Medicare Durable Medical Equipment
Class III Devices Do Not Warrant a Distinct Annual Payment Update
Gao ID: GAO-06-62 March 1, 2006
Medicare fee schedule payments for durable medical equipment (DME) that the Food and Drug Administration (FDA) regulates as class III devices, those that pose the greatest potential risk, increased by 215 percent from 2001 through 2004. From 2004 through 2006, and for 2008, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) provided for a payment update for class III DME equal to the increase in the consumer price index for all urban consumers (CPI-U). For 2007, MMA requires the Secretary of Health and Human Services to determine the payment update. MMA also requires that other DME receive a 0 percent update from 2004 through 2008. MMA directed GAO to report on an appropriate payment update for 2007 and 2008 for class III DME. In this report, GAO (1) examined whether class III devices have unique premarketing costs and (2) determined how the fee schedule rate-setting methodology accounts for the premarketing costs of such devices.
GAO found that manufacturers of class III devices, with limited exceptions, have higher premarketing costs than do manufacturers of class II devices that are similar to class III devices. Premarketing costs consist of FDA user fees and research and development costs, both for any clinical data the manufacturer is required to submit and for other research and development costs. Manufacturers of class III devices pay higher FDA user fees, because of the more complex FDA review required prior to marketing, than do manufacturers of class II devices. Specifically, the user fee for class III devices subject to this review in 2005 was $239,237, while the fee for class II devices in 2005 was $3,502. The FDA application and approval process takes longer for class III manufacturers, which lengthens the time it takes before they can market their devices and begin receiving revenue. FDA requires that manufacturers submit clinical data for class III devices, but only occasionally requires the same for class II devices. In interviews with GAO, class III manufacturers stated that they incur higher premarketing costs for other research and development, such as labor costs related to designing a device, compared to manufacturers of class II devices. Class II manufacturers also told GAO that they incur substantial costs related to other research and development. GAO did not evaluate proprietary data to determine whether a difference in other premarketing research and development costs exists between the two types of manufacturers. GAO found that the Medicare DME fee schedule rate-setting methodology accounts for the respective premarketing costs of class II and class III devices in a consistent manner. Regardless of device classification, the Medicare DME fee schedule payment rate for a device is based on either the manufacturer's retail price or historic reasonable Medicare charges, which the Centers for Medicare & Medicaid Services considers equivalent measures. In interviews with GAO, manufacturers of class III devices stated that when setting their retail prices, they take into account the premarketing costs of complying with federal regulatory requirements, including the costs of required clinical data collection and other research and development. These manufacturers accounted for over 96 percent of class III DME payments in 2004. Manufacturers of class II devices also stated that they take into account these costs when setting retail prices.
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GAO-06-62, Medicare Durable Medical Equipment: Class III Devices Do Not Warrant a Distinct Annual Payment Update
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Warrant a Distinct Annual Payment Update' which was released on March
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
March 2006:
Medicare Durable Medical Equipment:
Class III Devices Do Not Warrant a Distinct Annual Payment Update:
GAO-06-62:
GAO Highlights:
Highlights of GAO-06-62, a report to congressional committees:
Why GAO Did This Study:
Medicare fee schedule payments for durable medical equipment (DME) that
the Food and Drug Administration (FDA) regulates as class III devices,
those that pose the greatest potential risk, increased by 215 percent
from 2001 through 2004. From 2004 through 2006, and for 2008, the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) provided for a payment update for class III DME equal to the
increase in the consumer price index for all urban consumers (CPI-U).
For 2007, MMA requires the Secretary of Health and Human Services to
determine the payment update. MMA also requires that other DME receive
a 0 percent update from 2004 through 2008. MMA directed GAO to report
on an appropriate payment update for 2007 and 2008 for class III DME.
In this report, GAO (1) examined whether class III devices have unique
premarketing costs and (2) determined how the fee schedule rate-setting
methodology accounts for the premarketing costs of such devices.
What GAO Found:
GAO found that manufacturers of class III devices, with limited
exceptions, have higher premarketing costs than do manufacturers of
class II devices that are similar to class III devices. Premarketing
costs consist of FDA user fees and research and development costs, both
for any clinical data the manufacturer is required to submit and for
other research and development costs. Manufacturers of class III
devices pay higher FDA user fees, because of the more complex FDA
review required prior to marketing, than do manufacturers of class II
devices. Specifically, the user fee for class III devices subject to
this review in 2005 was $239,237, while the fee for class II devices in
2005 was $3,502. The FDA application and approval process takes longer
for class III manufacturers, which lengthens the time it takes before
they can market their devices and begin receiving revenue. FDA requires
that manufacturers submit clinical data for class III devices, but only
occasionally requires the same for class II devices. In interviews with
GAO, class III manufacturers stated that they incur higher premarketing
costs for other research and development, such as labor costs related
to designing a device, compared to manufacturers of class II devices.
