Medicare payments to oncologists, by type of service, 2004

Other
A%

E&M services
12%

Drug administration

12%

All Part B drugs
72%

Note:  E&M [evaluation and management). Medical specialties defined as hematology, hematology/oncology, and medical oncology. Other services
include tests, imaging, and other procedures.

Source: Direct Research analysis of data from Medicare Physician/Supplier Procedure Summary Master File, 1999-2004, and OPPS Files, 2004 Final
Rule through 2006 Proposed Rule.

in 2004 and 3 percent transition payments in 2005. Also in 2005, CMS established new
codes that permit physicians to bill more codes for an individual chemotherapy session. The
total number of chemotherapy drug administration services increased 33 percent from 2003
to 2005, while spending increased 182 percent.

.

To measure the number of chemotherapy infusions provided in physician offices, we
compared only the initial infusion code billed when chemotherapy sessions began in
2004 and 2005. Using this metric, we estimate that physicians provided 13 percent more
chemotherapy infusion sessions in 2005 than in 2004.

We also compared the number of Medicare beneficiaries receiving chemotherapy in
physician offices in 2003, 2004, and 2005. This analysis was complicated because

of inconsistencies in the claims data. We found many instances of chemotherapy
administration codes billed without any accompanying drug claims. We also found claims
for chemotherapy drugs without any accompanying drug administration claims. We
estimate that the number of beneficiaries receiving chemotherapy increased 7.5 percent in

MECpAC Effects of Medicare payment changes on oncology services | January 2006


. New chemotherapy agents developed through biotechnology have been approved by
the FDA. Manufacturers charge increasingly high prices for new drugs like Avastin and
Erbitux. For example, one practice reported that a round of treatment with Avastin costs
about $12,000 every two weeks. Patients continue to receive this treatment until their
condition worsens. An increasing number of patients may have difficulty paying their
coinsurance. This means that beneficiaries may not receive the most effective treatment
for their condition or that physicians may not collect the full Medicare payment for some
patients.

In addition, physicians sometimes face uncertainty about whether these therapies will be
covered by insurers, including Medicare, for a particular type of cancer. This uncertainty
may affect treatment choice and site of care.

. PET scans have been found useful in helping physicians determine the stage of particular
cancers and develop treatment plans. CMS has issued national coverage decisions
approving the use of this technology for a number of different cancers. Some practices are
purchasing this technology for use in their offices. The Commission is looking at ways to
address the appropriateness of Medicare payments for imaging services.

. Clinical research has suggested improved patient outcomes when chemotherapy is used
along with other forms of treatment. For example, chemotherapy may be used before or
after surgery. As a result, the number of patients receiving chemotherapy and the duration
of the treatment they receive is likely to continue increasing.

In general, the high cost of new chemotherapy agents, the increasing number of Medicare
beneficiaries receiving chemotherapy, and the development of new treatment patterns that lead
to the use of more drugs and more rounds of chemotherapy for individual patients are likely to
result in a continuing increase in Medicare payments for Part B drugs and drug administration
services. The Commission will continue to monitor access and quality of chemotherapy services
provided to Medicare beneficiaries.

30 Effects of Medicare payment changes on oncology services | January 2006 MECpAC


26

Table 4

Selected quality indicators from QOPI study

Range in scores among groups

Indicator (percent)
Was pain addressed? 30-90%
Was G-CSF given per guideline? 0-88
Were serotonin antagonist antiemetics given per guideline? 83-100
Were corticosteroids added per guideline? 60-97
Were erythroid growth factors given per guideline? 37-100
Was a pathology report available? 94-97
Was staging completed? 78-93
Were flow sheets used when chemotherapy was given? None*
Was a signed consent for chemotherapy in the chart? 2-100

Note: GOP! (Quality Oncology Practice Initiative], G-CSF (granulocytic growth factor). A perfect score is 100.
“Indicates all groups used flow sheets.

Source: Neuss 2005.

practice reviewed up to 85 medical records. Data are reported on a secure website developed

for this purpose. In a published study on the results of the pilot project, researchers (Neuss et al.
2005) found statistically significant differences among the groups for a majority of the measures
(Table 4). For example, there was wide variation in the extent to which practices addressed
patient pain. Because of the small size of the original sample, we cannot use these data to draw
conclusions about care provided by oncologists nationwide. However, the project is ongoing,
with an increasing number of practices participating.

The National Committee for Quality Assurance (NCQA) is in preliminary talks with ASCO to
conduct an independent assessment of cancer care quality based on the QOPI tool. The process
for the development of performance thresholds and the mechanisms for data collection and
transfer are undetermined. Physician practices who meet performance standards could get NCQA
recognition as quality providers.

Four QOPI measures concern the use of ancillary drugs for chemotherapy patients. These drugs
treat the side effects of chemotherapy, and their appropriate use is a crosscutting quality measure.
Practices’ use of serotonin antagonist antiemetics for treatment of nausea according to guidelines
was quite high. Practices exhibited more variation in the appropriate use of other drugs. For
example, practice use of granulocyte colony stimulating factor for neutropenia according to
clinical guidelines ranged from 0 to 88 percent. Use of erythroid growth factors for anemia
according to clinical guidelines varied from 37 to 100 percent overall, but average compliance
with guidelines declined from 72 percent in round | to 60 percent in round 2. Although the
sample size is very small, practice variation on these indicators suggests that CMS collection of

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


APPENDIX

Mandate for report



Medicare payment changes

The Medicare Prescription Drug, Improvement, and Modernization Act (MMA) changed the
way Medicare pays for both covered outpatient drugs and drug administration services under
the physician fee schedule.' The Congress directed the Commission to study the effects of these
changes on the quality of care Medicare beneficiaries received, patient satisfaction with that
care, the adequacy of payments in different geographic areas and physician practice sizes, and
the impact on physician practices (Appendix A). The first report, due January 1, 2006, focuses
on services provided by oncologists; the second report, due January 1, 2007, focuses on drug
administration services provided by other specialists.

Before 2003, Medicare generally paid physicians at rates well above their acquisition costs for
physician-administered drugs but paid less for the costs involved in administering those drugs
(MedPAC 2003). In 2004, the MMA reduced payment for most covered drugs from 95 percent
of the average wholesale price (AWP) to 85 percent of the listed AWP as of April 1, 2003.

Since AWP did not reflect actual prices charged to purchasers, the payment reduction resulted

in payments that were still generally above acquisition costs (see MedPAC 2003 for discussion
of incentives created by AWP). Medicare increased payment for drug administration services,
particularly those used for chemotherapy. In addition, the MMA mandated two years of transition
payments for chemotherapy drug administration services. This means that after CMS calculated
new drug administration rates, it added transition payments each time a drug administration code
was billed. In 2004, CMS increased each payment by 32 percent, and in 2005 each payment was
increased by 3 percent.

In 2005, payments for drugs and drug administration services changed again. The MMA set
payments for covered drugs at 106 percent of the average sales price (ASP).? ASP is based

on actual transaction prices. In addition, CMS established new drug administration codes but
reduced transition payments for drug administration services from 32 to 3 percent. As a result,
physicians saw lower fees for individual drug administration services than in 2004, but they
could bill for more services during each chemotherapy session.

CMS also implemented a one-year demonstration project to evaluate how chemotherapy affects
the level of fatigue, nausea, and pain experienced by patients. All oncologists were eligible to
receive $130 per patient per day for asking chemotherapy patients three questions about how
they had responded to treatment. Answers were coded on a 4-point scale, and each answer had
a payment code attached. To receive the payment, physicians had to submit answers to all three
questions.

In 2006, some additional payment changes will take place. Physicians no longer will receive
transition payments for drug administration services. CMS substituted a different demonstration
project for the 2005 quality-of-life project. The agency lowered payments for this demonstration
and changed data requirements. Physicians will be eligible to receive the demonstration payments
in connection with oncology evaluation and management visits by cancer patients.*

The MMA calls for the establishment of a competitive acquisition program (CAP) in 2006.
Organizations such as wholesalers or specialty pharmacies would submit bids to Medicare

MECpAC Effects of Medicare payment changes on oncology services | January 2006


Commissioners’ voting on recommendations

In the Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000, the
Congress required MedPAC to call for individual Commissioner votes on each recommendation,
and to document the voting record in its report. The information below satisfies that mandate.

Recommendation 1

The Secretary should allow an exception to the competitive acquisition program (CAP) delivery
rules for rural satellite offices of providers.

Yes: Bertko, Crosson, DeBusk, DeParle, Durenberger, Hackbarth, Hansen, Kane,
Milstein, Muller, Nelson, Reischauer, Scanlon, Smith, Stowers, Wolter
Absent: Burke

Recommendation 2

The Secretary should use his demonstration authority to test innovations in the delivery and
quality of health care. Demonstrations should not be used as a mechanism to increase payments.

Yes: Bertko, Crosson, DeBusk, DeParle, Durenberger, Hackbarth, Hansen, Kane,
Milstein, Muller, Nelson, Reischauer, Scanlon, Smith, Stowers, Wolter
Absent: Burke

Recommendation 3

The Secretary should require providers to enter patients’ hemoglobin level on all claims for
erythroid growth factors. This data should be used as part of Medicare’s pay-for-performance
initiative.

Yes: Bertko, Crosson, DeBusk, DeParle, Durenberger, Hackbarth, Hansen, Kane,

Milstein, Muller, Nelson, Reischauer, Scanlon, Smith, Stowers, Wolter
Absent: Burke

MECpAC Effects of Medicare payment changes on oncology services | January 2006

45


APPENDIX

Commissioners’ voting
on recommendations



Commission members

Glenn M. Hackbarth, J.D., chairman

Bend, OR

Robert D. Reischaver, Ph.D., vice chairman

The Urban Institute
Washington, DC

Term expires April 2006

Autry O.V. “Pete” DeBusk
DeRoyal
Powell, TN

Glenn M. Hackbarth, J.D.

Alan R. Nelson, M.D.
American College of Physicians
Washington, DC

Robert D. Reischaver, Ph.D.
David A. Smith, M.Ed.

Demos
New York, NY

Ray E. Stowers, D.O.
Lincoln Memorial University
College of Osteopathic Medicine
Harrogate, TN

John M. Bertko, F.S.A.,
M.A.A.A.

Humana Inc.

Louisville, KY

Sheila P. Burke, M.P.A.,
R.N., F.A.A.N.
Smithsonian Institution
Washington, DC

Francis J. Crosson, M.D.
The Permanente Federation, LLC
Oakland, CA

Arnold Milstein, M.D.,
M.P.H.

Pacific Business Group on Health
San Francisco, CA

Ralph W. Muller
University of Pennsylvania
Health System
Philadelphia, PA

William J. Scanlon, Ph.D.
Health policy consultant
Oak Hill, VA

Effects of Medicare payment changes on oncology services | January 2006

Term expires April 2008

Nancy-Ann DeParle, J.D.
JPMorgan Partners
Washington, DC

David F. Durenberger, J.D.
National Institute of Health Policy
University of St. Thomas
Minneapolis, MN

Jennie Chin Hansen, R.N.,
M.S.N., FA.A.N.

