Recombinant Erythropoietin: Payment

Options for Medicare

May 1990

OTA-H-451

NTIS order #PB90-256124
Recommended Citation:

U.S. Congress, Office of Technology Assessment, Recombinant Erythropoietin: Payment

Options for Medicare, OTA-H-451 (Washington, DC: U.S. Government Printing Office, May

1990).

For sale by the Superintendent of Documents

U.S. Government Printing Office, Washington, DC 20402-9325

(order form can be found in the back of this report)
FOREWORD

Recombinant erythropoietin represents a therapeutic breakthrough in the

treatment of anemia. Using biotechnology, researchers have developed a

recombinant form of the hormone erythropoietin, which stimulates the production

of red blood cells. The biologic corrects anemia associated with chronic renal

failure and is being studied for its possible use in other medical conditions.

Recombinant erythropoietin not only reduces patients’ need for blood transfusions

but also alleviates symptoms of anemia and improves the quality of their lives.

Policy interest in Medicare’s payment policies regarding recombinant erythropoietin has arisen chiefly because of the biologic’s expense. Through the End

Stage Renal Disease program, Medicare covers the biologic for more than 90 percent of the country’s approximately 100,000 patients who require dialysis. At

Medicare’s current payment rate, an annual supply of the product may cost $5,000

to $6,000 per treated patient.

Because of concern about the implications of recombinant erythropoietin use

for Medicare expenditures, the House Ways and Means Committee, Subcommittee on Health, requested OTA to examine alternative payment policies that

Medicare might adopt to pay for the biologic. In responding to that request, this

Special Report reviews clinical and economic issues regarding the use of

recombinant erythropoietin and develops a series of options for Congressional

consideration.

U JOHN H . GIBBON S

Director

. . .

111
OTA Staff -- Recombinant Erythropoietin: Payment Options for Medicare

Roger C. Herdman, Assistant Director, OTA,

Health and Life Sciences Division

Clyde J. Behney, Health Program Manager

Project Staff

Jane E. Sisk, Project Director

John M. Coster, Study Director

Frank D. Gianfrancesco, Senior Analyst

Paula M. Chludzinski, Research Assistant

Other Contributing Staff

Hellen Gelband, Senior Associate

Administrative Staff

Virginia Cwalina, Administrative Assistant

Carol Ann Guntow, P.C. Specialist

Carolyn Martin, Word Processor Specialist

Galen Lewis, Secretary

This report was prepared for desk-top publishing by Carol Guntow and Carolyn Martin.
CONTENTS

Chapter Page

1. Summary and Policy Options . . . . . . . . . . . . . . . . . . . . . . . . . . ...... ..e.... o........... ...........""""""""""""" 1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ ................... ...... 1

Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................... ............... 2

Clinical Significance of Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Structure of the Recombinant Erythropoietin Marketplace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Medicare’s Current Payment Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Dimensions for Evaluating Payment Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Quality of Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ ‘7

Access to Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... .......... ‘7

Cost and Efficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... 8

Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................... ........... 9

Technological Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... 9

Administrative Feasibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Options For Medicare Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

General Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........... 14

Payment to Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 20

Payment for the Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................... .......... 40

2. Clinical Significance of Recombinant Erythropoietin..00.00 .0...0 ..0..0 .0..0 ..00.0 ......0. eo.. eo.eo*o*o**o. o.o. oo*o.. o.. o.eoeo*. oo**oo. oe*0 ● 0.00 .43

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................... ........ 43

Treatment of Anemia Associated with Chronic Renal Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Evaluation of the Efficacy of Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Physiologic Effects of Recombinant Erythropoietin in Chronic Renal

Failure Patients. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........... 47

Effects of Recombinant Erythropoietin on the Quality of Life in Chronic

Renal Failure Patients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

Other Potential Uses of Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Evaluation of the Safety of Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Adverse Effects of Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Recombinant Erythropoietin and Blood Transfusions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Summary of Safety and Efficacy of Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

3. The Structure of the Marketplace **......... *.*............ ***... *..... *.**... *.**. **.... **.. ***.... *.*e*. e.*. ***** *...... **. *..... ***** ***.. *.*** ***.*. ● ..**** 63

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................... ........ 63

History of Discovery and Production. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

FDA Approval of Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Recombinant Erythropoietin and Patent Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

Recombinant Erythropoietin and the Orphan Drug Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

The Supply Side of the Market for Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

Distribution of Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

The Demand Side of the Market for Recombinant Erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

v
CONTENTS--Continued

4. Recombinant erythropoietin: Medicare’s Current Payment Policies . . . . . . . . . . . . . . . . . . . . . . . . . ● .0....0 ...000 . . . . . . . . . . . . . . . . . ● ..0..00.. 75

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........ ...................... 75

Medicare’s Payment Policies for

Medicare’s Payment Policies for

General Payment Policies...

ESRD Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Pharmaceuticals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

Prescription Drug Coverage Under the ESRD Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Hepatitis B Vaccine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

Immunosuppressive Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Medicare’s Current Coverage and Payment Policies for Recombinant erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Dialysis Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......... 79

Physicians’ Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ... 80

Medicaid Coverage of Recombinant erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82

Appendix

A. Method of the Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....................... 83

B. Workshop Participant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....... ............... 84

C. Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......................... 85

D. Glossary of Terms and Acronyms. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

E. Method Used by the Office of the Inspector General to Estimate

the Manufacturer’s Costs of Recombinant erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................... ..................... .... 93

Boxes

Box Page

2-A. Dialysis Treatment Methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 44

Table

1-1.

1-2.

2-1.

2-2.

2-3.

2-4.

2-5.

2-6.

2-7.