Class II manufacturers also told GAO that they incur substantial costs
related to other research and development. GAO did not evaluate
proprietary data to determine whether a difference in other
premarketing research and development costs exists between the two
types of manufacturers.
GAO found that the Medicare DME fee schedule rate-setting methodology
accounts for the respective premarketing costs of class II and class
III devices in a consistent manner. Regardless of device
classification, the Medicare DME fee schedule payment rate for a device
is based on either the manufacturer‘s retail price or historic
reasonable Medicare charges, which the Centers for Medicare & Medicaid
Services considers equivalent measures. In interviews with GAO,
manufacturers of class III devices stated that when setting their
retail prices, they take into account the premarketing costs of
complying with federal regulatory requirements, including the costs of
required clinical data collection and other research and development.
These manufacturers accounted for over 96 percent of class III DME
payments in 2004. Manufacturers of class II devices also stated that
they take into account these costs when setting retail prices.
What GAO Recommends:
The Congress should consider establishing a uniform payment update to
the DME fee schedule for 2008 for class II and III devices. GAO
recommends that the Secretary of Health and Human Services establish a
uniform payment update to the DME fee schedule for 2007 for class II
and class III devices. The agency agreed with GAO‘s recommendation.
www.gao.gov/cgi-bin/getrpt?GAO-06-62.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Kathleen M. King at (202)
512-7119 or kingk@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Class III Devices Have Higher Premarketing Costs than Class II Devices:
DME Fee Schedule Rate-Setting Methodology Accounts for Premarketing
Costs of Class II and III Devices in a Consistent Manner:
Conclusions:
Matter for Congressional Consideration:
Recommendation for Executive Action:
Agency and External Reviewer Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Health and Human Services:
Appendix III: GAO Contact and Staff Acknowledgments:
Abbreviations:
AdvaMed: Advanced Medical Technology Association:
CMS: Centers for Medicare & Medicaid Services:
CPI-U: consumer price index for all urban consumers:
DME: durable medical equipment:
FDA: Food and Drug Administration:
HHS: Department of Health and Human Services:
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of
2003:
ODE: Office of Device Evaluation:
PMA: premarket approval:
United States Government Accountability Office:
Washington, DC 20548:
March 1, 2006:
Congressional Committees:
Medicare pays for durable medical equipment (DME)[Footnote 1] provided
to beneficiaries based on a fee schedule. Until 2004, annual updates to
DME fee schedule payment rates had been applied uniformly to all items
on the fee schedule. The Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) provided for an annual payment rate
update equal to the annual percentage increase in the consumer price
index for all urban consumers (CPI-U) from 2004 through 2006 to
Medicare fee schedule payment rates for DME regulated as class III
medical devices[Footnote 2] by the Food and Drug Administration
(FDA).[Footnote 3] For these devices, in 2007, MMA provided for an
annual payment update to be determined by the Secretary of Health and
Human Services, and in 2008, for an update equal to the annual
percentage increase in the CPI-U. MMA also provided that from 2004
through 2008, all other DME will receive a 0 percent update. Although
payments for class III devices are less than 1 percent of total
Medicare DME payments, they increased from $16.9 million to $53.2
million, or by 215 percent, from 2001 through 2004. Osteogenesis
stimulators, devices used to promote bone growth in difficult-to-heal
fractures or following spinal fusion surgery, accounted for a large
proportion of class III DME payments during this time, representing
over 96 percent of the total in 2004.
MMA directed us to report on an appropriate payment update percentage
for 2007 and 2008 to the DME fee schedule for class III devices
provided to Medicare beneficiaries.[Footnote 4] To report on an
appropriate payment update percentage, as agreed with the committees of
jurisdiction, we (1) examined whether there are unique premarketing
costs associated with class III devices compared to similar devices in
other classes on the DME fee schedule and (2) determined how the DME
fee schedule rate-setting methodology accounts for the premarketing
costs of these devices.
To address these objectives, we interviewed officials from the Centers
for Medicare & Medicaid Services (CMS), the agency that administers
Medicare; FDA; two DME regional carriers, the contractors responsible
for processing DME claims; and the Statistical Analysis DME Regional
Carrier, the contractor that provides data analysis support to CMS. To
examine the premarketing costs of devices, we obtained the fees that
FDA charges for device review, known as user fees, which are published
on the FDA Web site. We also reviewed the FDA device approval process
and data on the length of time it takes for device review from FDA's
Office of Device Evaluation (ODE)[Footnote 5] 2004 Annual Report. We
interviewed manufacturers of class III devices about the types of costs
they incur in producing the devices, including FDA fees for device
review and the costs of research and development, both for any clinical
data the manufacturer is required to submit and for other research and
development costs, such as labor costs. We also interviewed
manufacturers of certain class II devices on the DME fee schedule that
CMS identified as similar to the class III devices on the schedule in
terms of complexity. We did not evaluate proprietary data to determine
whether a difference in other premarketing research and development
costs exists between the two types of manufacturers. To determine how
the DME fee schedule accounts for premarketing costs, we interviewed
CMS officials and reviewed CMS documents on the DME fee schedule rate-
setting methodology. We also interviewed officials from a trade
organization that represents manufacturers of medical devices, industry
organizations for orthopedic surgeons and pain physicians, and two
private health insurance companies. Appendix I contains a more complete
description of our methodology. We conducted our work from December
2004 through February 2006 in accordance with generally accepted
government auditing standards.