AARP

San Francisco, CA

Nancy M. Kane, D.B.A.
Harvard School of Public Health
Boston, MA.

Nicholas J. Wolter, M.D.
Billings Clinic
Billings, MT

49


Methodology: Price and quantity of drugs

Price and quantity (or volume) indices provide an aggregate measure of the average changes in
price and quantity (Table B-1). The price index compares the cost of a fixed “basket” of drugs
in different years. The difference in the total cost of that basket of drugs, evaluated at the two
price levels, is the measure of price change. Similarly, the quantity index asks how much the
2004 and 2005 “baskets” of drugs would have cost if they had both used prices from a single
year. The difference in the cost of the baskets, holding prices constant, is the measure of the
change in the quantity of drugs. If the basket of drugs remained the same, the difference would
represent the number of units of drugs provided. However, if the basket of drugs changed, the
measure of quantity would include the change in drug mix. Thus, if cheaper drugs are replaced
by more expensive drugs, the change will be counted as an increase in the quantity or volume of
drugs provided. Using this methodology, we consider the substitution of an expensive drug for a
cheaper one as an increase in the quantity of drugs, not the price of drugs.

To determine the overall effect of pricing changes from 2004 to 2005, we estimated what
Medicare would have paid if drugs billed in 2004 were paid for according to the Medicare
payment rates (average sales price (ASP) + 6%) as of October 2005. Prices for 2004 were
estimated using average allowed charge per unit as calculated from the claims. Prices for 2005
were based on Medicare payment rates for October 2005. Drugs were classified using Berenson-
Eggers Type of Service (BETOS) categories to include chemotherapy drugs, erythroid growth
factor, and other carrier-billed drugs. Using this methodology, we calculated that the same basket
of chemotherapy drugs purchased in 2004 would cost 31 percent less in 2005. Chemotherapy
drugs and erythroid growth factor together would cost 28 percent less in 2005. The entire market
basket of carrier-billed drugs in 2004 would cost 22 percent less in 2005. These figures reflect
changes in prices but do not account for changes in drug mix or the volume of drugs purchased.

Table B-1

Change in price and quantity indices for chemotherapy agents, 2004-2005

Type of change Percentage change
Quantity change, holding prices constant at:
2004 levels 30%
2005 levels 20

Price change, holding quantities constant at:
2004 levels -28
2005 levels 34

Source: Direct Research analysis of partial year, Medicare physicians/supplier claims files, 2004-2005

MECpAC Effects of Medicare payment changes on oncology services | January 2006

4)


other services in the office setting. Although quality of care may be equivalent in hospitals

and physician offices, beneficiaries face higher copayments in HOPDs and treatment usually
takes longer. For example, chemotherapy drugs must be mixed in the hospital pharmacy, where
pharmacists are preparing medications for all the other hospital patients. The chemotherapy
patient will wait longer until the medication is prepared. Only a few beneficiaries who
participated in our focus groups had been referred to the HOPD from physician offices. They
emphasized the duplication of tests and increased time commitments caused by the switch. One
individual complained about the higher copayments.

As the price of new cancer drugs continues to rise, beneficiaries without supplemental insurance
may have an increasingly hard time paying their 20 percent coinsurance. Although most
physician practices have continued to treat all beneficiaries in their offices, beneficiary inability
to meet cost-sharing requirements creates a financial liability for the practices. Unlike hospitals,
physicians cannot receive payment for bad debt from Medicare. Many practices have begun to
counsel beneficiaries on their estimated out-of-pocket liabilities before treatment begins. A few
practices reported instances in which a beneficiary refused treatment because she did not want to
travel to a hospital or leave her family with debts caused by her out-of-pocket liability.

We cannot quantify the number of beneficiaries who need help paying their coinsurance for
chemotherapy. We have no source of data to determine the number of Medicare beneficiaries
without supplemental insurance who are receiving chemotherapy services. Data on supplemental
insurance are not captured on Medicare claims. The oncology practices we visited estimated
between 5 and 20 percent of their Medicare patients have no source of supplemental coverage.
Estimates varied depending on the demographic structure of the market and the availability of
Medicare Advantage and retiree health insurance. The Commission (MedPAC 2005a) estimates
that 9 percent of all beneficiaries have no source of supplemental coverage. Beneficiaries without
supplemental coverage are not the only individuals facing high copayments. Some cancer
patients who participated in beneficiary focus groups were concerned that they might exceed
lifetime caps on their retiree coverage.

Many pharmaceutical companies offer patient assistance programs to help patients with the cost
of their medications. In 2003, pharmaceutical companies provided patients with medications
valued at $3.3 million. However, this assistance is not readily available for Medicare beneficiaries
without supplemental insurance. Most of the assistance goes to patients without any insurance.
Less aid is available for individuals needing help with copayments. Yet this cost may be

beyond the means of many beneficiaries. For example, one new cancer drug costs Medicare an
average of $12,000 every two weeks. Beneficiaries face copayments of $2,400 monthly for this
medication. Beneficiaries continue taking the medication until their condition worsens. Medicare
beneficiaries have no limit on the out-of-pocket drug costs they face under Part B, unlike Part D.

Additionally, manufacturers have individual programs linked to their own products.
Chemotherapy regimens generally require administration of a number of different drugs.
A patient would have to apply for assistance from each manufacturer. Therapies might be
determined depending on which manufacturer programs are available for the patient.

In the case of chemotherapy drugs, physicians often find patient assistance programs difficult to

MECpAC Effects of Medicare payment changes on oncology services | January 2006

13


References

Bassano, Amy. 2005. E-mail message to author, November 18.

Institute of Medicine. 2001. Crossing the quality chasm: A new health system for the 21° century.
Washington, DC: National Academy Press.

Lipscomb, J., M. S. Donaldson, A. K. Neeraj, et al. 2004. Cancer outcomes research. Journals of
the National Cancer Institute Monographs, no. 33: 178-197

Medicare Payment Advisory Commission. 2005a. A data book: Healthcare spending and the
Medicare program. Washington, DC: MedPAC.

Medicare Payment Advisory Commission. 2005b. Report to the Congress: Medicare payment
policy. Washington, DC: MedPAC.

Medicare Payment Advisory Commission. 2004. Report to the Congress: Benefit design and cost
sharing in Medicare Advantage plans. Washington, DC: MedPAC.

Medicare Payment Advisory Commission. 2003. Report to the Congress: Variation and
innovation in Medicare. Washington, DC: MedPAC.

Neuss, Michael, et al. 2005. A process for measuring the quality of cancer care: the quality
oncology practice initiative. Journal of Clinical Oncology 23, no. 25 (September 1): 6233-6239.

Office of Inspector General, Department of Health and Human Services. 2005. Report to
Congress: Adequacy of Medicare Part B Drug Reimbursement to Physician Practices for the
Treatment of Cancer Patients. No. A-06-05—-00024. Washington, DC: OIG. September. http://
oig.hhs.gov.

Patient Advocate Foundation. 2005. New Program for Insured Americans Assists with Co-Pays.
March 24. http://www.copays.org/news/2005-03-24a.html.

Rizzo, D. J., A. E. Lichtin, et al. 2002. Use of Epoetin in patients with cancer: evidence-based
clinical practice guidelines of the American Society of Clinical Oncology and the American
Society of Hematology. Blood, Journal of The American Society of Hematology and The
American Society of Clinical Oncology 100, no. 7 (October 1): 2303-2320.

Steensma, D. P. and C. L. Loprinzi. 2005. Erythropoietin use in cancer patients: A matter of life
and death? Journal of Clinical Oncology 23, no. 25 (September 1): 5865-5868.

The National Quality Forum. 2005. ‘Quality of Cancer Care Measures’ Project Steering
Committee Meeting. Washington DC, June 16. Meeting Summary.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

31




24

CMS quality-of-life demonstration project

CMS initiated a one-year demonstration project designed to evaluate the severity of side effects
experienced by chemotherapy patients. This was also a way to provide additional funds to
oncologists. The project attempts to measure how chemotherapy affects the level of fatigue,
nausea, and pain experienced by patients. In 2005, all oncologists were eligible to receive

$130 per patient per day for asking chemotherapy patients three questions about how they had
responded to treatment. Payment includes a 20 percent copayment by beneficiaries. Answers are
coded on a 4-point scale.

The Commission and others (OIG 2005) have serious concerns about the validity and
methodology of this project:

. It does not control for type of cancer, disease stage, or patient performance status.
Performance status refers to how the cancer affects the daily living abilities of the patient.'*

. It was announced and implemented without any period for comments by clinicians and
researchers.

. There is no uniform data collection process. In some practices we visited, nurses were
asking patients the three questions and coding the results based on their interpretation of
the patients’ answers. In other practices, patients were given a questionnaire and provided
their own coded responses.

+ In some cases, patients reported symptoms within the past week. In other cases, they
reported on the basis of their condition at the time of the survey.

. No data are collected on what interventions were initiated to alleviate reported symptoms.

While all practices we visited were participating in this project, most oncologists did not believe
it would lead to quality improvements for patients or produce any useful research findings. Many
expressed concern that patients were charged copayments as part of the billing process.

CMS recently announced that the demonstration project will be continued in an altered form
in 2006. The agency lowered payments to $23 and changed data requirements to provide
information on patient care. The goal of the demonstration is to collect data on what physicians
do for patients with different cancers at different disease stages. Physicians will use new codes
to report on the purpose of the patient visit, the stage of the patient’s cancer, and whether the
physician used clinical guidelines in the treatment of the patient. Physicians will describe the
purpose of the visit, such as evaluation, supervising therapy, monitoring the disease, and end-
of-life care. For each visit, the physician will note whether or not they were following clinical
guidelines. The physician can explain reasons for not following guidelines. For example, the
physician might note that no guidelines exist, or the guidelines are not appropriate in the case
of a particular patient. Physicians will be eligible to receive the demonstration payments in
connection with higher level oncology evaluation and management visits by cancer patients.
Only hematologists and medical oncologists are eligible to participate in the demonstration.

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


10

2005, based on the most conservative assumption. No matter what set of assumptions we
used, Medicare beneficiaries received an increasing number of chemotherapy sessions in
physician offices from 2003 to 2005.

Chemotherapy drugs

. Medicare paid less for chemotherapy drugs in 2005 than in 2004, although the volume of
drugs provided to beneficiaries, measured by quantity and drug mix, increased (Table B-1,
p. 41). As in previous years, physicians tended to substitute newer, more expensive drugs
for older products (Table B-2, p. 42). Expenditures for chemotherapy drugs declined by 14
percent from 2004 levels.

