. As a result, 40 percent of outpatient claims were excluded
from the weight-setting process. In the past 2 years, CMS has made
significant improvements in the use of multiple procedure claims.
Meanwhile, payment rates for certain items, such as drugs (and for
2003, devices of brachytherapy) that have been priced using claims data
and paid separately were calculated from 100 percent of the line items
in usable claims for those products. As a result, there was no
packaging for those products and use of multiple claims for such items
is not a problem. Overall, for the 2004 update, CMS used at least some
portion of the 82 percent of claims for services that fell under the
OPPS.
It is in this context that we address the recommendations in the GAO
report.
Attachment:
Centers for Medicare & Medicaid Services' Comments to the GAO
Draft Report: MEDICARE. Information Needed to Assess Adequacy of Rate-
Setting Methodology for Payments for Hospital Outpatient Services (GAO-
04-772):
GAO Recommendation:
That CMS gather the necessary data and perform an analysis that
compares the types and costs of services on single-service claims to
those on multiple-service claims.
CMS Response:
The CMS is searching for ways to use the data from all valid claims for
OPPS services, including multiple procedure claims. We have moved to
line item date of service segregation to attempt to associate revenue
code charges submitted without Healthcare Common Procedure Coding
System (HCPCS) codes with charges for the related, separately paid
HCPCS codes. We have also established criteria for bypassing charges
for separately paid HCPCS codes in determining whether a claim may be
treated as a single procedure claim. This has allowed us to use
significantly more claims data for 2004 OPPS than for 2002 or 2003
OPPS. We expect to further refine the methodology for 2005 OPPS. We are
also exploring ways of allocating line item charges among multiple
separately paid HCPCS codes on a claim. However, we note that any
methodology we use will allocate such charges generally but not
specifically.
When we have spoken to hospitals about this issue, they describe the
difficulties in allocating line item charges for packaged services
among the separately paid services, and that is why they bill charges
without HCPCS codes. For example, when there is a charge for
administration of an anesthetic during a surgery in which two
procedures are performed, the hospital cannot allocate the charge for
the anesthetic between the two procedures. Similarly, when a patient
incurs charges in an operating room and recovery room for two
procedures that were performed in the same operative session, hospitals
are unable to split the charges between the two separately paid
procedures as would be necessary to secure an accurate allocation of
the total charge for the use of those spaces.
An allocation of charges to use in multiple procedure claims would
require use of assumptions in an algorithm, rather than an actual split
based on the amount of the drug or the amount of operating room or
recovery room time that relates to each procedure separately. The
result of such a process may, in fact, create more distortion in
relative weights than would occur if we continue to set weights based
on single procedure claims. Moreover, there would be no way to confirm
that there is more or less distortion unless hospitals can provide the
data needed to create a "gold standard" against which to compare both
methodologies. Again, the cost to hospitals of providing, and to
Medicare of collecting and analyzing, such data needs to be considered.
As we have explained above, we have made and are continuing to make
strides in the amount of data from multiple procedure claims we are
able to use in rate setting. In our forthcoming proposed rule for 2005,
we expect to discuss additional improvements to our processes for using
data from multiple procedure claims.
GAO Recommendation:
That CMS analyze the effect that the variation in hospital charge-
setting practices has on the OPPS rate-setting methodology.
CMS Response:
The GAO says that "CMS assumed that to set charges, all hospitals mark
up their costs by the same percentage." We believe this statement is an
overgeneralization. Our department-specific cost-to-charge ratios
(CCRs) capture variability in charging practices by cost center. The
CMS uses department (cost-center) specific, or absent them, hospital
overall CCRs applied to the charges from that hospital by related
revenue code in order to determine the relative costs of services for
that hospital. The CCRs are determined from the cost and charge data
provided by the hospital and therefore reflect the differential
charging practices by department and by hospital. For example, for the
2004 final rule, median CCRs by department ranged from 0.12 for CAT
Scan (3230) to 1.12 for Family Practice (4040).
Hence, the CMS methodology does not assume that "all hospitals mark up
their charges by the same percentage." However the methodology does
assume that the CCR for the department or for the hospital reflects the
markup practices of that hospital for all services within the
department or within the hospital and therefore it determines costs on
a basis that is broader than each specific item or service in the
department. The CCRs are not available for specific items and services
within the hospital.