Page

Options for Congress to Address Medicare Payment Related

to Recombinant erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Summary of Analysis of Congressional Options for Medicare Payment

for Recombinant erythropoietin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Dialysis Treatment Methods Used in the United States by Medicare

and Non-Medicare Patients, December 31, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Home Dialysis Treatment Methods Used in the United States by Medicare

and Non-Medicare Patients, December 31, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

Distribution of Hematocrit Levels of Dialysis Patients, by Age, January 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Efficacy and Safety Studies in Chronic Renal Failure Patients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

Reduction in Blood Transfusions with Recombinant erythropoietin Therapy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Dose Response to Intravenous Recombinant erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

Studies of Subcutaneous Administration of Recombinant erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
CONTENTS--Continued

2-8.

2-9.

2-1o.

2-11.

3-1.

3-2.

3-3.

3-4.

3-5.

4-1.

4-2.

4-3.

Quality-of-Life Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ......... 55

Adverse Reactions to Recombinant erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Percent of Patients Reporting Adverse Reactions from Recombinant erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Adverse Reactions to Recombinant erythropoietin Per Patient Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Milestones in the Development of Recombinant erythropoietin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Recombinant erythropoietin Marketing Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Recombinant erythropoietin Products with Orphan Drug Designations,

March 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ ................. 69

Estimates of Individuals With Selected Conditions Who Are Anemic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Projections of Medicare-Eligible Dialysis Patients Who Are Candidates

for Treatment With Recombinant erythropoietin by Age Group, 1990-1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Coverage for Dialysis-Related Medical Services in the United States,

December 31,1988. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ 75

Dialysis and Kidney Transplant Service Providers in the United States,

November 1989. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ●. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ ........... 75

Prices of a 4,000 Unit Vial to Providers of Recombinant erythropoietin,

by Country, December 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

vii
Chapter 1

Summary and Policy Options

INTRODUCTION

The Food and Drug Administration’s

(FDA) approval of the biologicl 

recombinant erythropoietin in June 1989 made

available an important therapeutic advance

for treating anemia associated with chronic

renal failure. 2 By increasing the body’s

production of red blood cells, recombinant

erythropoietin may correct anemia and

reduce the need for blood transfusions, the

most frequently used treatment for this

condition.

Although recombinant erythropoietin

has engendered excitement in the clinical

community, it has also produced concern

among policymakers because of its expense

and the financial implications for the

Medicare program. An annual supply of

the product may cost approximately $5,000-

$6,000 per treated patient. Because

Medicare covers medical services for the

elderly and disabled and for about 100,000

dialysis patients (156), it is by far the predominant payer for recombinan t

erythropoietin in the United States.3

1 FDA defines a biologic as any virus, therapeutic serum, toxin,

antitoxin, or analogous product applicable to the prevention,

treatment, or cure of dis~ase or injuries to humans (21 CFR

600.3h).

zChronic renal failure is a degenerative condition that progresses from a predialysis phase, during which the kidneys still

maintain some of their function, to a later phase, when a continuous course of dialysis or kidney transplantation is needed to

maintain life. Anemia is characterized by a significant decrease in

red blood cell mass and a decrease in the oxygen-carrying

capacity of the bleed (23). Anemia is a common complication of

chronic renal failure and, in patients with that condition, is

caused primarily by an insufficient production of the hormone

erythropoietin.

sIn February 1990, Medicare contractors processed claims for

recombinant erythropoietin therapy from dialysis facilities for

about 31,000 patients. These claims totaled $16.9 million, of

which Medicare’s share was 80 percent or $13.5 million (47).

Reflecting concern about increased

Medicare expenditures, the House Committee on Ways and Means, Subcommittee

on Health, requested the Office of Technology Assessment (OTA) to evaluate

alternative payment policies for Medicare

that might control expenditures related to

recombinant erythropoietin withou t

sacrificing the quality of care for beneficiaries. 4 This Special Report responds to

that request.

This chapter first summarizes background material regarding recombinant

erythropoietin and then identifies and analyzes options for Medicare payment of the

biologic. Chapter 2 analyzes the clinical literature on its efficacy and safety; chapter 3

describes the economics of the recombinant erythropoietin marketplace; and

chapter 4 reviews Medicare’s current

payment policies for services provided to

patients with end-stage renal disease,5 for

other pharmaceuticals, and for recombinant erythropoietin administered in different health care facilities. The appendixes contain supporting material: appendix A describes the method used to conduct

the study; appendixes B and C acknowledge the valuable assistance of workshop

aThis study was originally requested as part of a broader OTA

project to evaluate alternative payment policies that Medicare

could adopt for the outpatient prescription drug benefit added by

the Medicare Catastrophic Coverage Act of 1988 (Public Law

100-360). After that benefit was repealed, OTA’s Congressional

Technology Assessment Board rescinded its approval of the

broader study.

sEnd-stage renal disease refers to permanent, chronic kidney

disease requiring continuous dialysis or a kidney transplant to

maintain life.

-1-
2- Recombinant Erythropoietin: Payment Options for Medicare

participants and other individuals;

appendix D defines technical terms in a

glossary; and appendix E describes the

method that the Office of the Inspector

General used to estimate the costs related

to recombinant erythropoietin of Amgen

Inc., currently the only manufacturer that

FDA has approved to market the biologic.

SUMMARY

Clinical Significance of

Recombinant erythropoietin

FDA evaluation of the safety and

efficacy of recombinant erythropoietin was

based on data from clinical trials conducted

in the United States in anemic chronic

renal failure patients. For predialysis and

dialysis patients, efficacy data indicate that

the biologic increases hematocrit levels and

reduces blood transfusions in most patients. The rate of increase in hematocrit

and the time required to increase it depend

on the dose. The product appears to be

efficacious by both the intravenous and

subcutaneous routes of administration.