Results in Brief:
Manufacturers of class III devices, with limited exceptions, have
higher premarketing costs than do manufacturers of class II devices.
Premarketing costs consist of FDA user fees and the costs of research
and development, including the costs of submitting clinical data.
Manufacturers of class III devices pay higher FDA user fees for review
of their devices, because of the more complex FDA review required prior
to marketing, than do manufacturers of class II devices. Specifically,
the user fee for class III devices in 2005 was $239,237, while the fee
for class II devices in 2005 was $3,502. In addition, according to FDA
data, compared to class II manufacturers, the FDA application and
approval process takes longer for class III manufacturers, which
lengthens the time it takes before they can market their devices and
begin receiving revenue. FDA also requires that manufacturers submit
clinical data for class III devices, for which manufacturers incur
costs. FDA only occasionally requires the submission of clinical data
for class II devices. Class III manufacturers stated that they incur
higher premarketing costs for other research and development compared
to manufacturers of class II devices. However, class II manufacturers
also stated that they incur substantial premarketing costs related to
research and development. Because we did not evaluate proprietary data
on other premarketing research and development costs, we could not
determine whether a difference in premarketing research and development
costs, other than clinical data collection costs, exists between class
III and class II manufacturers.
The CMS rate-setting methodology for Medicare's DME fee schedule
accounts for all premarketing costs of class II and class III devices
in a consistent manner. Regardless of device classification, the
Medicare DME fee schedule payment rate for a device is based on either
the manufacturer's retail price or historic reasonable Medicare
charges, which CMS considers equivalent measures. Manufacturers of
class III devices we spoke with, whose devices accounted for over 96
percent of class III DME payments in 2004, stated that when setting
their retail prices, they take into account the costs of complying with
federal regulatory requirements, including the costs of required
clinical data collection and other research and development.
Manufacturers of class II devices also stated that they take into
account these costs when setting retail prices.
The Congress should consider establishing a uniform payment update to
the DME fee schedule for 2008 for class II and class III devices.
Similarly, we recommend that the Secretary of Health and Human Services
establish a uniform payment update to the DME fee schedule for 2007 for
class II and class III devices. In commenting on a draft of this
report, the Department of Health and Human Services (HHS) agreed with
our recommendation to establish a uniform payment update to the DME fee
schedule for 2007 for class II and class III devices. The agency did
not comment on whether the Congress should consider establishing a
uniform payment update to the DME fee schedule for 2008 for these
devices. Industry representatives who reviewed a draft of this report
did not agree or disagree with our matter for congressional
consideration or our recommendation for executive action. They did,
however, express concern that we did not recommend a specific update
percentage for class III devices. Our report recommends a uniform
payment update to the DME fee schedule for class II and class III
devices; we believe that this recommendation satisfies the requirement
in MMA to make recommendations on the appropriate update percentage for
class III devices. Industry representatives were also concerned that we
did not examine all the costs they incur in marketing a device.
Specifically, they were concerned that we did not include some
regulatory costs; labor costs for services provided to beneficiaries
and physicians; and research and development costs to improve or find
new uses for a device. Based on our discussions with the manufacturers
of class II and class III devices, we believe labor and regulatory
costs are included in our analysis. Further, we believe the research
and development costs incurred for a future device are premarketing
costs related to that new device and not costs related to marketing the
existing device.
Background:
FDA is responsible for regulating the marketing of medical
devices[Footnote 6] to provide reasonable assurance of their safety and
effectiveness for human use. As part of its regulatory responsibility,
FDA reviews applications from manufacturers that wish to market their
medical devices in the United States. Prior to marketing new devices,
manufacturers must apply for FDA marketing approval through either the
premarket notification (also referred to as 510(k)) process, or the
premarket approval (PMA) process, a more rigorous regulatory review.
New devices are subject to PMA, unless they are substantially
equivalent[Footnote 7] to an already marketed device, in which case
they need to comply only with the premarket notification requirements.
Applications for premarket notification are generally reviewed more
quickly than applications for PMA and do not usually require clinical
data.[Footnote 8]
Medical devices are regulated using a three-part classification system
and are subject to different levels of control based upon their
classifications as class I, II, or III devices. Class I devices are
generally those with the lowest risk for use by humans and require the
least regulatory oversight. These devices are subject to general
controls, which include standards for good manufacturing practices, and
requirements related to manufacturer registration, maintenance of
records, and reporting. Examples of class I devices are patient
examination gloves, canes, and crutches. Class II devices are generally
of higher risk and are also subject to general controls; however, FDA
can establish special controls for these devices, such as development
and dissemination of guidance documents, mandatory performance
standards, and postmarket surveillance. Examples of class II devices
are blood glucose test systems and infusion pumps.
