Medicare
Comments on CMS Proposed 2006 Rates for Specified Covered Outpatient Drugs and Radiopharmaceuticals Used in Hospitals Gao ID: GAO-06-17R October 31, 2005On July 25, 2005, the Centers for Medicare & Medicaid Services (CMS) in the Department of Health and Human Services (HHS) published its notice of proposed rulemaking (NPRM) entitled "Medicare Program; Proposed Changes to the Hospital Outpatient Prospective Payment System and Calendar Year 2006 Payment Rates." As part of these changes, CMS is proposing Medicare payment rates for certain hospital outpatient drugs classified for payment purposes as specified covered outpatient drugs (SCOD). The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) defined a SCOD as a drug or radiopharmaceutical used in hospital outpatient departments, covered by Medicare, and paid for individually rather than as part of a payment group with other services. With regard to SCODs, the MMA directed CMS to set 2006 payment rates equal to hospitals' average acquisition costs--the cost to hospitals of acquiring a product, net of rebates. In several related requirements, the MMA directed us to provide information on SCOD costs and CMS's proposed rates. First, we were required to conduct a survey of hospitals to obtain data on their acquisition costs of SCODs and provide information based on these data to the Secretary of Health and Human Services for his consideration in setting 2006 Medicare payment rates. We provided information from this survey in two reports--one on drugs and biologicals, and another on radiopharmaceuticals. These reports presented systematic information on hospitals' purchase prices of SCODs and limited information on rebates. Second, we were required to evaluate CMS's proposed rates for SCODs and comment on their appropriateness in light of the survey of SCOD prices we conducted. In response to the second requirement, this report assesses the appropriateness of the Medicare payment rates that CMS has proposed for SCODs, taking into account the purchase prices obtained from the MMA-mandated survey we conducted in 2004 and 2005. Specifically, this report focuses on the appropriateness of CMS's proposed 2006 hospital outpatient rates for (1) drug SCODs and (2) radiopharmaceutical SCODs. To conduct this assessment, we examined the information CMS provided in the proposed rule on the data sources and methodology used to set the 2006 rates, analyzed this information in light of our survey of hospitals' purchase prices, and convened an expert panel to review our findings. Consistent with the MMA, we did not study the issue of hospitals' handling costs for SCODs and do not address these costs in this report. We performed our work according to generally accepted government auditing standards from July through October 2005.
We consider CMS's selection of a data source--average sales price (ASP)--for use in setting Medicare's hospital outpatient rates for drug SCODs to be practical, given available alternatives, but we consider CMS's proposed 2006 rates for drug SCODs to be excessive. CMS proposes to base its 2006 drug SCOD rates on manufacturers' ASP data, setting rates at ASP+6 percent. ASP is a composite measure of the average price of a SCOD--net of discounts, rebates, and other price concessions--paid by all purchasers, not just hospitals. Manufacturers report this information quarterly. In our view, ASP is a practical data source, providing the most timely publicly available data on prices of drug SCODs. However, we have two concerns about setting the proposed drug SCOD rates. As a composite measure, ASP is a black box, lacking the detail CMS needs to validate the reasonableness of the data underlying the reported prices. Without a breakdown of price data showing rebates and other components as well as average prices by purchaser type, CMS cannot ensure that ASPs accurately reflect average acquisition costs by hospital purchasers alone. CMS does not provide a convincing rationale for proposing a rate 6 percent higher than ASP. CMS's analysis indicates that ASP+6 percent will exceed hospitals' acquisition costs. CMS states that the prices reported in our survey--that is, the average prices hospitals paid for drug SCODs (which do not net out rebates received at a later time--equal ASP+3 percent. Logically, acquisition costs, which do net out rebates from purchase prices, would equal an amount less than ASP+3 percent. Therefore, our survey data and CMS's analysis of these data indicate that a rate set at or above ASP+3 percent is not appropriate, given that it would exceed the hospitals' average acquisition cost. Similarly, we are concerned that CMS's proposed 2006 rates for radiopharmaceutical SCODs will, on average, exceed hospitals' acquisition costs. CMS chose to use cost estimates developed from hospital charges rather than survey data on the prices hospitals reported paying for radiopharmaceuticals. However, as we have previously reported, the methodology for estimating costs from charges results in significant imprecision. CMS states that it intends to set rates for radiopharmaceutical SCODs that are consistent with previous years' payment rates, even though the MMA does not establish such a criterion. ASPs are not available for radiopharmaceuticals for 2006 rate setting, but CMS plans to get this information from manufacturers for future years' rates.