Erythroid growth factors

. Compared to 2004, the use of erythroid growth factors grew 15 percent in 2005 when
measured in equivalent doses between agents. We found that total spending for these
products, unlike chemotherapy drugs, grew 3 percent.

Quality of life demonstration project

. In 2005, CMS implemented a demonstration project that paid oncologists to report on the
side effects of chemotherapy their patients had experienced. In the part-year file through
June 23, 2005, CMS had paid for almost 1.9 million assessments, at a cost of about $81
million. Assuming no trend, extrapolating that amount to the entire year would suggest that
CMS will pay about $200 million under this demonstration in 2005.’

Changes in physician practices

The Congress required the Commission to examine the effect of the payment changes to
physician practices. During our site visits, we asked physicians for their response to the Medicare
payment changes. Although their answers were subjective, physicians told us they considered the
payment changes significant and changed their practices in response. All practices changed their
drug purchasing activities. Some also changed their use of drugs, office staffing, mix of services
offered, and patient mix.

All the physicians we visited reported that they spent more time and resources shopping for lower
prices for drugs than they did before the payment changes. Their choice of ancillary drugs for
treating chemotherapy side effects was more likely to be based on price. Many practice managers
reported that they routinely purchased only one drug to treat nausea and one erythroid growth
factor to treat anemia for all the physicians in the practice. Physicians also reported that they kept
smaller inventories of drugs on hand than previously. This allowed them to respond quickly to
price changes and avoid tying up large sums of capital.

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


16

OIG estimated that, on average, practices could purchase 35 of the 39 drugs at less than the
Medicare payment rate. For 32 of the drugs, OIG determined that average purchase prices were
within 15 percent of the Medicare payment rate. Five of the 35 drugs had positive margins
ranging from about 39 to 87 percent. Medicare paid practices at rates of 29 and 25 percent below
cost for two drugs. On average, larger physician practices purchased drugs at lower prices than
smaller practices. The smallest practices in the sample purchased 33 of the 39 drugs at prices
below Medicare payment rates.

The Commission further analyzed the data presented in the OIG report to determine what kinds
of drugs provided higher or lower payment margins compared to the Medicare payment rates
(Table 3). We also examined what happened to the Medicare payment rate in the last quarter of
2005 for drugs with larger-than-average margins in the first quarter.

We found that the physicians were able to purchase drugs at rates well below the Medicare
payment rate when generic alternatives, such as carboplatin and cisplatin, were newly available.
Medicare payment rates for these drugs dropped sharply by October 2005. Purchasers also
were able to buy brand name drugs with therapeutic substitutes available at prices well below
Medicare payment rates. One example would be dolasetron mesylate, used to treat nausea in
chemotherapy patients. In general, we found that when OIG found that the average purchase
price for a drug was more than 15 percent lower than the January Medicare payment rate, the
Medicare payment rate fell by October. Payment rates for chemotherapy drugs in this category
declined from 72 to 38 percent.

OIG determined that, on average, Medicare payment rates were inadequate to meet provider costs
for four drugs used frequently by oncologists. One possible reason for Medicare payments falling
below acquisition costs could be the way manufacturers include rebates in their calculations of
ASP. Since manufacturers frequently determine rebates retrospectively, based on the volume of
sales to specific purchasers, they may not know the final price they received for a given drug

at the end of a quarter. If a manufacturer reports the rebates earned by customers for a product
throughout the year at the time when the rebate is actually paid, the price or ASP for the product
will be lower than the typical acquisition cost for a purchaser during that reporting period. Since
the first quarter of 2005, CMS has changed the way rebates are factored into ASP calculations.
The agency found that some payment rates changed quarterly as the level of rebates added to the
calculations fluctuated. This may have affected rates for some of the drugs listed here.

The OIG report was based on provider acquisition costs in the first quarter of 2005. In that
quarter, ASP was calculated based on manufacturer prices in effect before the payment system
changed. The report provided an early indication that Medicare payment rates under the ASP
system were adequate. A second analysis is warranted to evaluate how the system is working
following a year’s experience.

The Commission had intended to recommend that OIG analyze 2006 physician acquisition costs
to see how accurate Medicare drug payments are following a year’s experience with the new
payment system. However, OIG has announced that it intends to audit a sample of oncology
practices to compare their acquisition costs with the Medicare payment rate in 2006. The

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


12

Physicians practicing in low geographic practice cost index (GPCI) areas told us they faced
disproportionate cuts in their overall payments because of the Medicare payment changes. Unlike
drug administration services, payments for drugs are not adjusted for geographic variation in

the costs of practice. With the MMA payment changes, physicians in these areas saw the same
cuts in payments for chemotherapy drugs but received lower additional payments for drug
administration services than physicians in other parts of the country.

Some physicians faced unique state laws and regulations that affected their Medicare payments.
For example, some states impose taxes on the drugs physicians purchase. State Medicaid policies
also affected the payments physicians received for treating beneficiaries dually eligible for
Medicare and Medicaid. In many states, Medicare program payments for services (80 percent of
the allowed payment rate) are equal to or higher than Medicaid rates. In these instances, the state
Medicaid program may not pay the 20 percent copayment for dual eligibles. Providers receive
the Medicare payment as payment in full.

Beneficiaries without supplemental insurance

Prices for new cancer and other Part B drugs have increased rapidly, while Medicare has begun
to pay physicians close-to-acquisition costs for drugs. Beneficiary copayments (20 percent of the
payment) have been rising, and physicians who cannot collect coinsurance from beneficiaries
will receive only 80 percent of the Medicare payment rate for the drugs. There is no limit to the
out-of-pocket costs that beneficiaries may face. Medicare beneficiaries without supplemental
coverage may be transferred to hospital outpatient departments (HOPDs) and face higher
copayments there. However, if beneficiaries who cannot pay cost sharing in physician offices

go to HOPDs for chemotherapy infusion, they are unlikely to be able to pay cost sharing there.
Instead, their unpaid bills would become bad debt. Medicare pays 70 percent of hospitals’ bad
debt.

The Commission is concerned about the burden of cost sharing for beneficiaries with cancer
and other catastrophic conditions. The Commission will explore the general issue of unlimited
beneficiary out-of-pocket liability, which can affect cancer patients and patients with other
illnesses, in future work.

Although we did not find any cases in which beneficiaries could not get chemotherapy services,
Medicare beneficiaries without supplemental insurance have more limited choices in some areas
of the country. These individuals are more likely than other beneficiaries to receive chemotherapy
in HOPDs. In 2004, the Commission found that in some markets, oncology practices had stopped
treating Medicare patients without supplemental insurance in their offices. Patients were sent to
hospital outpatient departments or safety-net facilities. When we returned to these practices in
2005, we found they were sending an increasing number of patients to the HOPD.*

When patients are sent to the hospital for chemotherapy, the physician continues to manage
their care. Physicians still provide evaluation and management visits, some lab work, and

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


The CMS 2005 project did demonstrate that practices can collect and report quality data on
claims in a timely manner without undue burden. Despite general agreement that the project was
flawed, oncologists and public and private partners have initiated a variety of other initiatives to
design and collect data that can be used to monitor and improve quality of care for chemotherapy
patients. As these indicators are validated, they could form the basis of a pay-for-performance
program for oncology.

Oncology quality initiatives

The Institute of Medicine (IOM) report, Crossing the Quality Chasm (2001), outlined a
framework for improving the nation’s health care quality and called on all payers to align
payment policies to encourage and support quality improvement. The IOM identified six goals
for a quality health care system: safety, effectiveness, patient-centeredness, timeliness, efficiency,
and equity. Physicians and researchers in a number of settings were encouraged by the report to
continue ongoing efforts to measure and improve the quality of cancer care. The National Quality
Forum (NQF) has implemented a cancer care quality measures project in collaboration with
federal health agencies. The American Society of Clinical Oncology (ASCO) has developed a
practice-based quality improvement initiative. The Community Oncology Alliance (COA) also
has proposed pilot projects to improve measurement of quality of care.

Quality of cancer care measures project

With funding from the National Cancer Institute, the Centers for Disease Control, CMS, and

the Agency for Healthcare Research and Quality, NQF established the quality of cancer care
measures project. NQF has brought together panels of experts to develop and review consensus
standards for measuring quality cancer care. The technical panels are addressing measure sets for
treatment of breast cancer, colorectal cancer, and symptom management/end-of-life cancer care.
The steering committee has made recommendations for breast cancer consensus standards but
has not yet addressed measure sets for colorectal cancer or symptom management.

QOPI initiative

ASCO is sponsoring an ongoing, practice-based system of quality measurement called the
Quality Oncology Practice Initiative (QOPI). Participating oncologists developed a set of quality
measures based on clinical guidelines and consensus-supported indicators of quality care. Most
measures are designed to be applicable for different types and stages of cancer although some
relate to end-of-life care and several are specific to breast or colorectal cancer. For example, some
measures relate to use of specific drug regimens for patients with breast cancer. The initial pilot
project was tested on seven oncology groups located in seven states. Participation is voluntary.
Twice yearly, practices report de-identified data from patient charts chosen retrospectively on the
basis of a specified chart selection formula. Each practice reviewed medical records from the 25
most recent patients with invasive malignancies. Depending upon patient case mix, an additional
10 to 20 medical records were reviewed for patients with diagnoses of lymphoma, breast cancer,
or colorectal cancer. Practices also reviewed records of 10 patients who had died of cancer. Each

MECpAC Effects of Medicare payment changes on oncology services | January 2006

25


Payment trends: 2000-2004

In this section, we analyze historical trends in spending for chemotherapy and drug
administration services from 2000 to 2004, the last year for which we have complete data.

We found that data present a consistent picture (Tables 1 and 2). Whether in the aggregate,

by site of service, or by individual drug, Medicare expenditures for chemotherapy drugs and
drug administration services increased during the period. Drug administration services include
providing chemotherapy infusions, other infusions, and injections to cancer patients. A nurse
usually provides these services. The drugs used for chemotherapy and other purposes are
billed separately. We found that drug spending grew rapidly in the period before passage of the
MMA. In 2004, the first year legislated changes took effect, trends changed. Expenditures for
drug administration services increased 217 percent, while spending for chemotherapy drugs
increased by 4 percent. In 2004, Medicare expenditures for medical oncology services totaled
$7,3 12,000,000, an increase of 19 percent over 2003.4

In 2004, the largest increase was for chemotherapy administration, which increased by 217
percent, to $912 million. This increase resulted from the increases in payment rates for
chemotherapy services mandated by the MMA and increased volume. Payments for drug

administration services represented about 12 percent of all Medicare payments to oncologists in
2004 (Figure 1, p. 9).

In 2004, the MMA reduced the payment rate for most covered drugs. As a result, drug payments
to oncologists grew more slowly than historical trends would indicate. Nevertheless, payments
for anemia drugs increased 17 percent over 2003 (following a 51 percent increase in 2003).
Payments for other drugs, used primarily to treat the side effects of chemotherapy, increased by
13 percent over 2003 levels.