Class III devices typically pose the greatest risk and thus have the
highest level of regulation. This classification includes most devices
that support or sustain human life, are of substantial importance in
preventing impairment of human health, or present a potential
unreasonable risk of illness or injury. Because general and special
controls may not be sufficient to ensure safety and effectiveness,
these devices, with limited exceptions, must obtain PMA. To obtain PMA,
the manufacturer must provide FDA with sufficient valid scientific
evidence providing reasonable assurance that the device is safe and
effective for its intended use. Once approved, changes to the device
affecting safety or effectiveness require the submission and approval
of a supplement to its PMA. Examples of class III devices include
automatic external defibrillators and implantable infusion pumps used
to administer medication.
Some class III devices are provided as part of a hospital visit;
Medicare pays for these devices through the hospital inpatient or
outpatient prospective payment systems. Five categories of class III
devices, however, can be provided in physicians' offices or prescribed
by physicians for use in the home; Medicare pays for these devices
through the DME fee schedule.[Footnote 9]
In 2004, Medicare payments for class III devices under the DME fee
schedule were $53.2 million, which represented less than 1 percent of
total DME payments. The Medicare DME fee schedule payment rate for a
device is based on either the manufacturer's retail price or historic
reasonable Medicare charges,[Footnote 10] which CMS considers
equivalent measures. MMA provided for a 0 percent annual update for
most Medicare DME fee schedule payment rates from 2004 through 2008.
However, under MMA, class III devices were excluded from the 0 percent
update and received payment updates equal to the annual percentage
increase in the CPI-U in 2004, 2005, and 2006.[Footnote 11] For these
devices, MMA provides, in 2007 for a payment update as determined by
the Secretary of Health and Human Services, and in 2008, for a payment
update equal to the annual percentage increase in the CPI-U.
Class III Devices Have Higher Premarketing Costs than Class II Devices:
We found that with limited exceptions, manufacturers of class III
devices have higher premarketing costs than do manufacturers of class
II devices. Manufacturers of class III devices pay higher FDA user fees
for review of their devices, because of the more complex FDA review
required prior to marketing, than do manufacturers of class II devices.
According to FDA data, compared to class II manufacturers, class III
manufacturers have a longer period before approval during the FDA
application process, which lengthens the time before they can market
their devices and begin receiving revenue. FDA requires that
manufacturers submit clinical data for class III devices, but only
occasionally requires the same for class II devices. In addition, class
III manufacturers stated they incur higher premarketing costs for other
research and development than do manufacturers of class II devices.
However, class II manufacturers also stated that they incur substantial
premarketing costs related to other research and development. Because
we did not evaluate proprietary data on other premarketing research and
development costs, we could not determine whether a difference in other
premarketing research and development costs exists between class III
and class II manufacturers.
Manufacturers of class III devices pay higher FDA user fees for review
of their devices, because of the more complex FDA review required prior
to marketing, than do manufacturers of class II devices. Specifically,
manufacturers of class III devices subject to this review pay the FDA
user fee for PMA, which in 2005 was $239,237 for each PMA.[Footnote 12]
Most PMA supplements, which must be filed when a manufacturer makes a
change to a class III device that affects its safety or effectiveness,
also require payment of a fee, which ranged from $6,546 to $239,237.
Manufacturers of class II devices pay the FDA user fee for each
premarket notification, which in 2005 was $3,502.[Footnote 13] When a
manufacturer makes a change to a class II device, a new premarket
notification application must be filed; there is no supplement process
for these devices.
Manufacturers of class III devices have a longer period before approval
during the FDA application process, which they stated delays the
marketing of their devices and the receipt of revenue. According to
ODE's 2004 Annual Report, in 2004, the average time for PMA review was
503 days while the average time for premarket notification review was
100 days.[Footnote 14] These average times include the total time a PMA
or premarket notification was under review by FDA and the time the
manufacturer used in responding to any FDA requests for additional
information.
FDA requires that class III manufacturers submit clinical data, for
which manufacturers incur costs. FDA only occasionally requires the
submission of clinical data for class II devices. Specifically, FDA
requires manufacturers of class III devices to submit clinical data as
part of the PMA process to provide reasonable assurance that the
devices are safe and effective for their intended uses. During its
review of a device's PMA application, FDA may require that the
manufacturer provide additional information, which may require
submission of additional clinical data. Manufacturers of class III
devices stated that to collect clinical data, they conducted costly
animal studies, human preclinical studies, and human clinical trials.