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Director: Team: Phone:GAO-06-17R, Medicare: Comments on CMS Proposed 2006 Rates for Specified Covered Outpatient Drugs and Radiopharmaceuticals Used in Hospitals
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October 31, 2005:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
The Honorable Joe Barton:
Chairman:
The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:
The Honorable William M. Thomas:
Chairman:
The Honorable Charles B. Rangel:
Ranking Minority Member:
Committee on Ways and Means:
House of Representatives:
Subject: Medicare: Comments on CMS Proposed 2006 Rates for Specified
Covered Outpatient Drugs and Radiopharmaceuticals Used in Hospitals:
On July 25, 2005, the Centers for Medicare & Medicaid Services (CMS) in
the Department of Health and Human Services (HHS) published its notice
of proposed rulemaking (NPRM) entitled "Medicare Program; Proposed
Changes to the Hospital Outpatient Prospective Payment System and
Calendar Year 2006 Payment Rates."[Footnote 1] As part of these
changes, CMS is proposing Medicare payment rates for certain hospital
outpatient drugs--classified for payment purposes as specified covered
outpatient drugs (SCOD). The Medicare Prescription Drug, Improvement,
and Modernization Act of 2003 (MMA) defined a SCOD as a drug or
radiopharmaceutical used in hospital outpatient departments, covered by
Medicare, and paid for individually rather than as part of a payment
group with other services.[Footnote 2]
With regard to SCODs, the MMA directed CMS to set 2006 payment rates
equal to hospitals' average acquisition costs--the cost to hospitals of
acquiring a product, net of rebates.[Footnote 3] In several related
requirements, the MMA directed us to provide information on SCOD costs
and CMS's proposed rates.[Footnote 4] First, we were required to
conduct a survey of hospitals to obtain data on their acquisition costs
of SCODs and provide information based on these data to the Secretary
of Health and Human Services for his consideration in setting 2006
Medicare payment rates. We provided information from this survey in two
reports[Footnote 5]--one on drugs and biologicals, and another on
radiopharmaceuticals.[Footnote 6] These reports presented systematic
information on hospitals' purchase prices of SCODs and limited
information on rebates. Second, we were required to evaluate CMS's
proposed rates for SCODs and comment on their appropriateness in light
of the survey of SCOD prices we conducted.[Footnote 7]
In response to the second requirement, this report assesses the
appropriateness of the Medicare payment rates that CMS has proposed for
SCODs, taking into account the purchase prices obtained from the MMA-
mandated survey we conducted in 2004 and 2005. Specifically, this
report focuses on the appropriateness of CMS's proposed 2006 hospital
outpatient rates for (1) drug SCODs and (2) radiopharmaceutical SCODs.
To conduct this assessment, we examined the information CMS provided in
the proposed rule on the data sources and methodology used to set the
2006 rates, analyzed this information in light of our survey of
hospitals' purchase prices, and convened an expert panel to review our
findings.[Footnote 8] Consistent with the MMA, we did not study the
issue of hospitals' handling costs for SCODs and do not address these
costs in this report. We performed our work according to generally
accepted government auditing standards from July through October 2005.
Results in Brief:
We consider CMS's selection of a data source--average sales price
(ASP)--for use in setting Medicare's hospital outpatient rates for drug
SCODs to be practical, given available alternatives, but we consider
CMS's proposed 2006 rates for drug SCODs to be excessive.
CMS proposes to base its 2006 drug SCOD rates on manufacturers' ASP
data, setting rates at ASP+6 percent. ASP is a composite measure of the
average price of a SCOD--net of discounts, rebates, and other price
concessions--paid by all purchasers, not just hospitals. Manufacturers
report this information quarterly. In our view, ASP is a practical data
source, providing the most timely publicly available data on prices of
drug SCODs. However, we have two concerns about setting the proposed
drug SCOD rates:
* As a composite measure, ASP is a black box, lacking the detail CMS
needs to validate the reasonableness of the data underlying the
reported prices. Without a breakdown of price data showing rebates and
other components as well as average prices by purchaser type, CMS
cannot ensure that ASPs accurately reflect average acquisition costs by
hospital purchasers alone.
* CMS does not provide a convincing rationale for proposing a rate 6
percent higher than ASP. CMS's analysis indicates that ASP+6 percent
will exceed hospitals' acquisition costs. CMS states that the prices
reported in our survey--that is, the average prices hospitals paid for
drug SCODs (which do not net out rebates received at a later time)--
equal ASP+3 percent. Logically, acquisition costs, which do net out
rebates from purchase prices, would equal an amount less than ASP+3
percent. Therefore, our survey data and CMS's analysis of these data
indicate that a rate set at or above ASP+3 percent is not appropriate,
given that it would exceed the hospitals' average acquisition cost.
Similarly, we are concerned that CMS's proposed 2006 rates for
radiopharmaceutical SCODs will, on average, exceed hospitals'
acquisition costs. CMS chose to use cost estimates developed from
hospital charges rather than survey data on the prices hospitals
reported paying for radiopharmaceuticals. However, as we have
previously reported,[Footnote 9] the methodology for estimating costs
from charges results in significant imprecision. CMS states that it
intends to set rates for radiopharmaceutical SCODs that are consistent
with previous years' payment rates, even though the MMA does not
establish such a criterion. ASPs are not available for
radiopharmaceuticals for 2006 rate setting, but CMS plans to get this
information from manufacturers for future years' rates.
In light of our assessment that CMS's proposed rates are higher than
can be justified, we are recommending that the Secretary of Health and
Human Services reconsider the level at which HHS has proposed to set
drug SCOD rates, reconsider its reliance on charge-based cost estimates
in setting radiopharmaceutical SCOD rates, and collect more detailed
information on ASPs. In written comments on a draft of this report, CMS
stated that it is considering our recommendations as it prepares the
final rule on the OPPS for 2006.
Background:
The relationship of SCODs to the outpatient prospective payment system
(OPPS) and the distinctions among acquisition costs, prices, and
related terms provide a context for interpreting CMS's proposed 2006
rates for SCODs and the agency's discussion of these rates in the NPRM.
Hospital Outpatient Payment System and SCODs:
The recent history of Medicare's rate setting for hospital outpatient
department services forms a backdrop for our comments on the proposed
SCOD payment rates. Specifically, CMS uses OPPS to pay hospitals for
services that Medicare beneficiaries receive as part of their treatment
in hospital outpatient departments. Under OPPS, Medicare pays hospitals
predetermined rates for most services.