Medicare payments for medical oncology services,
by type of service, 1999-2004

Spending (millions)

Type of service 1999 2000 2001 2002 2003 2004
All Part B drugs: $1,645 $2,132 $2,674 $3,650 $4,790 $5,276
Chemotherapy drugs 870 1,092 1,350 1,736 2,199 2,298
Erythroid growth factor 321 457 642 854 1,291 1,511
Other drugs 453 583 683 1,060 1,300 1,468
Drug administration 180 206 230 238 288 912
E&M services 550 612 676 7AS 823 862
Other services 136 151 174 213 256 260
Total 2,512 3,102 3,754 4,845 6,157 7,312

Note: E&M evaluation and management). Medical specialties defined as hematology, hematology/oncology, and medical oncology. Other services
include tests, imaging, and other procedures.

Source: Direct Research analysis of data from Medicare Physician/Supplier Procedure Summary Master File, 1999-2004, and OPPS Files, 2004 Final
Rule through 2006 Proposed Rule.

MECpAC Effects of Medicare payment changes on oncology services | January 2006


M E Cc Medicare ow nd 601 New Jersey Avenue, NW « Suite 9000 » Washington, DC 20001
A Payment Advisory (202) 220-3700 * Fax: (202) 220-3759 » www.medpac.gov


although they did not believe that the project would improve quality or produce useful research
results. The payments CMS provided to oncologists through this project made it difficult for the
Commission and the Congress to evaluate the effect of the Medicare payment changes.

The Commission recommends some policy changes to improve the payment system and promote
beneficiary access and quality chemotherapy care.

Recommendations are:

RECOMMENDATION 1

The Secretary should allow an exception to the competitive acquisition program
(CAP) delivery rules for rural satellite offices of providers.

RECOMMENDATION 2

The Secretary should use his demonstration authority to test innovations in the
delivery and quality of health care. Demonstrations should not be used as a
mechanism to increase payments.

RECOMMENDATION 3

The Secretary should require providers to enter patients’ hemoglobin level on all
claims for erythroid growth factors. This data should be used as part of Medicare’s
pay-for-performance initiative.

The Commission would have recommended that OIG conduct another study of physician
purchase prices for chemotherapy drugs. However, OIG has announced plans to conduct audits
of drug acquisition costs for additional practices in 2006. Also, in the course of this study and an
earlier one on cost sharing in private plans serving Medicare (MedPAC 2004), the Commission
recognized that beneficiaries receiving chemotherapy could be liable for very high cost sharing.
Changes to the Medicare benefit design that would limit cost-sharing liability for cancer patients
and other patients with large health care spending merit further study.

MECpAC Effects of Medicare payment changes on oncology services | January 2006


22

The CAP delivery rules were a response to concerns of potential vendors (Bassano 2005). Under
the CAP system, physicians do not own the CAP drugs. Vendors maintain title until the product
is administered. Vendors were concerned that they would be liable if the physician transported
the drug and did not handle it properly. The safety and quality of the drug could be compromised.

These concerns are not unreasonable. Physicians and vendors must always ensure that these
drugs are handled appropriately. Currently, many private payers have adopted systems of

“brown bagging” for physician-administered drugs (MedPAC 2003). Vendors deliver drugs to

the patient’s home, and the patient is responsible for bringing the medication to the physician’s
office. Physicians have raised concerns about the safety of drugs shipped in this way. Unlike most
patients, rural oncologists have experience storing drugs, preparing them, and transporting them
safely to satellite offices. Liability issues should be minimal.

RECOMMENDATION 1

The Secretary should allow an exception to the competitive acquisition program
(CAP) delivery rules for rural satellite offices of providers.

Rationale:

Oncologists in rural areas provide chemotherapy to beneficiaries through satellite offices. If they
can receive chemotherapy drugs in their main office, they will have the option of participating in
the CAP program.

Implications:
Spending. Negligible.

Beneficiary and provider. This would allow rural providers to participate in the CAP program. It
could help preserve access for beneficiaries in rural areas.

The CAP replacement model

Some potential vendors have suggested an alternative model to the CAP program, called the
replacement model. Under this model, physicians would estimate the type and quantity of drugs
they required for all of their Medicare patients for a week. The vendor would supply the drugs.
When a drug was used, the physician would notify the vendor, who then would bill Medicare and
the beneficiary for the drug and send a replacement for the administered drug to the practice.

This model would lessen the administrative burden on physicians and vendors. Physicians would
not have to write separate prescriptions for each patient and would not have to separate inventory
by patient (although they still would need to keep drugs for Medicare beneficiaries separate from
drugs for their other patients).

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


three quarters of 2005. Drugs include chemotherapy agents and medications used to treat the side
effects of chemotherapy. Many overlap with the drugs identified in the OIG report. The 26 drugs
accounted for more than 50 percent of physician-administered Part B drug spending in 2004.

Our analysis of prices paid by physicians showed that price variation for our basket of drugs
declined between the first and third quarters of 2005. Next, we looked to see if the decline in
price variation was more pronounced for any particular types of drugs. We grouped our drugs
in two ways. First, we classified them based on whether they were single source branded drugs
or had generic alternatives. Next, we looked at whether the drugs were chemotherapy agents or
prescribed to treat the side effects of chemotherapy. For all four categories, the range, defined as
the variation between the best and worst price obtained by physicians, narrowed between the first
and third quarters of 2005.'’ The range for single source chemotherapy drugs—small to begin
with—narrowed least, falling from 6.9 percent to 5.2 percent. The biggest change was in the
range for drugs used to treat the side effects of chemotherapy. That range declined 54 percent in
the third quarter (Figures 2 and 3).

Figure 3
Change in price variation for selected chemotherapy
and non-chemotherapy drugs purchased by oncologists
30%
25.3
25
= 2
g
2s
2 10 -
= 69
5.2
; | i
° 1
December 2004 June 2005

@ Chemotherapy G Nonchemotherapy

Note: Two drugs have been excluded because generic alternatives became available during the four quarters. Two others have been excluded because
of crosswalk problems. The range measures the percent of variability among the prices paid by clinics. It is measured by subtracting the price paid
by the 25th percentile of purchasers from the price paid by the 75th percentile of purchasers, dividing by the price paid by the 50th percentile of
purchasers, and multiplying by 100. MedPAC’s contract with IMS Health does not allow the prices of drugs to be named individually.

Source: MedPAC analysis of IMS Health data 2004-2005.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

19




Executive summary



Annual growth rate in Medicare payments for
oncology services, by type of service, 1999-2004

Annual growth (percent)

Type of service 2000 2001 2002 2003 2004
All Part B drugs 30% 25% 36% 31% 10%
Chemotherapy drugs 25 24 29 27 4
Erythroid growth factor 42 40 33 51 17
Other drugs 29 7 55 23 13
Drug administration 14 1 3 21 217
E&M services 1 10 10 1 5
Other services 1 15 22 21 2

Note:  E&M [evaluation and management). Medical specialties defined as hematology, hematology/oncology, and medical oncology. Other services
include tests, imaging, and other procedures

Source: Direct Research analysis of data from Medicare Physician/Supplier Procedure Summary Masier File, 2000-2004, and OPPS Files, 2004 Final
Rule through 2006 Proposed Rule.

Payments for evaluation and management (E&M) services provided by physicians increased 5
percent, and payments for other services, including imaging and tests, increased 2 percent over
2003 levels.

Medicare spending for drugs and drug administration in 2005

To measure the impact of 2005 Medicare payment changes, we analyzed carrier claims for the
first six months of 2005.5 We compared our results to spending and volume claims for the same
period in 2003 and 2004. The data cover drug administration services, chemotherapy drugs, and
erythroid growth factor used to treat anemia, administered in physician offices.° We also have
spending data for the quality-of-life demonstration project funded by CMS in 2005. We do not
have data on use and spending for other drugs to treat the side effects of chemotherapy or for
other physician services provided by oncologists. We found that beneficiaries received more drug
administration services in 2005 than 2004 but spending remained constant. Medicare payments
for chemotherapy drugs declined in 2005. Physicians substituted newer, more expensive
chemotherapy drugs for older drugs. Use and spending for erythroid growth factors continued to
increase. We estimate that the demonstration project will add about $200 million to spending for
chemotherapy services.

Drug administration services
. Coding changes make comparison of drug administration services between 2003, 2004, and

2005 difficult. The Congress added 32 percent transition payments for drug administration

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


After the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) mandated
payment increases in 2004, Medicare 2005 total payments for drug administration services
equaled 2004 levels, but the volume of services provided to Medicare beneficiaries increased.
Medicare paid less for chemotherapy drugs in 2005 than the previous year, although the volume
of drugs provided to beneficiaries, measured by quantity and drug mix, increased. The mix of
chemotherapy drugs provided to beneficiaries shifted towards newer, more expensive agents.
Volume and spending for erythroid growth factors continued to increase.

How did the payment changes affect quality of care and beneficiary satisfaction?

Our ability to assess the quality of chemotherapy-related services received by Medicare
beneficiaries is limited. Few consensus quality indicators for chemotherapy exist, although the
profession is working to develop them. Beneficiaries in our focus groups reported that they were
satisfied with the quality of care they received.

How did the payment changes affect adequacy of payment and availability of
chemotherapy services in different geographic areas?

Overall trends in spending for chemotherapy drugs and drug administration services were
similar in all geographic areas. Consistent with the general increases in chemotherapy services,
the Commission found no evidence of access problems for Medicare beneficiaries needing
chemotherapy in any part of the country. However, beneficiaries without supplemental coverage
may be more likely than other beneficiaries to receive chemotherapy in hospital outpatient
departments in some areas.

How did the payment changes affect adequacy of payment and availability of
chemotherapy services in different practice sizes?

We were unable to collect empirical data on this subject. Based on its audit of physician
purchases of chemotherapy drugs, the Office of Inspector General (OIG) of the Department of
Health and Human Services found that large practices generally could get lower prices for drug
purchases. However, all practices could purchase most drugs at or below the Medicare payment
tate. During our site visits, we also determined that physicians in varied practice settings were
able to purchase most drugs at the Medicare payment rate.

What was the impact on physician practices?

Our site visits suggest that all physician practices considered the 2005 payment changes
significant and that they made changes in response to the new payment system. Oncologists
responded to the changes by cutting costs and increasing efficiency (particularly with respect

to drug purchasing activities), finding new sources of revenue (such as imaging) or selecting
more profitable patients. Many physicians reported that the payments furnished to them through
the quality-of-life demonstration project implemented by the Centers for Medicare & Medicaid
Services (CMS) in 2005 ensured that they continued to provide care to Medicare beneficiaries,

Vili Effects of Medicare payment changes on oncology services | January 2006 MECpAC


14

use, because the programs provide replacement drugs for products that have been administered
rather than paying for the cost of the drug. Physicians cannot recoup the cost of the drug and
cannot bill for the replacement product if they administer it to another patient because the
physician did not buy it. Additionally, the physician may not have another patient who needs the
specific medication.