Manufacturers of class II devices must satisfy premarket notification
requirements; that is, they must submit documentation that a device is
substantially equivalent to a legally marketed device. An FDA official
stated that manufacturers of class II devices may be required to
provide clinical data. They may be required to provide these data, for
example, to demonstrate that modifications they have made to a device
would not significantly affect its safety or effectiveness, or if a
device is to be marketed for a new or different indication. According
to FDA, 10 to 15 percent of premarket notification applications include
clinical data.
Manufacturers of class III devices we spoke with stated that in
addition to collecting clinical data, they incur higher premarketing
costs related to other research and development, such as labor costs
and manufacturing supplies related to designing a device, than do
manufacturers of other classes of devices. They stated that class III
devices are highly innovative, complex products that require costly
premarketing research and development to produce. One class III
manufacturer we spoke with stated that approximately 10 percent of its
revenue between 2002 and 2005 was invested in premarketing research and
development. Another class III manufacturer stated that approximately 4
percent of its operating budget is spent on premarketing research and
development.
However, manufacturers of class II devices we spoke with also stated
that they incur substantial premarketing costs related to research and
development. Specifically, we spoke with a manufacturer of an insulin
pump and two manufacturers of continuous positive airway pressure
devices,[Footnote 15] each of which stated it incurs substantial
research and development costs. One class II manufacturer stated that
10 to 15 percent of a device's total cost was attributable to research
and development. Another class II manufacturer stated that
approximately 7 to 10 percent of its revenue is spent on research and
development. Because we did not evaluate proprietary data for other
premarketing research and development costs, we were unable to
determine whether a difference in other premarketing research and
development costs exists between class III and class II manufacturers.
DME Fee Schedule Rate-Setting Methodology Accounts for Premarketing
Costs of Class II and III Devices in a Consistent Manner:
The CMS rate-setting methodology for Medicare's DME fee schedule
accounts for the premarketing costs of class II and class III devices
in a consistent manner. The fee schedule payment rate for an item of
DME, regardless of device classification, is based on either historic
Medicare charges or the manufacturer's retail price, which CMS has
determined are equivalent measures. Manufacturers of both class II and
class III devices we spoke with stated that when setting their retail
prices, they take into account all premarketing costs necessary to
bring the device to market.
CMS has two DME fee schedule rate-setting methodologies: one method is
for items that belong to a payment category covered by Medicare at the
time the DME fee schedule was implemented in 1989, and one method is
for items added to the DME fee schedule after 1989 that are not covered
by an existing payment category. Regardless of its classification as a
class I, II, or III device, the payment rate for an item of DME covered
by Medicare when the DME fee schedule was implemented in 1989 is based
on its average reasonable Medicare charge from July 1, 1986, through
June 30, 1987, for some items, and July 1, 1986, through December 31,
1986, for other items (both referred to as the base year).
Historically, these payment rates have been updated by a uniform,
statutorily set, percentage, which is usually based on the annual
percentage increase in the CPI-U. Generally, for items added to the fee
schedule after 1989 that are not covered by an existing payment
category, CMS does not have historic Medicare charges upon which to
base the payment rate. CMS has determined that in these cases, the
manufacturer's retail price is a sufficient substitute to calculate the
fee schedule payment amount, and CMS considers the payment amount that
results from this methodology to be equivalent to historic reasonable
Medicare charges. To determine the payment rate, CMS obtains the
manufacturer's retail price for the new item and uses a formula based
on the cumulative annual percentage increase in the CPI-U to deflate
the price to what it would have been in the base year. Using a formula
based on the statutory DME fee schedule payment updates since the base
year, CMS then inflates the base year price to the year in which the
item was added to the fee schedule. In succeeding years, the item is
updated by the applicable DME fee schedule update. The cumulative
updates applied to DME are lower than the corresponding CPI-U increases
because, in certain years, the statutory update was less than the CPI-
U increase.[Footnote 16] Therefore, the payment rate of a device is
generally lower than its retail price.
Manufacturers of class III devices we spoke with, whose devices
accounted for over 96 percent of class III DME payments in 2004, stated
that when setting their retail prices, they take into account the
premarketing costs of complying with federal agencies' requirements,
including the costs of collecting clinical data, and the costs of
research and development. Manufacturers of class II devices similarly
stated that they take into account the premarketing costs of complying
with federal agencies' requirements and of research and development,
including any clinical data they may be required to collect.
Conclusions:
From 2004 through 2006, MMA provided for a payment update to the DME
fee schedule for class III devices equal to the annual percentage
increase in the CPI-U. In addition, for these devices, for 2007, MMA
provided for a payment update to be determined by the Secretary of
Health and Human Services, and for 2008, a payment update equal to the
annual percentage increase in the CPI-U. From 2004 through 2008, for
class II devices, however, MMA provided for a 0 percent payment update.