The optimal level of initial and maintenance doses, however, still require investigation.

The quality of life of dialysis patients has

been impaired because of a number of

factors, including the symptoms of anemia

(59). Studies assessing the effect of recombinant erythropoietin on the quality of life

of chronic renal failure patients suggest

that recombinant erythropoietin improves

the well-being and ability to function of

dialysis and predialysis patients. Future

studies should determine long-term

changes in the quality of life in elderly

dialysis patients, the group projected to

have the fastest rate of growth in the

dialysis population in the near future, and

the ability of dialysis patients to return to

work. In addition, the relationshi p

between the use of recombinant erythropoietin and the delayed need for dialysis in

the predialysis population should be

studied further.

Recombinant erythropoietin appears to

be relatively safe. Hypertension is the most

frequently occurring adverse reaction

(160). Although seizures have been

reported, they seem to occur at about the

same rate in untreated patients. Information is not available, however, on

whether the incidence of any adverse

reaction is statistically different compared

with untreated patients. Many of the side

effects attributable to recombinant erythropoietin therapy, such as hypertension, may

be the result of the natural progression of

chronic renal failure.

The occurrence of hypertension in

treated patients is a particularly important

side effect, since the majority of chronic

renal failure patients already have high

blood pressure (38). The incidence of seizures, although not significantly different

from untreated patients, appears to occur

most frequently during the early stages of

therapy as the hematocrit is increasing

(160). Iron deficiency occurs because iron

is necessary for erythropoiesis, the process

of red blood cell formation (23).

Studies are underway to evaluate the use

of recombinant erythropoietin for other

anemias, including anemia associated with

human immunodeficiency virus (HIV),

rheumatoid arthritis, and cancer. The

efficacy of recombinant erythropoietin in

increasing the donation of autologous

blood prior to elective surgery is also under

investigation.
— ——.. .

Chapter l--Summary and Policy Options- 3

The Structure of the Recombinant

erythropoietin Marketplace

Scientists have long recognized the

medical importance of erythropoietin in

regulating red blood cell production.

erythropoietin was first purified from

human urine in 1977; however, naturallyproduced human erythropoietin was an

unacceptable treatment alternative because

of an inability to collect and adequately

purify sufficient quantities for human

administration (102).

In the mid 1980’s, several biotechnology

firms attempted to make erythropoietin for

therapeutic use. Two of the manufacturers

were Amgen Inc., of Thousand Oaks, CA

and the Genetics Institute of Cambridge,

MA. Amgen developed and patented

genetic material that is an important component needed for the production of

recombinant erythropoietin in Chinese

hamster ovary (CHO) cells. Genetics

Institute developed and patented a method

to purify erythropoietin (6).

To market recombinant erythropoietin

in the United States, each manufacturer

entered into a licensing agreement with

other manufacturers. Except for chronic

renal failure patients on dialysis, Amgen

Inc. licensed its domestic rights for recombinant erythropoietin to the Orth o

Pharmaceutical Corporation of Raritan,

NJ. Genetics Institute licensed its domestic

rights to Chugai Pharmaceutical Company

of Japan, which in turn licensed its U.S.

rights to Chugai-Upjohn, Inc., of Rosemont, I1, a joint venture of the Chugai

Pharmaceutical Company of Japan and the

Upjohn Company of Kalamazoo, MI. Continuing disputes over patent rights between

Amgen Inc. on the one hand and Genetics

Institute and Chugai on the other, and over

the licensing agreement between Ortho

Pharmaceutical Corporation and Amgen

Inc. have resulted in legal proceedings that

are still unresolved. The results of these

proceedings have major implications for

the number of suppliers of recombinant

erythropoietin that will be on the market.

The Orphan Drug Act of 1983 provides

incentives for manufacturers to develop

products for rare diseases, currently

defined as conditions afflicting fewer than

200,000 individuals in the United States.

When a sponsor files an application for

FDA to approve a new product for

marketing, the sponsor may also apply for

FDA to designate the product an orphan.

Several sponsors of the same product may

receive orphan designations for the same

rare condition, but FDA grants a 7-year

period of market exclusivity for that condition only to the sponsor who first receives

FDA approval to market the product. To

date, FDA has approved only Amgen’s

Epoetin alfa and has granted 7-year market

exclusivity only to Epoetin alfa for anemia

associated with chronic renal failure.6

Ortho’s product has orphan designation

for the use of recombinant erythropoietin

for anemia associated with HIV7 and with

preterm infancy (54 CFR 16295). A

product may have orphan drug designation

and obtain market exclusivity for multiple

6 FDA will refer to recombinant erythropoietin in general as

Epoetin and will add the suffix alfa, beta, or gamma, etc. for different recombinant erythropoietin (160). At the time of this

Special Report, the United States Adopted Names Council, the

organization charged by FDA with assigning names to new compounds, had assigned the name Epoetin alfa to Amgen’s product

and Epoetin beta to Chugai-Upjohn’s product. FDA, however,

which makes the final determination on names assigned to new

products, had not assigned Epoetin beta to any product.

7 Ortho submitted a Product Licensing Application (PLA) to the

FDA in February 1989 for this indication (l).
4- Recombinant Erythropoietin: Payment Options for Medicare

orphan conditions. Thus, if approved by

FDA, Ortho’s product could receive 7-

years of market exclusivity for recombinant

erythropoietin for these two conditions.

In addition, Ortho’s and Chugai’s products have each received orphan designation for anemia associated with ESRD.