Limited help is available for Medicare beneficiaries who need assistance paying out-of-pocket
expenses. The Patient Advocacy Foundation, a national 501(c)(3) nonprofit organization,

has established a Co-Pay Relief (CPR) program to help qualified insured individuals with
copayments. The program is limited to patients who need treatment for breast cancer, lung
cancer, prostate cancer, and macular degeneration.

The Commission is concerned about high cost sharing for cancer patients. The issue of unlimited
beneficiary liability also affects other beneficiaries. In future work, we will examine long-term
solutions to this problem.

Medicare began paying for Part B drugs according to a new methodology, based on ASP, in
2005. Payment for most covered drugs is set at 106 percent of ASP. To date, this system has
reduced payment rates for most covered drugs. In the course of our site visits, the Commission
found that most oncologists could purchase most drugs at rates below the Medicare payment
level, but profit margins on these drugs generally were low, as the policy change anticipated.
Every practice reported that that they could not buy some drugs at the payment rate. A study by
the Office of Inspector General (OIG), Department of Health and Human Services indicated that
oncologists could still purchase most drugs at rates below the payment level, although specific
drugs posed a problem for some practices. In general, larger practices paid lower prices than
smaller practices for the same drugs.

The Commission has found that variation in prices paid by different purchasers has narrowed
throughout 2005. In general, the Commission finds that the payment system for drugs is
providing adequate payments, but some adjustments to the methodology may be warranted as
Medicare gains more experience with the new system. We found that more far-reaching changes
are needed in the regulations establishing the competitive acquisition program, an alternative
payment system.

Average sales price methodology

In general, Medicare’s change to a payment system based on ASP has resulted in program
savings, and oncologists can purchase most drugs at prices below the payment rate. Although
not an actual price, ASP represents the weighted average of the manufacturer’s sales price

for each product that falls within a Medicare drug billing code.? It is based on data submitted
quarterly by pharmaceutical manufacturers, is net of price concessions such as rebates and

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


JANUARY 2006

REPORT TO THE CONGRESS

Effects of Medicare

Payment Changes on
Oncology Services

‘Commission

MEO PAC Seer



Mandate for report

Medicare Prescription Drug, Improvement, and Modernization Act of 2003,
Section 303

(5)

(A) Review.—The Medicare Payment Advisory Commission shall review the payment
changes made under this section insofar as they affect payment under part B of title
XVIII of the Social Security Act—

i. For items and services furnished by oncologist; and

ii. For drug administration services furnished by other specialists.

(B) Oruer Marrers Stupiep.—In conducting the review under subparagraph (A), the
Commission shall also review such changes as they affect—
i. The quality of care furnished to individuals enrolled in part B and the
satisfaction of such individuals with that care;
ii. The adequacy of reimbursement as applied in, and the availability in, different
geographic areas and to different physician practice sizes; and
iii. The impact on physician practices.

(C) Reports.—The Commission shall submit to the Secretary and Congress—
i. Not later than January 1, 2006, a report on the review conducted under
subparagraph (A) (i), and
ii. Not later than January 1, 2007, a report on the review conducted under
subparagraph (A) (ii).
Each such report may include such recommendations regarding further adjustments in
such payments as the Commission deems appropriate.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

37


Effects of Medicare payment
changes on oncology services





50

Commission staff

Mark E. Miller, Ph.D.
Executive director

Sarah Thomas, M.S.
Deputy director

Effects of Medicare payment changes on oncology services | January 2006

Jack Ashby, M.H.A.

Jill Bernstein, Ph.D.
Cristina Boccuti, M.PP.
Niall Brennan, M.PP.
Sharon Bee Cheng, M.S,
David V. Glass, MLS.

Timothy F. Greene, M.B.A.

Scott Harrison, Ph.D,
Kevin J. Hayes, Ph.D.
Sally Kaplan, Ph.D.
Kathryn Linehan, M.P.H.
Craig K. Lisk, M.S.
Karen Milgate, M.P.P.
Jennifer Podulka, M.P.Aff.
Nancy Ray, MS.

Rachel Schmidt, Ph.D.
Joan Sokolovsky, Ph.D.
Jeffrey Stensland, Ph.D.
Ariel Winter, M.P.P.
Daniel Zabinski, Ph.D.

Research assistants

Sarah Friedman,
Sarah Kwon.

Special assistant to the
tive director

Annissa McDonald

A

Reda H. Broadnax, B.S.,
Executive officer

Wylene Carlyle

Diane E. Ellison
Timothy Gulley

Tina Jennings, MTESL.
Plinie (Ann) Johnson
Jason McMahon
Cynthia Wilson.



10.

14.

16.

Hospitals in these markets also reported they were treating increasing numbers of patients
with supplemental insurance who required expensive new drugs.

Some prices, including those paid by federal purchasers, are excluded from the
calculations.

Denileukin diftitox is used to treat a form of lymphoma, a rare type of cancer that affects
certain white blood cells and causes lesions to develop on the skin.

Our contract with the vendor does not allow us to present prices for specific drugs.
For this analysis we focused on prices paid by clinics and hospitals.

The range is calculated as the difference between the price at the 75th quartile and the 25th
quartile.

In the interim final rule, CMS noted that participating CAP physicians could maintain an
electronic or paper inventory rather than separate inventories for each patient. The agency
also stated that when a CAP drug was not administered in the specified time frame, the
participating physician must contact the CAP vendor to discuss what to do. If the drug was
unopened and it was permissible under state law, the physician could retain the drug for
administration to another Medicare beneficiary at a later date.

The one exception was a beneficiary dually eligible for Medicare and Medicaid who
received treatment in the HOPD of a safety-net institution.

The Eastern Cooperative Oncology Group has developed a 6-point scale to measure
performance status. This scale has been validated and is frequently used as a component of
data collected in clinical trials.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

33


In the physician fee schedule final rule, CMS announced that it would permit vendors to
subcontract with physicians to collect beneficiary copayments. This decision might make

the CAP program a more attractive alternative for some physicians. Physician offices could
receive some payment to offset the administrative costs of participating in this program. They
would also be aware of when beneficiaries could not pay their copayments and might be able to
intervene before vendors stopped supplying necessary drugs. For example, they could encourage
beneficiaries to apply for Medicaid or other programs that provide assistance with the costs of
drugs.

Vendors are also likely to favor this decision because they believe it would be difficult to collect
copayments from beneficiaries who do not know them or know what services they provide.

Potential vendors objected to the proposed rule for the CAP program because they did not
believe it established the conditions for a profitable business. They argued they could not
negotiate discounts with manufacturers because CAP prices are included in calculations of ASP.
Since vendors must supply almost all physician-administered drugs requested by physicians and
cannot encourage use of any one drug over another, manufacturers have little incentive to give
them discounts, even though they would purchase a large volume of drugs. CMS did not receive
any vendor bids before it decided to delay implementing the program.

In an interim final rule issued November 2, 2005, CMS exempted CAP prices from calculations
of ASP for a period of up to three years. The agency then will reevaluate this policy and its effect
on Medicare payment rates for Part B drugs.

The CAP program in rural areas

The CAP rules require that drugs be delivered to the facility in which they will be administered.
Oncologists in rural areas pointed out that they could not participate in the program because of
this rule. Beneficiaries in rural areas tend to receive chemotherapy in satellite clinics. A group
practice located in a central region provides chemotherapy services once or twice a week in small
satellite clinics owned by the physicians or in cooperation with a community hospital. Sometimes
the physicians see patients at these clinics but administer chemotherapy only in their central
offices. In some cases, physicians and nurses travel up to four hours to see patients at the satellite
clinics. Some practices reported that they lost money on the satellite clinics but consider it part
of their mission in rural areas. In 2004, many physicians we interviewed said they might have to
close these clinics because of the Medicare payment changes, but most remained open in 2005.

Sometimes nurses cannot mix drugs safely in these satellite offices because the office does not
have the expensive equipment necessary for the safe handling of these toxic products. Nurses mix
the drugs at the main facility and then travel to the satellite office to administer chemotherapy.
Under these conditions, the practice cannot ensure anyone will be at the satellite office to accept
delivery of a drug shipment, and staff working in the satellite office may not be able to mix the
drugs even if they do receive them.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

21




20

Competitive acquisition program

The MMA mandated the establishment of a competitive acquisition program in 2006 as an
alternative way for providers to acquire physician-administered drugs. The goal of the program
was to increase competition for Part B drugs. CAP vendors, who would purchase large quantities
of drugs, could negotiate lower prices with pharmaceutical manufacturers and produce Medicare
savings. The program also was designed to eliminate financial incentives for physicians to prefer
one drug over another. Additionally, small practices unable to purchase drugs at the Medicare
payment rate would have an alternative way of acquiring drugs and could continue to administer
chemotherapy in their offices.

Under CAP, organizations like wholesalers or specialty pharmacies would submit bids to
Medicare to become designated vendors for Part B drugs. Each year, physicians would choose
whether to continue to purchase and bill for Part B drugs or to receive these drugs through a
Medicare-designated vendor. Vendors would purchase and dispense drugs to physician offices on
the basis of prescriptions written by physicians for their individual Medicare patients. Medicare
would pay the vendors directly and the vendors would bill patients for required copayments.
CMS delayed implementing this program in response to vendor and physician comments on the
proposed rule. CMS issued an interim final rule on July 6, 2005, and a final rule on November
21, 2005.

None of the oncologists who we interviewed was willing to participate in CAP as described in
CMS’ interim final rule. Key criticisms of the rule by oncologists included the following:

. Vendors could stop supplying drugs for beneficiaries who did not pay their copayments in
a timely fashion. If this happened, a beneficiary’s treatment could end in the middle of a
course of chemotherapy.

. Office administrative burden would increase. Physicians would have to write prescriptions
for each patient’s drugs, rather than purchasing drugs in bulk as required by the practice.
There would be no payment to offset the administrative cost.

+ Offices would have to maintain separate inventories for each patient covered through the
CAP program." If a patient could not receive treatment on a given day, as is frequently
the case because of his medical condition, the office would have to return the drug to the
vendor.

. Offices would be tied to a specific vendor for a year, even if they were not satisfied with the
vendor’s performance.

+ Physicians would have to appeal all claim denials, even if they did not believe the time and
effort required to mount the appeal constituted an effective use of practice resources.

. Physicians with satellite offices in rural areas could not participate in the program because
they often cannot accept drug deliveries and mix drugs in their satellite offices.