Manufacturers of class III devices, with limited exceptions, have
higher premarketing costs than manufacturers of class II devices,
specifically, higher costs related to FDA user fees and submission of
clinical data. However, class III and class II manufacturers we spoke
with stated they take these premarketing costs, as well as premarketing
research and development costs, into account when setting their retail
prices. Because the initial payment rates for all classes of devices on
the Medicare DME fee schedule are based on these retail prices or an
equivalent measure, they account for the costs of class III and similar
class II devices in a consistent manner. Distinct updates for two
different classes of devices are unwarranted.
Matter for Congressional Consideration:
The Congress should consider establishing a uniform payment update to
the DME fee schedule for 2008 for class II and class III devices.
Recommendation for Executive Action:
We recommend that the Secretary of Health and Human Services establish
a uniform payment update to the DME fee schedule for 2007 for class II
and class III devices.
Agency and External Reviewer Comments and Our Evaluation:
We received written comments on a draft of this report from HHS (see
app. II). We also received oral comments from six external reviewers
representing industry organizations. The external reviewers were the
Advanced Medical Technology Association (AdvaMed), which represents
manufacturers of medical devices, and representatives from five class
III device manufacturers--the four manufacturers of osteogenesis
stimulators and one manufacturer of both implantable infusion pumps and
automatic external defibrillators.
HHS Comments:
In commenting on a draft of this report, HHS agreed with our
recommendation to establish a uniform payment update to the DME fee
schedule for 2007 for class II and class III devices. The agency did
not comment on whether the Congress should consider establishing a
uniform payment update to the DME fee schedule for 2008 for these
devices. HHS agreed with our finding that the costs of class II and
class III DME have been factored into the fee schedule amounts for
these devices, noting that CMS is committed to effectively and
efficiently implementing DME payment rules. It stated that our report
did a thorough job of reviewing Medicare payment rules associated with
the costs of furnishing class III devices.
HHS also provided technical comments, which we incorporated where
appropriate.
Industry Comments and Our Evaluation:
Industry representatives who reviewed a draft of this report did not
agree or disagree with our matter for congressional consideration or
our recommendation for executive action. They did, however, express
concern that we did not recommend a specific update percentage for
class III devices. Our report recommends a uniform payment update to
the DME fee schedule for class II and class III devices; we believe
that this recommendation satisfies the requirement in MMA to make
recommendations on the appropriate update percentage for class III
devices.
Two manufacturers of class III devices commented on the class II device
manufacturers we interviewed. One manufacturer stated that it would
have been more appropriate to interview manufacturers of class II
devices that are not similar to class III devices in terms of
complexity. The other manufacturer expressed concern that we did not
speak with more class II manufacturers.
The four osteogenesis stimulator manufacturers expressed concern that
we did not examine costs they incur after they market a device.
Specifically, several stated that they incur labor costs for services
provided to beneficiaries and physicians, research and development
costs related to FDA-required surveillance on osteogenesis stimulators'
safety, and research and development costs to improve or find new uses
for a device. In addition, one manufacturer stated that it conducts
costly research and development for some products that never come to
market.
Concerning comments about the class II manufacturers we interviewed, as
noted in the draft report, our conclusion that class III devices have
higher premarketing costs than do manufacturers of class II devices is
based on FDA requirements and FDA data that apply to class III and
class II manufacturers and not on information obtained from class III
and class II manufacturers. According to FDA data, manufacturers of
class III devices pay higher FDA user fees and have a longer period of
time before approval during the FDA application process. FDA also
requires that all class III manufacturers submit clinical data, for
which manufacturers incur costs, and only occasionally requires the
submission of clinical data for class II devices.
Regarding manufacturers' concerns that we did not examine all of their
device-related costs, we included these costs in our analysis, where
appropriate. With respect to labor costs for services provided to
beneficiaries and physicians, to the extent that suppliers do perform
these services, the costs are known prior to marketing the device and
can be taken into account when setting their retail price. Two class
III manufacturers we spoke with volunteered that they take these labor
costs into account when setting retail prices prior to the device going
to market. Regarding research and development costs for FDA-required
surveillance, both class III and class II devices may be subject to
surveillance on a case-by-case basis; prior to marketing, FDA notifies
manufacturers that a device will be subject to postmarket surveillance.
Also prior to marketing the device, manufacturers must submit, for FDA
approval, a plan to conduct the required surveillance. As noted in the
draft report, both class III and class II device manufacturers stated,
that when setting their retail prices, they take into account the
premarketing costs of complying with federal agencies' requirements.
With respect to research and development costs to improve or find new
uses for a device after it is marketed, these are costs incurred to
modify an existing device or develop a new device. Costs incurred for a
future device are premarketing costs related to that device and not
costs related to marketing the existing device. Finally, we did not
examine research and development costs for products that do not come to
market because these costs do not directly relate to items on the
Medicare DME fee schedule; therefore, it would be inappropriate to
consider them when reporting on the appropriate update percentage to
items on the fee schedule.