Structurally different products may receive

7 years of market exclusivity for the same

orphan condition. If FDA finds either

product structurally different from

Amgen’s, that company’s product could

theoretically be granted 7 years’ exclusivity

for anemia associated with ESRD or

chronic renal failure.8 By April 1990, FDA

had not determined whether Chugai’s or

Ortho’s product is different from Amgen’s

(142).

The existence of multiple patents, the

licensing agreements made among the

manufacturers, and the granting of exclusivity as orphan products to multiple

brands of recombinant erythropoietin have

the potential to increase the sources of

supply of recombinant erythropoietin.

Ortho’s product, Eprex, and ChugaiUpjohn’s product, Marogen, maybe on the

market shortly, joining Amgen’s product,

Epogen. Although one might expect that

the existence of competitors would lower

the price of recombinant erythropoietin

available to Medicare and its beneficiaries,

lower prices have not necessarily followed

the entry of additional manufacturers into

the markets for other pharmaceuticals

(100a).

8 Amgen’s original orphan product designation was for the use of

recombinant erythropoietin for anemia associated with ESRD.

Market exclusivity, however, was awarded to Amgen for the

broader indication of chronic renal failure. Ortho and ChugaiUpjohn have tiled PLAs for chronic renal failure: it is not known

whether their products will be approved for a broader indication

or if the orphan drug designation will be expanded (142).

Medicare payments currently dominate

the domestic market for recombinant

erythropoietin and constitute the primary

source of revenue for Amgen, the sole

manufacturer. The Medicare program will

remain the predominant payer of recombinant erythropoietin for the near term,

giving it substantial leverage in the marketplace, especially if there are multiple

sources of supply.9

Medicare's Current Payment Policies

For covered beneficiaries, the Medicare

program currently pays for recombinant

erythropoietin administered to dialysis

patients in dialysis facilities and to dialysis

and predialysis patients in physicians’

offices. Because the Social Security Act

generally prohibits Medicare from covering

pharmaceuticals that are self-administered,

Medicare does not cover recombinant

erythropoietin that patients administer to

themselves. This restriction prevents

Medicare from covering self-administration

for patients who receive dialysis at home,

who could number up to 18,000 beneficiaries (124).10

For recombinant erythropoietin administered in a dialysis facility, Medicare has

set a rate of $40 for any dose under 10,000

units administered to increase a patient’s

hematocrit to a target level of 30-33

g Since Medicare pays the medical expenses for approximately 93

percent of U.S. dialysis patients, it will continue to dominate

payments for recombinant erythropoietin in this market. At

present, Medicare also covers recombinant erythropoietin for

elderly and disabled predialysis patients. FDA approval of the

biologic for other indications under study, including anemia

associated with HIV, infant prematurity, and cancer plus

autologous blood donations, would add additional beneficiaries

to Medicare’s coverage.

10s. 2098 introduced in the Senate and H.R 4247 introduced in

the House of Representatives would extend Medicare coverage to

self-administration of recombinant erythropoietin for dialysis

patients.
Chapter 1--Summary and Policy Options- 5

percent, but no higher than 36 percent.ll

Medicare pays an additional $30 for any

dose over this amount needed to raise the

hematocrit to the target level (154). The

Health Care Financing Administration

(HCFA) used an estimate of Amgen’s costs

along with other factors in setting the

payment rate (see app. E). 12 Medicar e

pays for recombinant erythropoietin as a

separate item in addition to the composite

rate paid to dialysis facilities for a package

of services and supplies that are commonly

used during dialysis treatment (154).

Medicare does not pay dialysis facilities

separately for any additional staff time or

supplies, such as needles and syringes, that

are used to administer recombinant erythropoietin; Medicare considers these expenses to be covered by the composite rate.

For administration in a physician’s

office, Medicare pays for recombinant

erythropoietin on a fee-for-service basis

and sets approved charges based on

customary, prevailing, and reasonable

Charges. 13 Medicare makes a monthly

l1 For doses under 10,000 units, Medicare’s actual payment to

the dialysis facility is $32 per administration, since the program

covers 80 percent of the approved charge for medical semices

under Part B, and patients pay the remaining 20 percent as cost

sharing. At this payment rate, annual per patient costs for

recombinant erythropoietin could total $6,240, 80 percent of

which, or $4,992, would be paid by Medicare, and 20 percent, or

$1,248, would be paid by the patient or another third-party.

l2 It was anticipated that an average of 5,000 units of recombinant erythropoietin would be administered at each of the 3

weekly dialysis sessions (129). Recent data indicate that dialysis

patients are averaging 2,500 to 2,900 units per administration

(47,117).

13 Determination of Medicare’s approved charge is made by

Medicare’s contractors, known as intermediaries and carriers,

based on guidelines developed by HCFA. In general, carriers

make payments for outpatient services, and intermediaries make

payments for inpatient services. Payment for services provided in

a dialysis facility, however, are made by intermediaries, and

payment for dialysis-related physician services are made by carriers. HCFA regulations define the approved charge as the

lowest of 1) the physician’s or supplier’s customary charge for

that service, 2) the prevailing charge for similar services in that

locality, 3) the actual charge made by the physician or the supplier, or 4) the private business charge for comparable service

(35). For injectable, Medicare advises its carriers to use prices

from certain compendia of information on pharmaceutical prices

to set the approved charge (155).

capitated payment, which currently

averages $173, to the physician supervising

the patient’s dialysis-related care. For

recombinant erythropoietin and other

pharmaceuticals, Medicare pays these

physicians an additional amount only for

the product and the supplies to administer

it; it considers payment for staff time to

administer the product to be covered by

the monthly cavitation payment. If the

physician administering recombinant

erythropoietin is other than the patient’s

capitated physician, Medicare pays for the

product and supplies, and that physician

must obtain reimbursement for staff time

from the capitated physician (155).