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


Executive summary

In 2005, Medicare implemented significant changes in the way it pays oncologists for physician-
administered drugs and drug administration services. Congress mandated that the Commission
evaluate the effect of these changes and make policy recommendations if appropriate. We found
that the payment changes did not affect beneficiary access to chemotherapy services. Some shifts
in site of service were reported in site visits. Physicians provided more chemotherapy services
and more Medicare beneficiaries received services in 2005 than in 2004. We saw no indication
that quality of care was affected, and patients continue to be satisfied with the care they are
receiving. Although the use of chemotherapy services varied by geographic region, we found no
indication of access problems in any region. In general, larger practices were able to purchase
chemotherapy drugs at lower prices than smaller practices, but all could buy most drugs at prices
below the Medicare payment rate.

The Commission analyzed the effects of the payment changes on the provision of chemotherapy
services through a series of studies:

. We analyzed expenditures and changes in volume for chemotherapy services using
Medicare claims data.

. We analyzed a commercial database with prices for drugs used by oncologists to see if
prices physicians paid were below the Medicare payment rates, and we measured the
variation in prices different physician practices paid.

. We visited community oncologists, hospital outpatient departments, and health plans in five
markets to discuss the effects of payment changes on practices.

+ We conducted four focus groups with Medicare beneficiaries receiving chemotherapy in the
past year to see how the payment changes affected their experiences.

. We interviewed stakeholders to gain their perspective on how the payment changes affected
the buying and selling of physician-administered drugs.

+ We reviewed the literature on pricing for Part B drugs and studies of indicators of quality of
care for chemotherapy.

The Congress asked us to analyze the effects of the payment changes on a number of issues:

How did the payment changes affect Medicare payments?

Following historical trends, the Commission found that use of chemotherapy drug administration
services and chemotherapy drugs increased in 2004 and 2005 following Medicare payment
changes. Oncologists provided more chemotherapy sessions to Medicare beneficiaries in 2005
than in the previous year, and more individuals received chemotherapy in physician offices.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

vii


Many offices have hired employees to work with patients when they begin treatment to ensure
that they can pay their out-of-pocket expenses. This financial adviser estimates the beneficiary’s
potential liability based upon the treatment plan. If the beneficiary does not have supplemental
insurance, the adviser determines whether she qualifies for other assistance, including Medicaid
and assistance programs maintained by individual pharmaceutical manufacturers. The beneficiary
may be given a payment schedule to make copayments over time.

Practices reported that differences in local coverage policies affected their treatment decisions.
Physicians were reluctant to use expensive new therapies that they thought the local carrier

might not cover. For example, a carrier might cover a new drug for treatment of one cancer

while the physician wanted to use it to treat a patient with another type of cancer. One practice
reported sending a patient to the hospital outpatient department for treatment because the local
intermediary covered a particular drug and the carrier did not. Practices reported they were less
likely to appeal local coverage decisions. They found the appeals process too expensive and time-
consuming and the outcome of the appeal uncertain.

Physicians also took actions to reduce costs or improve efficiency. For example, some practices
reduced costs by changing their mix of employees, replacing full-time employees with part-

time employees, or replacing nurses with pharmacy technicians. Similarly, many practices
reported that they reduced health and pension benefits for their employees. One practice reported
increasing efficiency by hiring workers to do the coding for oncology nurses. In this way, they
believed that more of the nurses’ time would be freed for patient care. Similarly, several practices
reported hiring a pharmacist to purchase and mix drugs. The pharmacist also recommended
drugs to the practice based on price and clinical effectiveness.

Some practices tried to increase revenues by providing more services in their offices. For
example, some physician practices purchased positron emission tomography (PET) scanning
technology in the past few years and increased imaging in their offices. However, this was only
possible for practices with large facilities. Many practices reported they did not have the space or
capital to expand in this way.

No physician or office manager reported that the payment changes affected the quality of care
in their office. No beneficiary who participated in our focus groups reported that she had seen a
decline in the quality of care she was receiving.

Geographic differences

As with other medical services, the volume of chemotherapy drugs and drug administration
services provided to Medicare beneficiaries varies considerably by area. Overall trends

in spending for chemotherapy drugs and drug administration services were similar in all
geographic areas. We found no evidence of access problems for Medicare beneficiaries needing
chemotherapy in any part of the country, although beneficiaries without supplemental coverage
did get their chemotherapy in the hospital more often in some areas.

MECpAC Effects of Medicare payment changes on oncology services | January 2006 11




28

Rationale:

Medicare demonstration projects are designed to test innovative strategies for improving delivery
and quality of care for beneficiaries without increasing program spending. To test innovations,
CMS must design projects according to accepted research standards. Those standards include

a strategy for evaluation. Most researchers do not believe that the quality-of-life demonstration
program can be evaluated, and it is hard to see how the data generated can provide useful
research findings.

Moreover, the Commission’s and the Congress’ ability to assess the impact of changes in
payments for oncology drugs and drug administration services has been compromised by the
two oncology demonstration projects. These projects are not budget neutral. They are designed
to increase payments to specific specialties. In general, the Commission finds that if payment
tates are not accurate, CMS and the Congress should address the issue with Medicare payment
policies. It should not make payment policy through the creation of demonstration projects.

Implications:
Spending. This recommendation should have no effect on program spending.

Beneficiary and provider. Focusing the program’s resources on projects designed to improve care
delivery and quality should benefit beneficiaries and providers over the long run.

Use ot erythro d growth factors sosssssussssssssseesctsusteitessssssssssssessssssseesetsususisetessssesssssessee

In one case, use of erythroid growth factors according to clinical guidelines, CMS can begin
collecting data and using them as part of a pay-for-performance initiative immediately.
Erythropoeitin alpha and darbepoeitin alpha are used for the treatment of anemia following
chemotherapy as well as some other indications. Medicare expenditures for erythroid growth
factors account for the highest percentage of Medicare Part B drug spending. In 2001, non-end-
stage renal disease (ESRD) erythropoietin accounted for over 12 percent of Part B drug spending
(MedPAC 2003). Since a competing product, darbepoeitin alpha entered the market in 2002,
combined spending for the two products has risen rapidly. Expenditures by oncologists increased
33 percent from 2001 to 2002 and 51 percent from 2002 to 2003. In addition, Medicare
expenditures by internists for darbepoeitin alpha are the highest for any Part B drug.

At the same time, concerns have been raised about drug safety and potential under- and overuse
of these products. As noted above, ASCO’s QOPI project found wide variation in use of these
growth factors according to clinical guidelines. In 2004, the Food and Drug Administration
(FDA)(Steensma and Loprinzi 2005, Rizzo et al. 2002) responded to safety concerns about the
use of these products by issuing new prescribing information. Although noting the need for
individually based dosing, the agency recommended that the target hemoglobin level for cancer
patients should not exceed 12 g/dL and that growth factor should be withheld if the hemoglobin
level is 13 or higher. It also issued recommendations about the target rate of hemoglobin
increase.

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


Some local carriers have attempted to limit the use of erythroid growth factors in accordance
with FDA regulations and clinical guidelines. Although several carriers have issued local
coverage decisions defining appropriate use of these products, carriers are hampered by their
lack of access to all relevant clinical data. Carriers can use diagnosis codes to determine
whether use of growth factor is warranted, but they cannot tell whether the product is being

used appropriately for specific patients without access to the medical record. Hemoglobin level
is variable. If the hemoglobin level is recorded on each claim, Medicare will be able to track
whether the hemoglobin level falls within the target range. In the case of dialysis patients who
require these drugs, providers must enter the patient’s hematocrit level on claims forms to ensure
that patients are receiving appropriate care. Medicare could require that all providers who submit
claims for erythroid growth factors also provide hemoglobin levels on the claim form.

RECOMMENDATION 3

The Secretary should require providers to enter patients’ hemoglobin level on
all claims for erythroid growth factors. This data should be used as part of
Medicare’s pay-for-performance initiative.

Rationale:

Measuring appropriate use of erythroid growth factors meets many of the Commission criteria
for quality measures. Clinical guidelines exist. Use of growth factors is crosscutting, appropriate
for many, although not all, types of cancer. Practices can provide hemoglobin levels on Medicare
claims with minimum additional burden. CMS would not have to risk-adjust results. The initial
QOPI study showed variation in use of the product and suggested room for improvement.

Implications:

Spending. This recommendation should have no effect on program spending. It could reduce
program spending if the data show that erythroid growth factor is being overused.

Beneficiary and provider. This recommendation could increase the quality of care for Medicare
beneficiaries. It would create minimal additional provider burden. Researchers would have more
data available to measure the effect of the medication on quality of life and survival of cancer
patients.

Conclusion

In the past couple of years, physician practices have been affected by new technologies and new
treatment guidelines. These changes are likely to affect Medicare spending for chemotherapy and
related services.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

29




Estimated average prices for drugs purchased by oncologists

Change in
OIG estimated 1st quarter 4th quarter payment rate
average Medicare Percentage Medicare _ between 1st and

Drugs purchase price paymentrate difference paymentrate 4th quarters
Carboplatin $16.24 $125.47 87.1% $35.25 71.9%
Dexamethasone 0.05 0.14 64.3 0.11 -214
Cisplatin 2.05 4.96 58.7 2.37 -52.2
Vinorelbine 35.71 69.09 48.3 42.83 -38.0
Dolasetron Mesylate 4.04 6.61 38.8 6.52 -1.36
Cyclophosphamide 2.03 2.34 13.2 2.12 -9.83
Epoetin alfa 9.20 10.60 13.2 9.22 -13.0
Filgrastim 245.46 282.41 13.1 279.57 -1.0
Darbepoetin alfa 15.61 17.72 11.9 15.06 -15.0
Fluorouracil 1.49 1.68 11.3 0.64 -61.9
Leucovorin 1.16 1.30 10.8 1.32 1.8
Palonosetron hydrochloride 16.38 18.23 10.1 17.99 -1.3
Granisetron hydrochloride 6.39 7.09 99 7.14 0.6
Vincristine 3.18 3.50 91 3.60 29
Pegfilgrastim 2,080.71 2,273.93 8.5 2,078.07 -8.6
Etoposide 0.46 0.49 61 0.49 0.0
Docetaxel 280.71 297.58 5.7 293.64 -1.3
Pamidronate disodium 56.50 59.06 43 40.63 -31.2
Gemcitabine hydrochloride 111.40 115.34 3.4 115.89 0.5
Fludarabine 263.12 272.10 3.3 262.87 -3.4
Bevacizumab 55.27 57.08 3.2 57.11 0.1
Zoledronic acid 192.95 198.39 2.7 200.03 08
Trastuzumab 51.80 52.99 2.2 54.39 27
Oxaliplatin 8.07 8.24 2.1 8.53 3.5
Irinotecan 123.00 125.58 21 126.92 1d
Mitoxantrone 316.10 321.80 1.8 323.80 0.6
Doxorubicin J9001 353.30 359.63 1.8 364.53 14
Topotecan 730.88 739.69 1.2 763.80 3.3
Octreotide 84.40 85.39 1.2 87.31 2.3
Diphenhydramine 0.93 0.94 11 0.72 -23.4
Sargramostim 21.44 21.67 11 21.87 09
Amifostine 414.00 417.56 0.9 439.31 5.2
IMIG non-lyophil 56.25 56.72 0.8 56.30 ~0.7
Fulvestrant 79.97 80.51 07 81.33 1.0
Rituxan 440.10 442.01 0.4 455.92 3.2
Paclitaxel 16.71 15.85 5.4 13.33 -15.9
leuprolide 279.34 253.13 -10.4 224.42 -114
Enoxaparin sodium 6.45 5.16 -25.0 5.45 5.6
Doxorubicin J9000 5.48 4.26 -28.6 5.84 37.0

Note: OIG [Office of Inspector General), [VIG [Intravenous immune globulin). Table excludes denileukin difftox, which was listed in the Inspector
General's report without an estimated price.