Industry representatives raised several issues that went beyond the
scope of our report. These issues included the appropriateness of the
DME rate-setting methodology, payment incentives that may lead
providers to use one site of service over another, and incentives for
manufacturers to bring new devices to the market.
Reviewers also made technical comments, which we incorporated where
appropriate.
We are sending copies of this report to the Secretary of Health and
Human Services, the Administrators of CMS and FDA, and appropriate
congressional committees. We will also make copies available to others
on request. In addition, the report is available at no charge on GAO's
Web site at http://www.gao.gov.
If you or your staffs have any questions, please contact me at (202)
512-7119 or kingk@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 appendix III.
Signed by:
Kathleen M. King:
Director, Health Care:
List of Committees:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
The Honorable Joe L. 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:
[End of section]
Appendix I: Scope and Methodology:
To address our objectives, we interviewed officials from the Centers
for Medicare & Medicaid Services (CMS); the Food and Drug
Administration (FDA); two of the four durable medical equipment (DME)
regional carriers, the contractors responsible for processing DME
claims; and the Statistical Analysis DME Regional Carrier, the
contractor that provides data analysis support to CMS. To examine the
premarketing costs of devices, we obtained the fees that FDA charges
for device review, known as user fees, which are published on the FDA
Web site. We also reviewed the FDA device approval process, and data on
device review times from FDA's Office of Device Evaluation's 2004
Annual Report. We interviewed the four manufacturers of osteogenesis
stimulators and one manufacturer of both implantable infusion pumps and
automatic external defibrillators, all class III medical devices, about
the types of costs they incur in producing the devices, including FDA
fees for device review and the costs of research and development, both
for any clinical data the manufacturer is required to submit and for
other research and development costs, such as labor costs related to
designing a device. These class III manufacturers' devices accounted
for over 96 percent of class III Medicare DME payments in 2004. We also
spoke with a manufacturer of insulin pumps and two manufacturers of
continuous positive airway pressure devices, class II devices on the
DME fee schedule that CMS identified as similar to the class III
devices on the schedule in terms of complexity. We did not evaluate
proprietary data to determine whether a difference in other
premarketing research and development costs exists between the two
types of manufacturers.
To determine how the DME fee schedule accounts for premarketing costs,
we interviewed CMS officials and reviewed CMS documents on the DME fee
schedule rate-setting methodology. We interviewed representatives from
the Advanced Medical Technology Association; the American Academy of
Orthopedic Surgeons; the American Society of Interventional Pain
Physicians; and two private insurance companies.
We conducted our work from December 2004 through February 2006 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: Comments from the Department of Health and Human Services:
DEPARTMENT OF HEALTH & HUMAN SERVICES:
Office of Inspector General:
FEB 7 2006:
Ms. Kathleen M. King:
Director, Health Care:
U.S. Government Accountability Office:
Washington, DC 20548:
Dear Ms. King:
Enclosed are the Department's comments on the U.S. Government
Accountability Office's (GAO's) draft report entitled, "MEDICARE
DURABLE MEDICAL EQUIPMENT: Class III Devices Do Not Warrant a Distinct
Annual Payment Update" (GAO-06-62). 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 provided technical comments directly to your staff.
The Department appreciates the opportunity to comment on this draft
report before its publication.
Sincerely,
Signed by:
Daniel R. Levinson:
Inspector General:
Enclosure:
The Office of Inspector General (OIG) is transmitting the Department's
response to this draft report 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.
COMMENTS OF THE DEPARTMENT OF HEALTH AND HUMAN SERVICES ON THE U.S.
GOVERNMENT ACCOUNTABILITY OFFICE'S DRAFT REPORT ENTITLED, -MEDICARE
DURABLE MEDICAL EQUIPMENT: CLASS III DEVICES DO NOT WARRANT A DISTINCT
ANNUAL PAYMENT UPDATE" (GAO-06-62):
The Department of Health and Human Services (HHS) appreciates the
opportunity to review the Government Accountability Office's (GAO)
draft report.
HHS's Centers for Medicare & Medicaid Services (CMS) is committed to
effectively and efficiently implementing the payment rules set forth in
the Social Security Act for durable medical equipment (DME) and other
items and services. The Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) mandates competitive acquisition
programs for DME, excluding devices determined by the Food and Drug
Administration to be class III devices under the Federal Food, Drug,
and Cosmetic Act, such as bone growth stimulators, implanted infusion
pumps, and stair climbing wheelchairs. As part of the transition to
competitive acquisition, Congress mandated that the fee schedule
amounts for DME, other than class III devices, be frozen at 2003 levels
through 2008.
The MMA mandates that for class III DME, an annual update factor based
on the percentage change in the consumer price index for urban
consumers (CPI-U) is applied to the fee schedule amounts for 2004
through 2006. For 2007, the 2006 fee schedule amounts for class III DME
are to be updated by a factor determined to be appropriate by the
Secretary of HHS after taking into account recommendations by the GAO
study regarding the appropriate update percentage for class III devices
for both 2007 and 2008. Also mandated by the MMA, for 2008, the 2007
fee schedule amounts for class III DME are to be increased by an annual
update factor based on the percentage change in the CPI-U.