Available data suggest that payments to

dialysis facilities have been covering their

costs. According to claims for dialysis

patients processed through February 1990,

the dose per treatment has averaged about

2,700 units, and Medicare’s approved

charge has averaged about $41 per

treatment (47).

14 Based on a survey of

selected dialysis facilities from November

1989 through March 1990, their product

cost per treatment has averaged about $28

(slightly over $10 per 1,000 units) (85).

According to one facility, its costs of labor,

supplies, and financing amount to about $4

per treatment (43,90).1

5 If these nonproduct costs are representative of dialysis

facilities generally, costs per treatment

IL Through February 1990, HCFA contractors had processed

claims submitted by about 1,400 dialysis facilities for about 31,000

patients (47).

I5’l%ese additional costs are based on current estimates for one

dialysis facility in Michigan. The representativeness of this cost is

not known. The facility was involved, over a 2-year period, in

Amgen’s clinical trials for recombinant erythropoietin.

Therefore, their non-product costs are based on considerable

experience in administering this biologic and may also

incorporate practices continued after the clinical trials ended.

Their figures did not include an allowance for fixed costs associated, for example, with building and equipment.
6- Recombinant erythropoietin: Payment Options for Medicare

would total close to $32, and dialysis

facilities would be averaging a profit of

about $9 per treatment.

These statistics require certain caveats.

Because of the different mix of patients at

different facilities, a dialysis facility could

be only breaking even or even incurring

losses, if its patients required higher doses

to respond. Furthermore, the dat a

averaged from claims do not reflect the

evolving nature of patient treatment and

the dynamics of the patient population.

Data from clinical studies suggest that the

average dose for most patients may rise

over time, at least during the initial phase

of therapy. During the induction phase,

before the target hematocrit was reached,

about 55 percent of patients responded to

doses equivalent to about 3,000 units per

patient, but doses over 5,000 units were

needed for 80 percent to respond (55) (see

ch. 2). Although clinicians appear to be

initiating therapy at low doses, the amounts

may rise as substantial numbers of patients

fail to respond. Doses required t o

maintain hematocrits at the target level

could be much lower, however (see ch. 2).

At any time, the treated population consists of patients at various stages of therapy.

At present, when diffusion of this therapy is

progressing rapidly, new entrants would be

expected to comprise a greater percentage

of treated patients than during the later

phases of diffusion, when most patients will

be on a maintenance dose. Thus, it is possible that the average dose and the profits

earned from current payment levels could

change considerably over time. It is also

possible that dosage levels have been

influenced by the incentives of current

payment methods to constrain use per

treatment and to treat marginally anemic

patients, as described below under option

3. Clarification of these patterns must

await data on more long-term experience

with therapy and Medicare claims.

DIMENSIONS FOR EVALUATING

PAYMENT OPTIONS

Medicare coverage of medical services is

intended to give beneficiaries financial

access to medical care that can maintain

and improve health or slow its deterioration. Medicare coverage of recombinant

erythropoietin for anemic patients with

chronic renal failure has improved

financial access to a therapeutic breakthrough that is becoming the standard of

care for this condition. In an analysis of

the implications of alternative payment

options, the likely effects on the quality of

beneficiaries’ care and on their financial

access to care command primary attention.

Especially in an era of Federal budget constraints, how a payment alternative is likely

to affect Medicare expenditures and

overall efficiency also weighs heavily in

decisionmaking.

The payment options identified in this

Special Report are evaluated according to

their likely effects across these and other

dimensions worthy of consideration: the

quality of beneficiaries’ medical care;

access of beneficiaries to medical care;

costs to the Medicare program, beneficiaries, and society plus overall efficiency;

equity for beneficiaries and providers; technological innovation; and administrative

feasibility. Payment methods that are

effective in achieving some of these objectives may interfere with others. Highlighting these tradeoffs is an important part

of the analysis in this chapter.
Chapter 1--Summary and Policy Options- 7

Quality of Care

By affecting incentives for providers and

patients to use services, Medicare payment

methods for recombinant erythropoietin

may affect the quality of medical care that

beneficiaries receive. The quality of care

has many dimensions, reflecting the

diversity of acceptable outcomes for

patients, the complexity of the medical care

process, and the multiple dimensions of

patients’ health.

Underlying evaluations of the appropriateness of care for a specific condition is

knowledge about the efficacy and safety of

a technology, such as recombinant erythropoietin, and its relationship to other technologies. Therapeutic technologies may

bring about changes in length or quality of

life, with effects on functional, physical,

and psychological well-being. For patients

with chronic renal failure, recombinant

erythropoietin has been shown to correct

anemia, reduce blood transfusions and

improve functioning and well-being (see ch.

2). The risk of severe adverse events, such

as seizures, appears to be minimal, and

common side effects, such as hypertension,

can usually be controlled.

Depending on the method and level of

payment, Medicare policies may encourage

providers to increase or decrease their use

of recombinant erythropoietin and other

services, with subsequent implications for

patients’ health. Similarly, through effects

on patients’ out-of-pocket expenses and

access to care, payment policies may

influence beneficiaries’ decisions regarding

the use of services and, ultimately, the

quality of care received.

Access to Care

The concept of access refers to the ease

with which a beneficiary can obtain

medical care. Access relates to financial

and physical barriers to obtaining a particular service. By affecting beneficiaries’

and providers’ costs, Medicare payment

may influence both aspects of access.

Medicare beneficiaries directly bear the

costs of recombinant erythropoietin and

most other Part B services through an

annual deductible and, for expenses greater

than the deductible, through payment of

20-percent of Medicare’s approved charge.