While we recognize that the application of CCRs to the charges of a
hospital does not result in precise costing for individual items and
services, it has long been the recognized method of establishing
reasonable costs for hospital services. It has been supported by
hospital organizations in public comments as the best means of
establishing relative costs for OPPS rate setting. The application of
CCR to charges is a fundamental principle of cost reimbursement that
was in effect in Medicare for many years, supported by the hospital
industry as resulting in an appropriate reflection of the costs of
services they furnished. Moreover, as recently as the passage of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA), Congress specified that this methodology would be used to set
payment amounts for brachytherapy sources at cost. In a budget neutral
payment system, the relative costs serve as the means for distributing
the payments relative to the costs of items and services paid under the
system and the application of hospital reported CCR to hospital
reported charges in order to determine relative cost is the best system
we currently have on which to base the payment distribution.
The issue raised by manufacturers is whether the department-specific
ratio can adequately capture the variation in mark-up between low and
high cost services within the same cost center. This variability may
reflect hospital pricing sensitivity to income elasticity on the part
of beneficiaries, among other influences, such as competitive pricing.
The CMS' use of variable OCRs and the specific distinction of "within"
department differences should be addressed. GAO might demonstrate that
this was the issue raised in its interview guide. Further, GAO should
note that its acquisition cost survey required by the MMA will provide
some evidence on variability in charges for drugs, assuming that
sampling is by hospital.
GAO Recommendation:
That CMS analyze whether the OPPS rate-setting methodology results in
payment rates that uniformly reflect hospitals' costs of the services
they provide to Medicare beneficiaries, and, if it does not, make
appropriate changes in that methodology.
CMS Response:
We will consider GAO's recommendations as we continue to assess and
refine our rate-setting methodology. In that regard, we would welcome
more specific recommendations from GAO based on the findings in this
report and/or as part of the studies that GAO is undertaking pursuant
to its mandate under the MMA on hospital costs for drugs, biologicals,
radiopharmaceuticals, and brachytherapy sources. We also look forward
to receiving the results of GAO's surveys on hospital acquisition costs
of the items mandated by the MMA. However, we believe the GAO
recommendations should take into account the costs to providers and to
the Medicare program of gathering additional data for analysis and
possible methodological changes.
We continue to welcome specific recommendations from GAO and others on
additional ways to increase the percentage of data used from multiple
procedure claims to update OPPS rates. In spite of the progress we have
made, we recognize that there are some services that are very
frequently performed with other services that may be underrepresented
in our rate-setting data. However, we believe we have made great
strides on this issue and we are continuing to pursue the analyses
necessary to create means by which all claims can be used to set the
OPPS relative payment weights and rates.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Nancy A. Edwards, (202) 512-3340:
Acknowledgments:
Beth Cameron Feldpush, Joanna L. Hiatt, Maria Martino, and Paul M.
Thomas made major contributions to this report.
(290290):
FOOTNOTES
[1] The Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4523, 111
Stat. 251, 445 (1997).
[2] In this report, we use the term "drugs" to refer to both drugs and
biologicals.
[3] In July 2001, the agency's name was changed from the Health Care
Financing Administration to CMS.
[4] The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of
1999, Pub. L. No. 106-113, App. F, § 201(b), 113 Stat. 1501A-321,
1501A-337 (1999).
[5] Often described as a "sticker price" or "list price," AWP is the
average price that a manufacturer suggests wholesalers charge
pharmacies.
[6] Devices were initially eligible for pass-through payments based on
the individual device. Effective April 1, 2001, devices are eligible
for pass-through payments based on device categories, with an
individual device eligible if it meets a category description.
[7] Since this group included all drugs and devices eligible over a 4-
year period (from January 1, 1997 through January 1, 2001), many more
items expired in 2003 than are expected to expire in any subsequent
year.
[8] In our analysis, we used the 2004 OPPS payment rates set by CMS in
the November 7, 2003 final rule, which were based on hospital costs and
hospital outpatient claims. 68 Fed. Reg. 63,398 (2003). These rates do
not reflect provisions that limited the amount of fluctuation between
the 2003 and 2004 rates that were implemented on January 1, 2004 as a
result of the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003. We did not analyze the updated rates because
they were not based on hospital costs or hospital outpatient claims.