GAO has done a thorough job in reviewing Medicare payment rules and
methods and issues associated with the costs of furnishing class III
devices. We agree with the finding in the report that the costs of
furnishing class II and class III DME devices have been factored into
the fee schedule amounts calculated for these devices. We also agree
with the recommendation to establish a uniform fee schedule update for
2007 for class II and class III devices. We will take GAO's
recommendation into consideration when establishing an update for class
III devices as mandated by section 302 (c)(1)(B) of the MMA; GAO's
recommendation is necessary for CMS to determine an appropriate fee
schedule update factor for 2007 for class III DME.
We thank GAO for their efforts in this report in establishing the
covered item update for class III DME for 2007. We look forward to
working with GAO on any follow-up issues associated with Medicare
payments for class III DME.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Kathleen M. King, (202) 512-7119 or kingk@gao.gov:
Acknowledgments:
In addition to the contact named above, Nancy A. Edwards, Assistant
Director; Joanna L. Hiatt; and Andrea E. Richardson made key
contributions to this report.
FOOTNOTES
[1] DME is equipment that primarily and customarily serves a medical
purpose, can withstand repeated use, is generally not useful to an
individual in the absence of an illness or injury, and is appropriate
for use in the home. 42 C.F.R. § 414.202.
[2] Pub. L. No. 108-173, § 302(c)(1)(A), 117 Stat. 2066, 2230-31.
[3] FDA regulates devices using a three-part classification system.
Class III devices are generally those that support or sustain human
life, are of substantial importance in preventing impairment of human
health, or present unreasonable risk of illness or injury. These
devices typically pose the greatest potential risk for human use and
have the highest level of FDA regulation. An example of a class III
device is an automatic external defibrillator. Class II devices
generally pose less risk and require less regulatory oversight. An
example of a class II device is an infusion pump. Class I devices
generally pose the lowest risk for use by humans and require the least
regulatory oversight. An example of a class I device is a patient
examination glove.
[4] Pub. L. No. 108-173, § 302(c)(1)(B), 117 Stat. 2231.
[5] ODE is a part of FDA's Center for Devices and Radiological Health.
It is responsible for the program areas under which medical devices are
evaluated or cleared for clinical trials and marketing.
[6] The Federal Food, Drug, and Cosmetic Act defines a medical device
as an instrument, apparatus, implement, machine, contrivance, implant,
in vitro reagent, or other similar or related article, including any
component, part, or accessory that is (a) recognized in the National
Formulary or the United States Pharmacopeia or any supplement to them,
(b) intended for use in the diagnosis of disease or other conditions,
or in the cure, mitigation, treatment, or prevention of disease in man
or other animals, or (c) intended to affect the structure or any
function of the body of man or other animals, and which does not
achieve its primary intended purposes through chemical action within or
on the body of man or other animals, nor required to be metabolized to
achieve its primary intended purposes. 21 U.S.C § 321(h).
[7] Substantially equivalent means that a device has (1) the same
intended use and the same technological characteristics as a marketed
device or (2) the same intended use and different technological
characteristics, but is as safe and effective as the marketed device
and does not raise different questions of safety and effectiveness. 21
U.S.C. §360c(i)(1).
[8] For additional information on FDA's review of medical device
applications, see GAO, Food and Drug Administration, Limited Data
Available Indicate That FDA Has Been Meeting Some Goals for Review of
Medical Device Applications, GAO-05-1042 (Washington, D.C.: Sept. 30,
2005).
[9] Medicare pays for osteogenesis stimulators, infusion pumps and
their related supplies, neuromuscular stimulators, and certain
ultraviolet light therapy systems and automatic external defibrillators
and related supplies as class III devices under the DME fee schedule.
[10] If the actual charge for an item is less than the fee schedule
payment rate, the Medicare payment is limited to the actual charge.
[11] Class III devices received payment updates of 2.1 percent in 2004,
3.3 percent in 2005, and 2.5 percent in 2006.
[12] In 2005, for businesses with $30 million or less in annual gross
sales and revenue, PMA fees were reduced to $90,910 and the first PMA
submitted by such a business was free.
[13] In 2005, for businesses with $30 million or less in annual gross
sales and revenue, premarket notification fees were reduced to $2,802.
[14] These average times are for reviews completed in fiscal year 2004,
regardless of when the application was received.
[15] Continuous positive airway pressure devices are used to treat,
among other things, sleep apnea.
[16] In 1991 and 1992, the statutory update was the annual percentage
increase in the CPI-U reduced by 1 percentage point. In 1998, 1999,
2000, and 2002, the statutory update was 0 percent.
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