When OPPS was first developed as required by the Balanced Budget Act of
1997,[Footnote 10] the OPPS rates for hospital outpatient services,
drugs, and radiopharmaceuticals were based on hospitals' 1996 median
costs. However, these rates prompted concerns that payments to
hospitals would not reflect the costs of newly introduced
pharmaceutical products used to treat, for example, cancer, rare blood
disorders, and other serious conditions. In turn, congressional
concerns were raised that beneficiaries might lose access to some of
these products if hospitals avoided providing them because of a
perceived shortfall in payments. In response to these concerns, the
Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999
authorized pass-through payments, which were a way to temporarily
augment the OPPS payments for newly introduced pharmaceutical products
first used after 1996.[Footnote 11] The MMA modified this payment
method for some of these pharmaceutical products.[Footnote 12] As part
of the modification, the MMA defined the new SCOD payment category,
which includes many of these newly introduced pharmaceutical products.
Acquisition Costs, Purchase Prices, Discounts, and Rebates:
Hospital acquisition costs--the level at which CMS is directed to set
payment rates for SCODs--cannot be directly observed from price data
alone. Hospitals can buy pharmaceutical products directly from
manufacturers or from other vendors, namely wholesalers and
distributors.[Footnote 13] Hospitals may receive discounts or rebates
or both. Discounts are price concessions given by manufacturers or
wholesalers that are reflected in the purchase price--the price
hospitals pay at the time of delivery. Rebates are price concessions
given to hospitals by manufacturers subsequent to receipt of the
product. The acquisition cost to hospitals is the difference between
the purchase price paid at the time of a product's delivery and any
rebates given by the manufacturer after hospitals receive the product.
(See fig. 1.) As a result of rebates, a hospital's acquisition cost for
a product may be lower than the purchase price.
Figure 1: Relationship of Purchase Prices, Rebates, and Acquisition
Costs:
[See PDF for image]
Note: Numbers are hypothetical.
[End of figure]
Both discounts and rebates depend on a hospital's purchasing patterns.
Manufacturers' discounts and rebates may be based on a hospital's
purchase volume of a drug or on its market share--the percentage of a
certain type of drug bought from a single manufacturer. In some cases,
rebates are based on a purchaser's volume or market share of a set, or
bundle, of products defined by the manufacturer. This bundle may
include more than one drug or a mixture of drugs and other products,
such as bandages and surgical gloves. Hospitals can also receive
"prompt pay" discounts when they pay in advance or within a prescribed
time period.[Footnote 14]
In contrast to purchase price and acquisition cost, which are common
business and economic terms, ASP is a price measure established in law
and used by CMS. This price measure is used to set payment rates for
drugs administered in physician offices and covered under part B of
Medicare. CMS instructs pharmaceutical manufacturers to report ASP data
to CMS within 30 days after the end of each quarter. The MMA defined
ASP as the average sales price for all U.S. purchasers[Footnote 15] of
a drug, net of volume, prompt pay, and cash discounts; free goods
contingent on a purchase requirement; and charge-backs and
rebates.[Footnote 16]
CMS's Proposed Rule to Pay for SCOD Products in 2006:
Under the MMA, payment for SCODs in 2006 is required to be equal to the
average acquisition cost for the drug as determined by the Secretary of
Health and Human Services, taking into account the hospital acquisition
cost survey data we collected in 2004 and 2005.[Footnote 17]
CMS has issued an NPRM that, along with other matters relating to the
OPPS, describes the way it proposes to implement the MMA requirements
on SCOD payment rates. CMS will receive comments from interested
organizations and individuals, consider these comments, and publish a
final rule--which may differ in some particulars from the proposed
rule--later in 2005. To establish the proposed rates, CMS made two
primary decisions for both drug SCODs and radiopharmaceutical SCODs:
the data source to use and the level at which the rates should be set.
Data for Drug SCODs:
CMS considered three possible data sources--purchase prices from our
survey, Medicare charges, and ASP; it selected ASP. The NPRM noted two
problems with the purchase price data: (1) prices could have increased
since the end of the time period for which they were collected--July
2003 through June 2004--and (2) the data did not take into account
rebates and similar price concessions. The problem cited with the
Medicare charge data was that charges include both acquisition costs
and handling costs. Because of the inclusion of handling costs, CMS
concluded that Medicare charges were not an acceptable proxy for
acquisition costs. The NPRM stated that ASP-based payment rates served
as the best proxy for average acquisition costs because the
manufacturers' sales prices from the last quarter of 2004 provided the
most recent data available.
Rates for Drug SCODs:
CMS considered setting the rates at three levels: ASP+3 percent, ASP+6
percent, and ASP+8 percent; it selected ASP+6 percent.[Footnote 18] CMS
considered ASP+3 percent because, on average, it was equal to the
purchase price obtained from our survey. It considered ASP+8 percent
because, on average, it was equal to an estimate of cost based on
charges.[Footnote 19] CMS did not use either of these options because
of its concerns about using the purchase prices from our survey and the
charges from Medicare claims as data sources. CMS arrived at a hospital
drug SCOD rate of ASP+6 percent by eliminating the other two options.
The NPRM mentioned that ASP+6 percent is also the rate that Medicare
pays physicians for drugs.
Data for Radiopharmaceutical SCODs:
CMS considered two data sources for radiopharmaceutical rates: survey
results on purchase prices and Medicare charges; it selected Medicare
charges.[Footnote 20] ASP was not an option because ASP has not been
collected for radiopharmaceuticals. (For payment rates in 2007 and
future years, CMS plans to collect ASP for radiopharmaceuticals.) CMS
elected not to use the survey results on purchase prices because, in
comparing the purchase prices of the nine radiopharmaceuticals in the
GAO data to CMS's 2005 payment rates, it found that "the GAO purchase
prices were substantially lower for several of these agents."
Similarly, the Medicare charge data yielded estimated costs lower than
the 2005 payment rates. CMS selected the Medicare charge data, noting
that charges are believed to cover both acquisition costs and handling
costs, so these data could be used to set a payment rate that covered
both.
Rates for Radiopharmaceutical SCODs:
Having selected the charge data, CMS had only one option: to use the
charges to estimate costs for setting radiopharmaceutical SCOD rates.