Source: Office of Inspector General 2005, and MedPAC analysis of CMS October 2005 Payment Allowance Limits for Medicare Part B Drugs.

MECpAC Effects of Medicare payment changes on oncology services | January 2006 17


More about MedPAC



Acknowledgments

This report was prepared with the assistance of many people. Their support was key as the
Commission considered policy issues and worked towards consensus on its recommendations.
We are particularly grateful to the many cancer patients, physicians, nurses, hospital and practice
administrators who shared their experiences and insights with us.

The Commission benefited from the many individuals—in government, industry, and the research
community—who generously offered their time and knowledge. Our thanks to the following:
Nancy Davenport—Ennis, Tricia Davis, Allen Dunehew, Elizabeth Eaton, Jack Hoadley,
Christopher Hogan, Alana Ketchel, Sreelata Kintala, Dianne Kube, Len Lichtenfeld, Zein Malas,
Barbara McAneny, Kristen McNiff, Brent Miller, Jeffrey Scott, Catherine Truchinski, and Leigh-
Ann White.

We also thank staff members of the Centers for Medicare & Medicaid Services who, despite a
heavy workload, gave us their help: Peter Bach, Amy Bassano, and Kim Neuman.

Finally, the Commission wishes to thank Mimi Cantwell and Linda Rabben for their help editing
this report.






4

to become designated vendors for Part B drugs. Each year, physicians would choose whether

to continue to purchase and bill for Part B drugs or receive these drugs through a Medicare-
designated vendor. Vendors would purchase and dispense drugs to physician offices on the
basis of prescriptions written by physicians for their Medicare patients. Medicare would pay the
vendors directly and the vendors would bill patients for required copayments. The program has
not yet been implemented. In recent rule making, CMS changed requirements for CAP vendors
and expects to implement the program by July 2006.

MedPAC analyses

Because the legislated changes have not yet been fully implemented, the Commission has limited
ability to analyze the impact of these changes. In addition, we have only partial Medicare claims
data for 2005, the first year Medicare implemented a new pricing method based on the ASP.
Information provided during our site visits is not necessarily generalizable, and the perspectives
of beneficiaries and providers have not been separately validated. Finally, few consensus quality

indicators exist for chemotherapy-related services, although the profession is working to develop
them.

The Commission undertook a series of qualitative and quantitative analyses to examine the effect
of Medicare payment changes on the delivery of oncology services to Medicare beneficiaries.
We conducted site visits to oncology facilities in five regions of the country. We organized four
focus groups of beneficiaries who had received chemotherapy within the past year. We analyzed
Medicare claims data and drug pricing data. Additionally, we interviewed stakeholders involved
in the purchase and distribution of chemotherapy drugs. Finally, we reviewed the literature on
pricing for Part B drugs and studies of quality-of-care indicators for chemotherapy.

Site visits

In 2004 we conducted site visits in five states or metropolitan areas to learn how chemotherapy
was delivered in different types of practices around the country. In some cases we focused on

a single metropolitan area; in others we visited practices located throughout a state. We visited
practices in northern New Jersey, Iowa, Seattle, Atlanta, and New Mexico. Although the opinions
elicited during these visits were subjective and cannot be considered nationally representative,
we found considerable consistency in physicians’ perspectives. In physician offices, we met with
oncologists, oncology nurses, practice administrators, and pharmacists. Although we focused on
community oncology practices most affected by the payment changes, we also met with relevant
personnel in community hospitals, university hospitals, and cancer hospitals. To obtain a broader
perspective on market conditions for oncology services, we also met with representatives of local
health plans.

Physician interviews included questions on:

. practice size and patient volume,

Effects of Medicare payment changes on oncology services | January 2006 MECpAC




6

MMA was passed, some oncologists said that they might send their Medicare patients to the
hospital for chemotherapy rather than furnish the service in their offices. Currently, more than 80
percent of chemotherapy is provided in physician offices. A significant shift in site of care could
create convenience or access problems for beneficiaries if hospitals do not have the capacity to
meet higher demand or if beneficiaries must travel long distances to the hospital. In addition,
costs are generally higher for beneficiaries and the Medicare program when chemotherapy

is provided in hospitals. Beneficiaries without supplemental insurance and patients requiring
expensive therapies could be particularly at risk for higher out-of-pocket costs if physicians
began sending some of their patients to the hospital.

Drug pricing analysis

We purchased commercial data on prices for the top 20 Part B drugs used by oncologists from
the last quarter of 2004 to the third quarter of 2005. Although these data do not include all the
rebates that purchasers may receive from manufacturers, they allow us to look at price trends
over time, variation in prices negotiated by different purchasers, and average prices obtained by
different types of purchasers, such as hospitals and physicians.

Interviews with stakeholders

We interviewed wholesalers, specialized oncology group purchasing organizations, and
pharmacists working at physician practices and hospitals to understand better how oncology
drugs are sold and distributed. Interviewees talked about how the drug distribution system for
Part B drugs has changed since Medicare began basing payment on the average sales price.
We also interviewed representatives of oncology specialty societies to discuss indicators that
Medicare could use to measure quality of care for chemotherapy patients.

We measured changes in use and spending on chemotherapy drugs and drug administration
services for Medicare beneficiaries from 1999 to 2004, the last year for which we have complete
data. Beneficiaries received an increasing volume of drugs and drug administration services
throughout the period. Physicians tended to substitute newer, more expensive medications for
older products. For 2005, we have partial data for chemotherapy drugs, erythroid growth factor,
quality-of-life demonstration payments, and payments for drug administration services provided
in physician offices. From this limited data, we found that Medicare payments for chemotherapy
drugs declined while payments for erythroid growth factors continued to increase. Medicare
beneficiaries received more drug administration services, but Medicare expenditures remained
at 2004 levels. We estimate that the Medicare quality-of-life demonstration added about $200
million in payments to providers.

Effects of Medicare payment changes on oncology services | January 2006 MECpAC




data on the use of ancillary drugs according to clinical guidelines could lead to improved quality
of care.

Community Oncology Alliance pilot projects

COA has established a committee, the Quality, Safety, and P4P (QSP) Committee, to solicit
recommendations from community oncologists, oncology nurses, and practice administrators

on improving the documentation, safety, and quality of cancer care. QSP has recommended
ways to improve the utility of the CMS quality-of-life demonstration including providing patient
performance status information on claims. It has also suggested that CMS develop a pilot project
in which oncology practices could develop and validate measures to collect staging information
in a standard fashion. Currently, oncologists stage patients at diagnosis, determining how far

the cancer has progressed. Oncologists use the staging to determine appropriate therapy. This
initial stage continues to define the patient’s cancer, even if the disease progresses and alternative
treatments are initiated. QSP suggests that a pilot project could be used to develop and validate
standardized measures for staging that reflect changes in patient condition over time. This
measure then could be used to provide more comparable data on symptom management and
treatment regimens.

In our March 2005 Report to Congress, the Commission (MedPAC 2005b) described the
requirements necessary before pay-for-performance programs can be implemented to distinguish
among health care providers.

° Consensus must exist on a core set of quality measures;

. Where necessary, adequate risk adjustment must be available;

. Data used to measure quality must be collectable without undue burden on providers or the
program;

. There is room for improvement on the dimensions of quality we can measure.

In the case of chemotherapy, crosscutting measures that apply to a variety of different cancers
also would be preferable.

Oncologists and both public and private institutions are undertaking a variety of initiatives to
develop and implement measures that meet these criteria. The Commission supports these efforts.

REC OMTMMMTMMENODATI ON 2

The Secretary should use his demonstration authority to test innovations in the
delivery and quality of health care. Demonstrations should not be used as a
mechanism to increase payments.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

27


discounts, and is limited to sales in the United States. The ASP payment rate is set prospectively,
based on transaction prices from two quarters prior.

All stakeholders that take part in the drug distribution system, including CMS, pharmaceutical
manufacturers, group purchasing organizations (GPOs), and physician purchasers, have been affected
by the new payment system. Stakeholders have had to adapt to the transition to the new system:

. CMS had to develop a new payment system and provide direction to manufacturers on
calculating ASP for their products.

. Manufacturers had to evaluate their pricing practices with the knowledge that large
discounts given to some purchasers would lower Medicare payment rates in subsequent
quarters. If they raised prices sharply, they might reduce demand for their products.

They also had to evaluate the fees they paid to wholesalers and GPOs. Representatives of
GPOs told us they had more difficulty negotiating substantial discounts for their clients
as manufacturers calculated the effect of reduced prices on their products’ ASP for the
following quarters.

. Oncology practices also had to adapt to the new system, developing more efficient
purchasing practices. Many oncology practices interviewed noted they were more likely to
purchase non-chemotherapy drugs on the basis of price than in previous years. All practices
reported they kept smaller drug inventories, taking advantage of prompt pay discounts, the
most readily available discounts they could receive under the new payment system.

Although rates calculated under the new system generally resulted in Medicare payments that
were adequate, all physicians interviewed reported some drugs could not be purchased at the
calculated rate. In conversations with the Commission staff, physicians frequently listed older
generic drugs among the products they could not purchase at 106 percent of ASP. Wholesaler
markups are not included in manufacturer ASP calculations but raise prices paid by physicians
and other purchasers. If markups represent a higher percentage of the cost of generic drugs,
they may result in inadequate payments for these products. Manufacturers also do not take into
account final prices when products are resold by the original purchasers for profit.

How did the change to ASP affect Medicare payment rates for drugs?