If a physician’s charge exceeds Medicare’s

approved charge, the physician may also

bill the beneficiary for the balance. Given

that treatment with recombinant erythropoietin can result in sizable out-of-pocket

expenses for beneficiaries, in the range of

$1,250 per year under the current payment

method for dialysis patients, these direct

financial liabilities may affect access to

care. Although private supplementary

insurance and Medicaid cover Medicare

deductibles and copayments for many beneficiaries, financial access may still pose

problems for some beneficiaries.16 Therefore, payment methods that keep Medicare

expenditures for recombinant erythropoietin at reasonable levels also afford

greater financial access to beneficiaries.

16 According to a 1981 survey of ESRD patients, about 80

percent of Medicare patients receiving hemodialysis at home, 66

percent of patients receiving hemodialysis from a center, and 74

percent using continuous ambulatory peritoneal dialysis and

continuous cycling peritoneal dialysis (both in-center and at

home) had insurance coverage supplementary to Medicare’s. No

information was available, however, on the portion of Medicare

deductibles and copayments that were covered. (94)
8- Recombinant erythropoietin: Payment Options for Medicare

Medicare’s payment policies may also

affect how out-of-pocket expenses are distributed across beneficiaries. Payment

methods that result in copayment extremes

may be more harmful to access, particularly

for those without Medicaid or other supplementary coverage, than methods that

keep these direct beneficiary costs to more

uniform levels. For example, under feefor-service payment for recombinant

erythropoietin, patients requiring high

doses could incur out-of-pocket expenses

many times the more uniform out-ofpocket expenses that beneficiaries now

incur under the current per-treatment

payment to dialysis facilities.17

In addition, Medicare policy may affect

beneficiaries’ access through restrictions on

the settings in which services are covered.

For example, because Title XVIII of the

Social Security Act does not cover

pharmaceuticals that patients administer to

themselves, Medicare does not cover self

administration of recombinant erythropoietin by dialysis patients in their homes.

Especially for patients who receive dialysis

at home, travel to physicians’ offices or

dialysis facilities to obtain the biologic

could prove inconvenient.

Besides more direct effects on beneficiaries, financial incentives imparted by

payment methods to the providers of

recombinant erythropoietin may affect

access. Depending on the paymen t

llAccording to claims from dialysis facilities processed during

November and December 1989, the dose per treatment with

recombinant erythropoietin ranged from fewer than 1>00 units to

over 10,000 units (47). If providers charged $10 for each 1,000

units, charges for the product alone would total $100 per

treatment for patients receiving 10,000 units per treatment.

Based on the 20-percent coinsurance for Medicare, annual outof-pocket expenses for patients without supplementary insurance

coverage could reach more than $3,000.

method, providers may have a financial

incentive to treat low-dose, less costly

patients who would benefit only marginally

from this biologic or to deny appropriate

treatment to high-dose, more costly

patients.

Costs and Efficiency

Costs and efficiency refer to the use of

resources that are implied by a payment

option, especially when measured against

alternative uses to which those resources

could be put. The costs of recombinant

erythropoietin are directly borne by the

Medicare program and, through deductibles and copayments, by beneficiaries.

Indirectly, these costs are borne by society

through taxes and by beneficiaries through

Medicare premiums.

The total costs of recombinant erythropoietin to the Medicare program depend

on the quantity consumed, Medicare’s

payment rate, and resulting effects on the

use and cost of related medical services.

Medicare’s costs represent alternative uses

of public and private resources and should

be balanced against the health benefits

gained from the biologic. Additional

dollars spent on recombinant erythropoietin may be taken from other worthy

areas, both public and private, to which

society’s limited resources may be allocated. Therefore, payment methods should

encourage an allocation of resources

between recombinant erythropoietin and

other areas that is socially desirable.

Payment methods should also encourage

distributors and providers to set prices that

reflect the least-cost method of producing

or providing a product and do not include a

higher profit than is necessary to compensate for these activities. Higher prices
Chapter l–Summary and Policy Options- 9

imply fewer health benefits from any

Medicare dollar allocated to recombinant

erythropoietin. By the same token, prices

that are too low may discourage socially

desirable investments and, depending on

their pricing strategies, may induce distributors and providers to shift costs to other

payers.

Historically, health insurance coverage

and methods of payment have insulated

providers and beneficiaries from the

financial implications of their decisions to

buy and use medical technologies. The literature clearly shows that use and total

expenditures have been higher the lower

beneficiary out-of-pocket expense when

medical services are rendered (144). One

would expect that the use of recombinant

erythropoietin, like other expensive

therapies, would be greater with Medicare

coverage. Physicians would be more likely

to prescribe and patients to use the biologic

the lower patient cost-sharing.

Equity

Equity relates to who pays and who

benefits from Medicare’s policies. In

public finance generally, equity is served by

treating similarly people in similar circumstances and by treating differently people

in different circumstances.

For recombinant erythropoietin, the

issue is to what extent beneficiaries’ out-ofpocket expenses should vary with their use

of the biologic. For example, dialysis

patients who require little or no recombinant erythropoietin may look unfavorably

on a payment method that significantly

increases their out-of-pocket expenses.

Beneficiaries may feel that their direct payments for recombinant erythropoietin

should be commensurate with their use.

Historically, out-of-pocket expenses,

whether for private insurance or for

Medicare coverage, have varied with the

use of services.

For providers of recombinant erythropoietin, equity is served if payments reflect

any differences in their costs that are associated with operating in different markets.