For each radiopharmaceutical SCOD, it proposed adjusting the hospital
charges to a hospital-specific estimate of costs. These estimates of
cost would include both acquisition costs and handling costs. CMS
stated that it intended to maintain consistency whenever possible
between the payment rates in 2005 and 2006, because such "rapid
reductions" could adversely affect beneficiary access to services
utilizing radiopharmaceuticals.[Footnote 21]
Adjustments to Rates for Overhead:
Under the MMA, the Medicare Payment Advisory Commission (MedPAC) was
required to report on adjusting SCOD payments to take account of
overhead and related expenses, such as pharmacy services and handling
costs, and the Secretary may adjust payment rates to take into account
MedPAC's recommendations.[Footnote 22] For drugs, the proposed
regulation provides for increasing the payment for drug acquisition
costs by 2 percent of ASP to cover overhead and handling, resulting in
a total payment for drugs of ASP+6 percent+2 percent. According to CMS,
costs calculated from charges equal ASP+8 percent. Since it has
determined that acquisition costs are equal to ASP+6 percent, and since
pharmacy overhead costs are built into the charges, CMS concluded that
the difference between charge-based costs (equal to ASP+8 percent) and
acquisition costs (which CMS states equal ASP+6 percent) is the
overhead adjustment. Consequently, it proposed to set the overhead
adjustment at 2 percent of ASP.
For radiopharmaceuticals, CMS has chosen to use charge-based costs.
Since these costs appear to include overhead, CMS concluded that no
further adjustment for overhead is required.
See table 1 for a summary of the proposed rule for drug and
radiopharmaceutical SCODs.
Table 1: CMS's Proposed Rule for Drug and Radiopharmaceutical SCODs:
Drug SCODs: Data source;
Alternatives that CMS considered (CMS decision in italics):
* ASP;
* Purchase prices[A];
* Cost estimated from claims data.
Drug SCODs: Rates;
Alternatives that CMS considered (CMS decision in italics):
* ASP+3 percent;
* ASP+6 percent [B];
* ASP+8 percent.
Radiopharmaceutical SCODs: Data source;
Alternatives that CMS considered (CMS decision in italics):
* Purchase prices[A], Cost estimated from claims data.
Radiopharmaceutical SCODs: Rates;
* Alternatives that CMS considered (CMS decision in italics):
* Average purchase price; Cost estimated from charges[C].
Source: GAO analysis of CMS proposed rule.
[A] Calculated by GAO from its hospital survey data.
[B] CMS also proposed an additional 2 percent of ASP to cover
hospitals' overhead and handling costs for drug SCODs.
[C] The rate includes hospitals' overhead and handling costs.
[End of table]
ASP Is Reasonable as Data Source for Setting Rates, but ASP+6 Percent
Is Excessive Relative to Hospitals' Acquisition Costs:
The results from our survey of hospitals' purchases of drug SCODs
suggest that the data source on which CMS proposes to base its rate-
setting is reasonable, but the proposed rate is too high. For several
practical reasons, ASP is an acceptable data source for setting drug
SCOD rates, given the challenges of collecting drug price data.
However, without more information on the data used to construct ASP,
CMS cannot determine if this blend of average prices paid by all U.S.
purchasers--not just hospitals--measures the prices paid by hospitals
alone with sufficient accuracy. In addition, CMS's proposal to set the
2006 payment rate 6 percent above ASP is excessive and inconsistent
with setting payment rates equal to acquisition costs.
ASP Practical as Data Source, but Accuracy Could Be Affected by Certain
Information Gaps:
CMS's decision to use ASP data is practical for four reasons. First,
ASP at least roughly approximates hospital acquisition costs of drug
SCODs.[Footnote 23] Second, the use of ASP does not entail data
collection start-up costs for CMS or manufacturers, as CMS uses an ASP-
based methodology to pay for drugs in the physician office setting.
Third, ASP is the most recent publicly available price information: it
is based on data submitted by manufacturers 30 days after the close of
each quarter. In contrast, an alternative method to ASP--conducting
surveys of hospitals--would likely be costly, present challenges to
hospitals' information system capabilities, and require a lengthy
period for data collection and processing.[Footnote 24] Fourth, ASP
takes account of rebates, which we found were difficult for hospitals
to report, and therefore we did not deduct them from our estimates.
Notwithstanding these advantages, information gaps remain that render
ASP a "black box" in terms of its constituent components. For example,
in reporting ASP data to CMS, manufacturers do not break out ASP price
components, such as rebates and other price concessions.[Footnote 25]
CMS instructs manufacturers to deduct components such as rebates in
calculating ASP, but lacking a price breakdown--or an independent
source of price and rebate data--the agency cannot assess whether
rebates and other components were appropriately excluded or whether the
amount of any exclusions was plausible. In addition, information about
the basis on which manufacturers calculate rebates would be useful.
Collecting price breakdowns and related information would allow CMS to
assess the reasonableness of the data underlying the reported prices.
In addition, because ASP is an average of prices paid for a product by
all U.S. purchasers, it lacks sufficient detail for estimating
acquisition costs of hospitals in particular. ASP data are not compiled
by purchaser type--such as hospital outpatient department, physician
office, retail pharmacy, or wholesaler. Thus, ASP does not permit CMS
to distinguish between prices paid by hospitals and those paid by other
end purchasers. The net effect of averaging all sales into one price is
to weaken ASP as an accurate indicator of acquisition costs for
hospitals alone.
Rationale Unconvincing for CMS's Proposed Rates, Which Would Pay
Hospitals More Than Their Acquisition Costs:
CMS proposes to set payments for drug SCODs at ASP+6 percent, but the
questions that arise from setting rates at this level are not answered
by the agency's analysis. As CMS notes, the MMA requires that the
agency's determination of average acquisition costs take into account
our mandated survey of prices hospitals paid for SCOD products.