A report issued by OIG (2005) found that oncologists generally could purchase drugs for the
treatment of cancer at less than the Medicare payment rates (Table 3). The Congress mandated
that OIG analyze acquisition costs for oncology drugs during the first quarter of 2005. The study
was based on audits of 193 practices, focusing on payment for 40 drugs that in sum represented
about 94 percent of total 2004 oncology-billed Medicare drug spending. The drugs included

the 25 drugs with the highest total spending in 2004, five drugs identified by industry as having
Medicare payment rates that were too low, and an additional 10 drugs with high expenditures.
One drug, denileukin diftitox, was eliminated from the study because of insufficient purchases by
sample practices.'° Prices were collected from January through March 2005 and compared with
Medicare payment rates for the first quarter of the year.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

15


JANUARY 2006

REPORT TO THE CONGRESS

Effects of Medicare

Payment Changes on
Oncology Services

‘Commission

MECPAC ==

601 New Jersey Avenue, NW * Suite 9000 * Washington, DC 20001
(202) 220-3700 * Fax: (202) 220-3759 * www.medpac.gov


APPENDIX

Methodology: Price and
quantity of drugs



The Congress directed the Commission to report whether quality of care was affected by
Medicare payment changes for chemotherapy services. Not surprisingly, clinicians we
interviewed think the quality of services they provide is quite high, and patients are generally
satisfied with the quality of care they receive. We found no indication that quality of care

has been affected by the payment changes. However, few consensus quality indicators for
chemotherapy-related services exist, and data to evaluate indicators that do exist are limited.
CMS initiated a one-year demonstration project in 2005 to measure the side effects of
chemotherapy on patients’ quality of life. Current public and private initiatives to define and
measure quality of cancer care can provide the framework for a pay-for-performance oncology
quality initiative.

We discussed perceptions of differences in quality of care with physicians and patients in the
course of our site visits and focus groups. We found that physicians’ evaluation of differences in
quality of care across settings was subjective and seemed to be dictated by where they practiced.
Oncologists in single-specialty practices felt they had more experience in educating patients
about their condition and were more likely to hire oncology-certified nurses. They felt they
provided more continuity of care and greater convenience for patients. By contrast, physicians
practicing in hospital settings pointed to the availability of staff pharmacists to mix drugs,
maintaining that this resulted in higher quality and fewer medication errors. They also pointed to
greater use of safety guidelines and standard treatment protocols as indicators of higher-quality
care.

Beneficiaries who participated in our focus groups received treatment in a variety of settings,
including single-specialty oncology offices, outpatient departments of community hospitals,
outpatient departments in university hospital cancer centers, and infusion centers of integrated
health plans. Almost without exception, beneficiaries praised the quality of care they received."
None experienced changes in the quality of care received in the past year. Two focus group
participants shifted site of chemotherapy administration from physician offices to HOPDs in
2005. Neither felt quality of care suffered, although both felt there was less coordination of care
and greater out-of-pocket expense in the hospital.

Measuring quality of care

It is difficult to measure the quality of care for Medicare patients with cancer. Cancer patients
receive care from a variety of specialty physicians, including surgeons, radiologists, radiation
oncologists, and medical oncologists. No single physician may be responsible for coordinating
care. Typically, patients do not see a medical oncologist until after their cancer has been
diagnosed. The patient might not be referred to an oncologist until surgery is completed. In
addition, there are many varieties of cancer, each requiring its own treatment protocols and drug
regimens. Physicians may find that treatment advances make last year’s best practice obsolete.
Many existing quality measures are related to screening guidelines, more relevant for primary
care physicians and health plans than for medical oncologists. Others apply to a specific type of
cancer and not to the patient population of all medical oncologists.

MECpAC Effects of Medicare payment changes on oncology services | January 2006

23


32

Endnotes

The MMA also changed the way Medicare pays for outpatient drugs under the hospital
outpatient department PPS, but those changes are outside the scope of this report.

ASP represents the weighted average of prices charged for a product in the United States. It
is based on data submitted quarterly by pharmaceutical manufacturers and is net of rebates
and discounts offered to purchasers by the manufacturers. Some prices are excluded from
calculation of ASP, including prices paid by the Department of Veterans Affairs and other
federal purchasers.

E&M visits must be coded level 2 or above.

Throughout this report the terms oncology and medical oncology are defined as the
specialties of hematology, hematology/oncology, and medical oncology. The specialty of
radiation oncology is not included.

CMS provided the Commission with all carrier-paid claims for a list of chemotherapy-
related codes supplied by the Commission. The claims cover somewhat less than half of
2005 and include only those claims submitted and scheduled to be paid through June 22,
2005. To develop a comparable 2004 file, we used the same set of date cutoffs on the 2004
5 percent standard analytic file data. That is, we took claims incurred and paid through June
22, 2004. For both files, only claims lines allowed for payment (not denied) were included
in the analysis.

Variation in claims processing times between years should have a negligible effect on
the totals. Carrier-processed claims are typically paid rapidly. For the chemotherapy
administration and drug codes in question, the median lag between date of service and
scheduled date of payment was 13 days for the 2004 claims sample and 15 days for the
2005 data. This suggests that the claims “tail” (services incurred in the period but not
paid in time for inclusion in the analysis) was relatively small, and that we may slightly
understate actual 2005 volume (relative to 2004), due to the slightly slower claims
processing in 2005. The net result is that we are estimating the change in use from two
(presumed) identical part-year files, both of which contain claims for roughly 40 to 45
percent of the full-year data.

For our claims analysis, chemotherapy drugs are defined as those drugs included in the
CMS Berenson-Eggers Type of Service (BETOS) category of chemotherapy drugs. Some
drugs not included in this category are also used for the treatment of cancer.

Using a slightly different cutoff date and different growth assumptions, OIG (2005)
estimated that spending for the demonstration project would equal $270 million in 2005.

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


18

Commission also plans to monitor the relationship between ASP and purchaser prices in the

coming year. If changes are warranted, we may recommend modifications to the calculation of
ASP.

Price variation

The Commission hypothesized that pharmaceutical manufacturers would narrow the range of
discounts offered to purchasers to ensure that all physicians could purchase their products at

the Medicare payment rates. Since the market for chemotherapy drugs is limited, manufacturers
would want to maximize their customer base. To track changes in oncology prices over time,

the Commission acquired pricing information from a commercial data source.'! The data track
sales to retail pharmacies, staff-model HMOs, hospitals, clinics (including physician offices),
long term care facilities, and federal facilities.” Prices are net of discounts but do not include
rebates provided by manufacturers retrospectively. The database also shows variation between the
lowest and highest prices the purchaser paid at each quartile for each distribution channel. The
Commission purchased data on 26 drugs billed by oncologists for one month of each of the first

Change in price variation for selected brand
and generic drugs purchased by oncologists

18%

10.4

8.4

6.8

Range (percent)

December 2004 June 2005

MH Brand D Generic

Note: Two drugs have been excluded because generic alternatives became available during the four quarters. Two others have been excluded
because of crosswalk problems. The range measures the percent of variability among the prices paid by clinics. Itis measured by subtracting
the price paid by the 25th percentile of purchasers from the price paid by the 75th percentile of purchasers, dividing by the price paid by the
50th percentile of purchasers, and multiplying by 100. MedPAC’s contract with IMS Health does not allow the prices of drugs to be named
individually.

Source: MedPAC analysis of IMS Health data 2004-2005.

Effects of Medicare payment changes on oncology services | January 2006 MECpAC


R EC O M M E N D A T O N S

1 The Secretary should allow an exception to the competitive acquisition program (CAP)
delivery rules for rural satellite offices of providers.
COMMISSIONER VOTES: YES 16 * NO 0 * NOT VOTING 0 » ABSENT 1
2 The Secretary should use his demonstration authority to test innovations in the delivery
and quality of health care. Demonstrations should not be used as a mechanism to increase
payments.
COMMISSIONER VOTES: YES 16 * NO 0 * NOT VOTING 0 » ABSENT 1
3° The Secretary should require providers to enter patients’ hemoglobin level on all claims
for erythroid growth factors. This data should be used as part of Medicare’s pay-for-
performance initiative.
COMMISSIONER VOTES: YES 16 * NO 0 * NOT VOTING 0 » ABSENT 1





Number of claims lines for chemotherapy drugs, 2004-2005

Number of lines

Cost per claim line 2004 2005 Percentage change
$1000 and higher 287,920 340,914 18%
$500-$1000 579,480 564,929 -3
$100-$500 358,240 347,166 -3

$100 and lower 896,200 787,747 -12

Total 2,121,840 2,040,756 4

Note: A claim line represents the Medicare payment rate for a drug unit multiplied by the number of units administered fo a patient on a given day.

Source: Direct Research analysis of partial year, Medicare physicians/supplier claims files, 2004-2005

This is an important consideration because the mix of chemotherapy agents shifted strongly
toward higher-cost-per-dose agents in 2005. In Table B-2, we use the average cost per claim

line as the estimate of the cost per dose. In other words, the claim line represents the Medicare
payment rate for a drug, multiplied by the number of units of that drug provided in a particular
chemotherapy session. One claim line may equal many units of an inexpensive drug or a smaller
number of units of an expensive medication. Agents with average 2005 costs over $1,000 saw
an 18 percent increase in the number of times they were billed. Agents costing under $100 per
line saw a 12 percent decline in the number of claim lines billed. Overall, the number of claim
lines for chemotherapy agents declined 4 percent between the years. This finding suggests that
physicians may be using fewer combination therapies in a single session. (This appears to be
part of an ongoing trend. The number of claims lines for chemotherapy agents declined 3 percent
from 2003 to 2004.)

42 Effects of Medicare payment changes on oncology services | January 2006 MECpAC


. patient mix, including percentage of Medicare patients,

. drug selection and purchasing practices,

. the impact of new (and very expensive) chemotherapy agents,
. shifts in site of service,

. services provided to cancer patients, and

. quality of care in different settings.

Oncologists who worked within hospitals described the extent to which their institutions
delivered chemotherapy. We asked if they were experiencing any increase in volume as a result of
patients being shifted from physician offices to hospital outpatient departments. Finally, we asked
them to compare the quality of services provided in both settings.

Representatives of local health plans discussed the market for oncology services in their
communities. They discussed their payment methods and how they expected to be affected by the
Medicare payment changes.

In 2005, we conducted follow-up interviews. We asked practices to evaluate how the payment
changes actually affected them. We also asked them about ways Medicare could measure and
provide incentives for quality care of cancer patients.

Beneficiary focus groups

In 2005, we conducted four focus groups with Medicare beneficiaries who had received
chemotherapy services within the past year. Focus groups took place in Georgia and Maryland.
Beneficiaries who participated in our focus groups received treatment in a variety of settings,
including single-specialty oncology offices, outpatient departments of community hospitals,
outpatient departments within university hospital cancer centers, and infusion centers of
integrated health plans. We asked beneficiaries to discuss their satisfaction with the services they
had received and whether they had experienced any changes in their chemotherapy care during
the past year.

Medicare claims analysis

We analyzed partial-year carrier claims for 2005 to see if current payment changes had an
impact on volume and spending for chemotherapy services provided within physician offices. We
also analyzed Medicare claims data from 1999 to 2004 to examine trends in use and spending
for Medicare beneficiaries receiving chemotherapy. We analyzed spending for drugs and drug
administration services.

For the period between 1999 and 2004, we wanted to see if any shift occurred in the site of care
for chemotherapy services from physician offices to hospital outpatient departments. When the

MECpAC Effects of Medicare payment changes on oncology services | January 2006