For example, some providers in small and

geographically remote markets may incur

higher unit costs for recombinant erythropoietin because of smaller purchases and

costlier transportation expenses. Other

providers of recombinant erythropoietin

may serve patients who, on average,

require larger doses of recombinant

erythropoietin. Such market-related costs,

if not incorporated into Medicare’s payment rates, could adversely affect providers’ finances and, in turn, beneficiaries’

access to care. In addition to possible

effects on beneficiaries, Government

agencies have an obligation to treat providers, distributors, and manufacturers

fairly, especially when the Government

commands a predominant role in the

market, as it does with recombinant

erythropoietin.

Technological Change

Through its influence on the market,

Medicare payment policies can shape the

direction and extent of innovation in

medical technologies. How Medicare and

others pay for the services associated with a

technology determines the total revenue

and profitability of that product. Moreover, the market’s response to a product or

class of products sends a signal to potential

innovators and investors in that field; successful ventures encourage future investments in similar undertakings, while

failures retard their development.
10- Recombinant erythropoietin: Payment Options for Medicare

Because Medicare promises to remain

the primary payer of recombinan t

erythropoietin for the near future, the

program’s payment policies will have a substantial effect on the total market for the

product. Over time, Medicare’s policies

are likely to influence investment in

endeavors perceived as similar, namely

research on innovative pharmaceuticals

that employ biotechnology and on other

products for which Medicare would be the

dominant payer.

Especially when Medicare accounts for

a substantial share of the market, as it does

for recombinant erythropoietin, it is

advisable that policymakers at least consider the implications of payment on the

industry that develops, distributes, and

administers it. More controversial is the

responsibility of Medicare, as opposed to

other Federal programs, to encourage

worthwhile innovation. Even if one accepts

that the Federal Government has some

responsibility to foster worthwhil e

innovation, it is not clear that the Medicare

program, as opposed to a Federal program

charged specifically with that mission,

should pursue that objective if it conflicts

with Medicare’s role as a prudent payer of

medical care for its beneficiaries.

Administrative Feasibility

The final dimension for evaluating a

payment option is the administrative

feasibility of implementing the measure

proposed. This aspect of the analysis questions how easily Medicare’s administrative

structure and the country’s arrangements

for producing, distributing, prescribing, and

dispensing drugs could incorporate the proposed change.

A complex structure to support HCFA’S

administration of the Medicare program is

already in place. HCFA’s intermediaries

administer payment for inpatient and

dialysis services, and its carriers administer

payment for physician services and most

outpatient services. End-stage renal

disease networks and peer review organizations are responsible for reviewing the

quality of care provided to beneficiaries.

Most pharmaceutical products are

readily available to patients and health

care professionals through multiple distribution outlets across the nation. Traditionally, pharmaceutical products are

shipped from the manufacturer, often

through a wholesaler, to a point of distribution or administration to patients, such as

physicians’ offices, hospitals, pharmacies,

and dialysis facilities.

Some of the potential payment options

would require changes in the product and

financial flows or in procedures for setting

payment rates and assessing the quality of

care. The extent to which these changes

would pose a burden to beneficiaries, providers, distributors, manufacturers, or Government administrators represents an

important aspect of an option’s implications.

A further administrative consideration

relates to updating payment arrangements

in response to dynamic changes in the

market for recombinant erythropoietin. As

market conditions (e.g., the number of

manufacturers, the medical conditions

approved by FDA and Medicare’s prominence in the market) evolve, it will be

necessary for HCFA to reassess the

appropriateness of the level and perhaps

even the method of payment.
Chapter 1--Summary and Policy Options- 11

OPTIONS FOR MEDICARE PAYMENT

This Special Report analyzes nine

options regarding Medicare payment of

recombinant erythropoietin. Two general

options discuss Medicare coverage of selfadministered recombinant erythropoietin

and Medicare payment to encourage needed research on the biologic. The other

options relate to methods of paying providers or to methods of paying for the

product (see table l-l). Each option is

evaluated across the six dimensions

described above; table 1-2 summarizes the

findings for each option.

The implications of each option depend

not only on its inherent qualities but also

on the market circumstances under which it

is applied. The market for recombinant

erythropoietin is dynamic, with substantial

changes likely in the next few years in the

number of manufacturers and in Medicare’s share of the market. In the near

term it seems likely that between one and

three firms will supply the market. It also

seems that Medicare will, for some time, be

the dominant payer for the use of this

biologic.

With a single manufacturer of recombinant erythropoietin, Medicare’s options

for setting payment rates would be more

limited. For example, using a competitive

approach to determine payment rates for

the product would not be feasible.

Medicare would have to rely on an alternative method, such as setting a rate based on

Table l-l-Options for Congress to Address Medicare Payment

Related to Recombinant erythropoietin

Option 1:

Option 2:

Option 3:

Option 4:

Option 5:

Option 6:

Option 7:

Option 8:

Option 9:

General Options

Amend the Social Security Act to allow Medicare coverage of recombinant erythropoietin

self-administered by patients.

Mandate the Medicare program to set different payment rates for providers who

participate in approved clinical trials of recombinant erythropoietin.

Provider Payment Options

Mandate the Medicare program to set a fixed rate per recombinant erythropoietin

treatment.

Mandate the Medicare program to include payment for recombinant erythropoietin in the

composite rate paid dialysis facilities and the monthly cavitation rate paid physicians for

dialysis patients.

Mandate the Medicare program to pay for recombinant erythropoietin on the basis of

customary, prevailing, and reasonable charges (CPR).

Mandate the Medicare program to pay for recombinant erythropoietin according to a fee

schedule.

Product Payment Options

Mandate the Medicare program to base payment rates for recombinant erythropoietin on

manufacturer costs.

Mandate the Medicare program to set the payment rate at the lowest price for

recombinant erythropoietin listed in the Federal Supply Schedule.