According to CMS, our survey's purchase prices on average equal ASP+3
percent,[Footnote 26]and we and CMS agree that these purchase prices do
not account for any after-purchase rebates that would lower the
product's actual cost to the hospital. Logically, then, for payment
rates to equal acquisition costs, CMS would need to set rates lower
than ASP+3 percent, taking our survey data into account. We could not
determine how much lower the rates should be set, as neither we nor CMS
were able to systematically quantify the magnitude of rebates or other
price concessions as a percentage of a product's purchase price or ASP.
In effect, ASP+3 percent is the upper bound of acquisition costs--that
is, acquisition costs should be less than ASP+3 percent. Consistent
with our reasoning, CMS notes that "Inclusion of these rebates and
price concessions in the GAO data would decrease the GAO prices
relative to the ASP prices, suggesting that ASP+6 percent may be an
overestimate of hospitals' average acquisition costs."
Nevertheless, CMS did not propose to set rates at less than ASP+3
percent. It suggests that SCOD prices may have increased from the June
30, 2004, end point of the time period for which hospitals submitted
survey data. However, neither data from our survey of purchase prices
nor CMS's quarterly ASP data support the agency's concerns about
potential drug price increases. Specifically:
* Between the first and last quarters for which we collected survey
data, purchase prices for drug SCODs decreased slightly--falling by
about 1 percent, on average.
* CMS found that, between the fourth quarter of 2004 and the first
quarter of 2005, ASP declined, on average, by 2 percent. CMS officials
also told us that, between the third and fourth quarters of 2004, the
trend in the average ASP for drug SCODs was relatively flat or slightly
downward.
The lack of evidence for SCOD drug price inflation--coupled with CMS's
calculation that hospitals' acquisition costs on average are lower than
purchase prices (equivalent to ASP+3 percent)--show that a rate for
SCOD drugs of ASP+6 percent would be too high. In the NPRM, CMS notes
that it proposes to pay for drug SCODs at the payment rates used for
drugs used in physician offices and suggests that a "consistency of
drug pricing between physician offices and hospital outpatient
departments" would be desirable. However, CMS does not show evidence
that acquisition costs are similar for the two provider types.
CMS's Estimates of Hospitals' Costs for Radiopharmaceuticals Do Not
Utilize Available Data on Actual Prices Paid and May Be Excessive:
CMS's proposed rates for radiopharmaceutical SCODs are cost estimates
based on charges and, although ASP data are not available for
radiopharmaceuticals, do not utilize available survey data on actual
prices paid for these products. In addition, the proposed rates may be
excessive.
Historically, CMS has not directed manufacturers to report ASPs for
radiopharmaceuticals. Lacking these data, CMS proposes to set 2006
rates for radiopharmaceutical products equal to its estimates of the
costs to hospitals of acquiring and handling these products. To obtain
these cost estimates, CMS converts charges to costs using a ratio that
applies to all of a hospital's expenses and is not specific to
radiopharmaceuticals. In calculating this ratio, CMS will use the most
recent data available on costs, which likely will be for 2004.
CMS contends that its estimated costs are the best available proxy for
the average acquisition cost of a radiopharmaceutical and include its
handling cost. It states that hospitals' different purchasing,
preparation, and handling practices for radiopharmaceuticals are
reflected in hospitals' charges, which can be converted to costs using
hospital-specific cost-to-charge ratios. In the absence of actual
transaction data, this method would be reasonable though imperfect. At
best this method is subject to significant imprecision. The charge-
setting methodologies of hospitals and departments within hospitals
vary considerably, whereas CMS's cost-to-charge calculations assume
uniformity.[Footnote 27] In contrast, we collected transaction data for
our recent reports.[Footnote 28] Our survey data included purchase
prices on nine key radiopharmaceutical SCODs--accounting for over 90
percent of Medicare spending on all radiopharmaceutical SCODs. These
purchase prices are averages of the actual prices that hospitals paid.
As a result, the average purchase prices approximate hospitals'
acquisition costs more closely than the charge-based estimates CMS has
proposed. Unlike purchase prices for drugs, purchase prices for most
radiopharmaceuticals are likely to be equivalent to acquisition costs,
as rebates are not commonly paid for radiopharmaceuticals. Regarding
the radiopharmaceutical SCODs for which purchase price data are not
available and which account for less than 10 percent of Medicare
spending on radiopharmaceutical SCODs, CMS's proposed charge-based
method of estimating costs is reasonable in setting 2006 rates.
CMS does not rely on the purchase prices from our survey in setting
rates for radiopharmaceutical SCODs. It contends that the average
purchase prices developed from our survey for some radiopharmaceutical
SCODs are not suitable because these prices were substantially lower
than CMS's payment rates for these SCODs in 2005.[Footnote 29] However,
this relationship to payment rates is also true for CMS's estimated
costs of radiopharmaceutical SCODs, based on charges found in hospital
claims data--the method selected in CMS's proposed rule. CMS states
that it wants to maintain consistency between 2005 and 2006 payment
rates and is concerned that "rapid reductions" in payment rates could
adversely affect access to radiopharmaceuticals. As with purchase
prices, CMS also found that for several radiopharmaceuticals its
estimated costs based on charges were lower than CMS's 2005 payment
rates. However, CMS did not explain why, despite their similar
relationship to the payment rates, the estimated costs from claims data
were preferable to the actual purchase prices for key
radiopharmaceutical SCODs.