Pub. L. No. 108-173, § 621, 117 Stat. 2066, 2307 (2003).
[9] These claims are for services performed from April 1, 2001 through
March 31, 2002.
[10] We analyzed all outpatient drugs that were individually identified
in the outpatient claims data, not only the drugs classified as pass
through. We could analyze only pass-through devices because these
devices were individually identified in the outpatient claims, while
other devices were not.
[11] The HCPCS is a uniform system of codes used by providers and
medical suppliers to report professional services, procedures, and
supplies.
[12] For multiple-service claims that have no packaged services, CMS
considers each primary service its own single-service claim. Similarly,
CMS treats each pathology service on a multiple-service claim as its
own single-service claim. If a multiple-service claim contains one
primary service together with certain other primary services that CMS
states do not typically have packaged services associated with them,
such as a chest X-ray or an electrocardiogram, CMS assigns all packaged
services to that one primary service and treats it as a single-service
claim. In addition, if the claim includes the date for each service and
each primary service has a different date, CMS uses the dates of
service associated with packaged services listed on the claims to match
them to primary services with the same dates of service, and makes each
primary service its own single-service claim.
[13] CMS expects that most drug charges would be present on claims that
also include the service for the administration of the drug; however,
it is possible that drug charges are present on claims with primary
services other than an administration and are included in the APCs to
which those primary services are assigned.
[14] This analysis excludes 2 drugs: 1 for which we were unable to
determine a reliable AWP, and 1 for which the payment rate was an
extremely high percentage of AWP.
[15] Generally, "sole-source" drugs are brand-name drugs produced by
only one manufacturer, "multi-source" drugs are drugs with generic
equivalents or drugs for which there are two or more competing
therapeutically-equivalent brand-name products, and "generic" drugs
are not patented and can be produced by many manufacturers.
[16] GAO, Medicare: Payments for Covered Outpatient Drugs Exceed
Providers' Cost, GAO-01-1118 (Washington, D.C.: Sept. 21, 2001).
[17] These APCs are identified in 67 Fed. Reg. 66,801-2 (2002).
[18] We defined "cancer center hospitals" as those hospitals that were
members of the Association of Community Cancer Centers as of February
28, 2003, the latest data available when we performed this analysis. We
defined teaching status by a hospital's intern/resident-to-bed ratio.
We defined a major teaching hospital as a hospital with an intern/
resident-to-bed ratio of 0.25 or more and a hospital without major
teaching hospital status having a ratio of less than 0.25.
[19] We analyzed all outpatient drugs identified by a HCPCS code in the
outpatient claims data, not only the drugs that had pass-through
eligibility. We could analyze only pass-through devices because these
devices were specifically identified in the outpatient claims while
other devices were not.
[20] In 2003 and 2004, CMS used 53 percent of the approximately 20.4
million and 58 percent of the approximately 16.9 million multiple-
service claims to set its rates, respectively. In the same years, the
exclusion of the multiple-service claims from the analysis resulted in
CMS using only 81 and 83 percent of all claims, respectively.
[21] Beginning in 2004, CMS uses the dates of service associated with
packaged services listed on a claim to match them to primary services
with the same dates of service to create a single service claim. Thus,
claims with only chemotherapy administration and packaged services
including drugs, and no other primary services delivered on the same
dates, would be included in rate setting, however claims with
chemotherapy administration, packaged services, and additional primary
services delivered on the same date or dates would be excluded.
[22] This data file contains claims for services performed from April
1, 2001 through March 31, 2002.
[23] For both chemotherapy administration and cardiac services, we
included in our analysis the procedure or administration codes
associated with those services. We also included any chemotherapy or
cardiac drugs that were assigned to their own APC for payment in 2003.
We identified only separately paid drugs, and did not include packaged
drugs, because the structure of the data file would have counted the
packaged codes twice in our analysis - once with the procedure code and
again if they were also listed separately on the claim. For the same
reason we excluded all of the device codes from our analysis, as all
devices that lost pass-through eligibility were packaged in 2003.
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