Nonetheless, maintaining consistency with 2005 rates is a questionable
goal, since the MMA directed CMS to pay SCODs an amount equal to
acquisition costs and did not mention other goals. Moreover, this
relationship suggests that some of CMS's 2005 payment rates were
excessive relative to the actual costs hospitals incurred to acquire
these products, thereby refuting CMS's contention that "rapid
reductions" in 2006 payment rates (based on average purchase price)
could reduce beneficiary access to services using radiopharmaceuticals.
Furthermore, in light of the tendency CMS noted for 2005 rates to
exceed purchase prices, we are concerned that payment rates for
radiopharmaceutical SCODs for 2006 may also be too high.
Conclusions:
Overall, we have two concerns about CMS's proposed 2006 rates for drug
SCODs:
* First, ASP is a black box, which does not permit CMS to ensure the
reasonableness of the data underlying the drug SCOD rates. While CMS's
selection of ASP as a data source for drug SCODs is reasonable, given
the alternatives, additional information to validate ASP is needed to
assess the accuracy of these data in approximating hospitals'
acquisition costs. A breakdown of ASP by hospitals and other purchaser
types would enable CMS to determine if ASP--a blend of prices paid by
wholesalers and various end purchasers--closely approximates the prices
paid by hospitals alone. A separate breakdown of ASP by rebates and
other components would enable CMS to assess whether the magnitudes of
the various components are reasonable and to confirm that they are
taken into account appropriately in calculating ASPs.
* Second, the proposed rates for drug SCODs are too high because their
level exceeds hospitals' acquisition costs. To approximate hospitals'
acquisition costs, average purchase prices--estimated by CMS to equal
ASP+3 percent--would need to be reduced by some unknown magnitude to
account for rebates. Instead, CMS's proposed rate--ASP+6 percent--is
higher than the average purchase price, for reasons that CMS does not
convincingly explain.
For setting radiopharmaceutical SCOD rates, CMS proposes to rely on
charge-based estimates of cost, which are likely to be inaccurate
measures of acquisition costs, and dismisses available purchase price
data, which cover products accounting for more than 90 percent of
Medicare's expenditures for hospital outpatient radiopharmaceuticals.
CMS's proposed 2006 rates for radiopharmaceutical SCODs are likely to
exceed hospitals' acquisition costs. CMS relies on cost estimates
rather than available data on actual purchase prices. CMS declined to
use our purchase prices for the proposed 2006 radiopharmaceutical SCOD
rates because it found that our prices were substantially lower than
CMS's 2005 payment rates. However, the fact that 2005 payment rates
were higher--or lower--than the purchase prices hospitals paid for key
radiopharmaceutical SCODs only reveals weaknesses in the payment rates.
Paying hospitals' acquisition costs and no more should be the aim that
drives CMS's rate-setting calculations for SCODs. For drug SCODs, CMS
proposes rates that are too high, while for radiopharmaceutical SCODs,
the agency has declined to set rates equal to an available measure of
acquisition costs.
Recommendations for Executive Action:
We recommend that, to better approximate hospitals' acquisition costs
of SCODs, the Secretary of Health and Human Services take three
actions:
* Reconsider the level of proposed payment rates for drug SCODs, in
relation to survey data on average purchase price, the role of rebates
in determining acquisition costs, and the desirability of setting
payment rates for SCODs at average acquisition costs.
* Reconsider the decision to base payment rates for radiopharmaceutical
SCODs exclusively on estimated costs, in light of the availability of
data on actual prices paid for key radiopharmaceuticals.
* Collect information on ASP components and ASP by purchaser type to
validate the reasonableness of reported ASPs as a measure of hospital
acquisition costs.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, CMS summarized our
analyses of its proposed method and payment rates for SCODs. (We
reprinted CMS's comments in enclosure I of this report.) CMS stated
that it is considering our recommendations as it prepares the final
rule on the OPPS for 2006. In particular, CMS expressed appreciation
for our analysis of the data sources it considered in the NPRM and
noted our concern that because of information gaps, CMS cannot ensure
that ASPs accurately reflect hospitals' acquisition costs. CMS affirmed
its commitment to ensuring that SCOD payment rates equal hospitals'
average acquisition costs, as required by law, and cited our finding
that ASP+3 percent should be a ceiling on payment rates. However, our
finding was that ASP+3 percent is the upper bound on acquisition costs;
therefore we have revised our report to clarify that payment rates
should be less than the ceiling. With respect to radiopharmaceutical
SCODs, CMS expressed appreciation for our analysis and noted our
concern that CMS's proposed charge-based rates would overpay hospitals
for these products. CMS also noted our recommendation to collect
additional information on ASP to validate the reasonableness of
reported ASPs, saying that it would consider the feasibility of the
recommendation.
Our recommendations seek to ensure that the payment rates Medicare sets
for SCODs equal hospitals' average acquisition costs and that these
average costs are measured as accurately as possible. We reiterate the
importance of taking our recommendations into account in preparing the
final rule.
We are sending copies of this report to the Secretary of Health and
Human Services and the Administrator of CMS. The report is available at
no charge on GAO's Web site at http://www.gao.gov. We will also make
copies available to others on request. If you or your staff have any
questions about this report, please contact me at (202) 512-7119 or
steinwalda@gao.gov. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in enclosure II.
Signed by:
A. Bruce Steinwald:
Director, Health Care:
Enclosures - 2:
Comments from the Department of Health and Human Services:
DEPARTMENT OF HEALTH 8t HUMAN SERVICES:
Office of Inspector General:
Washington, D.C. 20201:
OCT 21 2005:
Mr. A. Bruce Steinwald:
Director, Health Care:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Mr. Steinwald:
Enclosed are the Department's continents on the U.S. Government
Accountability Office's:
(GAO's) draft correspondence entitled, "MEDICARE: Comments on CMS
Proposed 2006 Rates for Specified Covered Outpatient Drugs and
Radiopharmaceuticals Used in Hospitals" (GAO-06-17R). These comments
represent the tentative position of the Department and are subject to
reevaluation when the final version of this report is received.
The Department appreciates the opportunity to comment on this draft
report before its publication.
Sincerely,
Signed for:
Daniel R. Levinson:
Inspector General:
Enclosure:
The Office of Inspector General (OIG) is transmitting the Department's
response to this draft correspondence in our capacity as the
Department's designated focal point and coordinator for U.S. Government
Accountability Office reports. OIG has not conducted an independent
assessment of these comments and therefore expresses no opinion on
them.
HHS COMMENTS ON THE U.S. GOVERNMENT ACCOUNTABILITY OFFICE'S DRAFT
CORRESPONDENCE ENTITLED, "MEDICARE: COMMENTS ON CMS PROPOSED 2006 RATES
FOR SPECIFIED COVERED OUTPATIENT DRUGS AND RADIOPHARMACEUTICALS USED IN
HOSPITALS" (GAO-06-17R):
The Department of Health and Human Services (HHS) appreciates the
opportunity to comment on the U.S. Government Accountability Office's
(GAO) draft correspondence.
General Comments:
The draft correspondence summarizes GAO's position regarding the
proposed payment rates for Specified Covered Outpatient Drugs (SCODs)
and radiopharmaceuticals included in the calendar year (CY) 2006
Outpatient Prospective Payment System (OPPS) Proposed Rule.
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) instructed the Centers for Medicare & Medicaid Services
(CMS) to pay hospitals for outpatient drugs based on average
acquisition cost beginning in 2006. Also in the MMA was a provision
requiring GAO to conduct a survey in 2004 and 2005 on hospital
acquisition cost of drugs in the outpatient department and to share the
results with CMS.
In the OPPS proposed rule, CMS proposed basing average acquisition cost
on average sales price (ASP) data already collected by CMS. CMS
included GAO's findings on hospital acquisition costs in our analysis
of the three proposed payment rate options: ASP + 3 percent, ASP + 6
percent, and ASP + 8 percent. As radiopharmaceuticals were not required
to report ASP data in 2005, CMS proposed to base payment on hospital
charges adjusted to cost using hospital-specific, department-specific
cost-to-charge (CCR) ratios.
In general, GAO supports CMS's proposal to pay acquisition costs based
upon ASP methodology and includes further analysis of the three
proposed payment rates for SCODs discussed in the OPPS rule. In
addition, GAO analyzes the proposed payment rate for
radiopharmaceuticals and offers alternative suggestions for CMS to
consider for all drugs and radiopharmaceuticals.
The GAO analysis notes several reservations to CMS's proposal to set
SCOD payment rates at ASP + 6 percent and the payment of
radiopharmaceutical agents at hospital charges adjusted to costs.
CMS is committed to ensuring that in 2006 hospitals are paid for SCODs
and radiopharmaceuticals at average hospital acquisition cost as
required by the MMA. We appreciate the effort that went into this
report and are considering GAO's recommendations as we prepare our
final rule on the OPPS for CY 2006. We look forward to working with GAO
on this and other pertinent issues addressed in this report.
GAO Recommendation #1:
Reconsider the level of proposed payment rates for drug SCODs in
relation to survey data on average purchase price, the role of rebates
in determining acquisition costs, and the desirability of setting
payment rates for SCODs at average acquisition costs.
HHS Response:
CMS is committed to ensuring that in 2006 hospitals are paid for SCODs
at average hospital acquisition cost as required by the MMA.
In this draft correspondence, GAO generally supports CMS's proposal to
base SCOD payments on the ASP methodology because of its ability to
quickly reflect market trends and its ability to account for hospital
rebates, but cautions that information gaps may decrease the accuracy
of ASP rates. GAO suggests ASP + 3 percent as a payment ceiling instead
of CMS's proposed ASP + 6 percent payment rate for SCODs.
We appreciate GAO's analysis of the data sources that we considered
when developing our proposed rule. We are considering GAO's
recommendations as we prepare our final rule on the OPPS for calendar
year 2006.
GAO Recommendation #2:
Reconsider the decision to base payment rates for radiopharmaceutical
SCODs exclusively on estimated costs, in light of the availability of
data on actual prices paid for key radiopharmaceuticals.
HHS Response:
Unlike SCODs, radiopharmaceuticals were not subject to ASP reporting
requirements in 2005, and therefore payments must be based on an
alternative methodology that accounts for the cost of the materials and
their preparation.
GAO presents an analysis regarding radiopharmaceutical costs and
outlines the alternative payment method that they suggest CMS adopt for
these products in 2006. GAO offers analysis that indicates that CMS's
proposed payment rate of hospital charges reduced to cost would overpay
hospitals for these agents.
Again, CMS appreciates GAO's analysis, and the recommendation will be
considered as we prepare our upcoming OPPS final rule.
GAO Recommendation #3:
Collect information on ASP components and ASP by purchaser type to
validate the reasonableness of reported ASPS as a measure of hospital
acquisition costs.
HHS Response:
We note the GAO's recommendations for better understanding the
relationship between ASP and hospital acquisition costs and will
consider the feasibility of the recommendation.
[End of section]
Enclosure II:
GAO Contact and Staff Acknowledgments:
GAO Contact:
A. Bruce Steinwald, (202) 512-7119 or steinwalda@gao.gov:
Acknowledgments:
Jon Ratner, Assistant Director; Hannah Fein; Dae Park; Phyllis
Thorburn; Thomas Walke; and Craig Winslow contributed to this report.
(290487):
FOOTNOTES
[1] 70 Fed. Reg. 42,674.
[2] Pub. L. No. 108-173, sec. 621(a), § 1833(t)(14)(B), 117 Stat. 2066,
2307--08 (to be codified at 42 U.S.C. § 1395l(t)(14)(B)).
[3] Specifically, the MMA required that payment rates equal the average
acquisition costs as determined by the Secretary of Health and Human
Services, unless hospital acquisition cost data are not available. If
such data are not available, the law permitted payment rates to equal
one of several amounts, including average sales price, as calculated
and adjusted by the Secretary. MMA 117 Stat. 2307.
[4] MMA 117 Stat. 2308--09. The law also required the Medicare Payment
Advisory Commission (MedPAC) to report on overhead and related expenses
(such as pharmacy services and handling costs) and authorized the
Secretary of Health and Human Services to adjust the SCOD rates for
these costs. MMA 117 Stat. 2309. See ch. 6, "Payment for pharmacy
handling costs in hospital outpatient departments," in MedPAC's
mandated report, Issues in a Modernized Medicare Program (Washington,
D.C.: June 2005).
[5] GAO, Medicare: Drug Purchase Prices for CMS Consideration in
Hospital Outpatient Rate Setting, GAO-05-581R (Washington, D.C.: June
30, 2005), and GAO, Medicare: Radiopharmaceutical Purchase Prices for
CMS Consideration in Hospital Outpatient Rate Setting, GAO-05-733R
(Washington, D.C.: July 14, 2005).
[6] In this report, the term drugs refers to both drugs and
biologicals. Biologicals are products derived
from living sources, including humans, animals, and microorganisms.
Radiopharmaceuticals are radioactive substances used for diagnostic or
therapeutic purposes.
[7] The MMA also required us to report on differences in SCOD
acquisition costs by type of hospital and recommend future data
collection methods, taking into account our experience. We will address
these issues in a future report.
[8] The panelists were Joseph P. Newhouse, John D. MacArthur Professor
of Health Policy and Management, Harvard University; Robert A.
Berenson, Senior Fellow, Urban Institute; Ernst R. Berndt, Professor of
Applied Economics, Sloan School of Management, Massachusetts Institute
of Technology; Andrea G. Hershey, Clinical Coordinator and Pharmacy
Residency Program Director, Union Memorial Hospital (Baltimore, Md.)
and Richard L. Valliant, Senior Research Scientist, University of
Michigan.
[9] GAO, Medicare: Information Needed to Assess Adequacy of Rate-
Setting Methodology for Payments for Hospital Outpatient Services, GAO-
04-772 (Washington, D.C.: Sept. 17, 2004).
[10] Pub. L. No. 105-33, § 4523, 111 Stat. 251, 445--50.
[11] Pub. L. No. 106-113, app. F, § 201(b), 113 Stat. 1501A-321, 1501A-
337--1501A-339.
[12] MMA 117 Stat. 2307--10.
[13] Wholesalers and distributors perform related functions, and the
two terms are often used interchangeably. We refer to both wholesalers
and distributors as wholesalers.
[14] Conversely, vendors can charge markups when hospitals do not pay
within an agreed-upon time period.
[15] MMA 117 Stat. 2240--41. Certain prices, including prices paid by
federal purchasers and prices for drugs furnished under the Medicare
prescription drug discount card program, are excluded. In the future,
prices for drugs furnished under Medicare part D, the prescription drug
benefit, will also be excluded.
[16] A charge-back is a payment by a manufacturer to a wholesaler that
is made when the wholesaler's price to a hospital is lower than the
price the wholesaler initially paid the manufacturer. Charge-back
arrangements occur when hospitals have negotiated lower prices from the
manufacturer, often through a group purchasing organization. All but
Medicaid rebates are deducted in the manufacturer's calculation of ASP.
Under the Medicaid program, manufacturers are required to pay rebates
to states for prescription drugs covered by state Medicaid programs.
[17] MMA 117 Stat. 2307.
[18] 70 Fed. Reg. 42,724--27.
[19] To estimate the cost of a SCOD, CMS multiplied hospital charges
for the SCOD by a ratio of hospital costs to hospital charges.
[20] 70 Fed. Reg. 42,727--28.
[21] CMS gave no indication of the magnitude of any such reductions.
[22] 70 Fed. Reg. 42,728-29. For MedPAC's report and recommendations,
see Issues in a Modernized Medicare Program, ch. 6.
[23] Because purchase price is the largest component of acquisition
costs, and purchase cost is equal to ASP+3 percent, it follows that ASP
roughly approximates acquisition costs. Purchase price is highly
correlated with ASP for drug SCODs (r = .9978).
[24] For example, our methodology, consistent with statutory
requirements, entailed considerable start-up and logistical costs as
well as a substantial period for data collection. The MMA required that
we obtain price information from hospitals, not manufacturers, and that
the sample of hospitals be "large." Our survey included over 1,000
hospitals with a wide range of capabilities to provide needed data
promptly. Fielding the survey required a commitment of substantial
resources. In addition, hospitals had to expend considerable effort to
identify, compile, and transmit purchase price data, making the
potential for frequent data collection through hospital surveys
problematic.
[25] The only information regarding price that CMS requires is the
product's ASP. Nonprice information that manufacturers must report
consists of the manufacturer's name, the product's National Drug Code,
and the number of units.
[26] Our purchase prices do not uniformly equal ASP+3 percent. For
example, for several drug SCODs, the purchase price is approximately
equal to ASP.
[27] See GAO, Medicare: Information Needed to Assess Adequacy of Rate-
Setting Methodology for Payments for Hospital Outpatient Services, GAO-
04-772 (Washington, D.C.: Sept. 17, 2004).
[28] GAO-05-581R and GAO-05-733R.
[29] For two of the radiopharmaceuticals in our survey, CMS payment
rates were lower than purchase prices.