Mandate the Medicare program to set payment for recombinant erythropoietin through

competitive bidding.

SOURCE: Office of Technology Assessment, 1990.
Table l-2-Summary of Analysis of . Options for Medicare Payment for Recombinant Erythropoietin

Dimensions for evaluation

Technological Administrative

Options Costs and ● fficiency Access Quality Equity innovation feasibilit y

GENERAL OPTIONS:

Option 1:

Coverage of selfadministration

Option 2:

Different payment

for providers in

clinlcal trial s

PROVIDER PAYMENT

Option3 :

Fixed rate par

rHuEPO treatment

Option4 :

Payment for

rHuEPO treatment

in conposite rate

0ption5:

CPR payment

according to

units of rHuEPO

used

Slight to moderate increase in use

end higher coats to Medicare.

Decreased Medicare and beneficiary

costs for patients otherwise

administered product in physicians

offices, depending on payment rate.

Increased short-term coats to

Medicare. May transfer research

costs from manufacturers to

Medicare. Over time, knowledge

gained may reduce dose and associated expenditures.

Incentive to reduce and t o

treat low-dose cases. Moderate

costs for Medicare, depending on

payment level. Moderate and fairly

uniform out-of-pocket costs for

beneficiaries.

Strong incentive for providers to

skimp on use. Low coats for

Medicare, depending on payment

level. Uniform coats for beneficiaries .

Strong incentive for providers to

increase dose ● nd to raise charges

to Medicare. High coats to

Medicare. High and variable outof-pocket costs to beneficiaries,

with strong likelihood of extremes.

Improved access

for beneficiarie s

on home dialysis.

lmproved if option

speeds FDA

approval and

access for indications not yet

approved.

Moderate financial

access for beneficiaries .

High financial

access for beneficiaries. Incentiv e

for providers to

deny access.’

Cost-sharing

higher and

financial access

lower for highdose patients. No

incentive for providers to deny

access.

Improved because of

better access.

Improved knowledg e

about appropriate dose

gained more quickly.

Incentive to reduce

dose below clinically

appropriate levels and

to treat low-dose

cases.

Major incentive for

providers to reduce

dose below clinically

appropriate level.

Incentive for providers to increase use

above clinically

appropriate level.

Equity Improved

for home dialysis

patients.

Improved for beneficiaries i f

knowledge gained

expedites FDA

approval for

other indications.

May be moderately

to highly inequitable for beneficiaries end

providers.

May be highly

inequitable for

beneficiaries and

providers.

Moderately equitable for beneficiaries and providers.

Higher revenues

for manufacturers

and perhaps

greater incentive

for innovation.

Spur to

innovation, if

overall use rose

and option was

used for other

technologies.

Moderate stimulus

for technological

innovation.

Reasonable threat

of insufficien t

stimulus for

technological

innovation.

Likely to

stimulate

excessively

innovation.

Little administrativ e

change needed.

Administration of

studies would increase

Medicare costs moderately .

Need to differentiate

and update provider

payments. Moderate to

strong need for peer

review to assess

overuse and underuse.

Need to differentiate

and update provider

Payments. Strong need

for peer review to

counter underuse.

Administratively

complex. Strong need

for peer review to

counter overuse.
Table 1-2--Summary of Analysis of congressional Options for Medicare Payment for Recombinant Erythropoietin-continud

Dimensions for evaluation

Technological

Opt ions

Administrative

Costs and efficiency Access Quality Equity innovation feasibilit y

Option 6: Incentive for providers to increase

Fee schedule dose, depending on payment rates.

according to Moderate to high costs to Medicare,

units of rHuEPO depending on payment level. Moderate

used and variable out-of-pocket costs to

beneficiaries, with possible

extremes.

PRODUCT PAYMENT OPTIONS:

option 7:

Based on manufacturer costs

Option 8:

Buy from federal

Supply Schedule

Option 9:

Competitive

bidding among

manufacturers

Risk that product price may be set

too high or too low. Low price

implies lower costs to Medicare and

beneficiaries and cost shifting to

other markets and products. High

price implies higher cost to Medicare

and beneficiaries and possible substitution of less effective

therapies.

Substantial risk that product price

will be set too high. Little or no

risk it will be too low. High price

implies high costs to Medicare and

beneficiaries and potential substitution of less effective

therapies.

Risk that product price will be set

too low. Little or no risk it will be

too high. Low prices imply low costs

to Medicare and beneficiaries, but

also may result in cost shifting to

other markets and products or exit of

new or small firms.

KEY: rHuEPO = recombinant erythropoietin

SOURCE: Office of Technology Assessment, 1990.

Moderate

financial access

for beneficiaries . Little

or no incentive

for providers to

deny access.

Low product price

implies greater

access for beneficiaries, and

high price

reduced access.

High product

price implies

reduced access

for beneficiaries.

Low product price

implies greater

access for beneficiaries.

Incentive for providers to increase

dose above clinically

appropriate level,

depending on payment

level. Little or no

incentive to reduce

dose below this level.

High product price may

result in use below

clinically appropriate

levels. Low price per

se should not affect

use.

High product price may

result in use below

clinically appropriate

levels.

Low product price may

stimulate overuse.

Highly equitable

for beneficiaries. Moderately equitable

for providers.

No implications

for beneficiary

or provider

equity.

No

for

and

equity

implications

beneficiary

provider

.

No implications

for beneficiary

and provider

equity.

Moderate stimulus

for technological

change.

Low price may

discourage technological

innovation, while

high price may

provide excessive

stimulus.

High product

price may

excessively

stimulate technological

innovation.

Low product price

may discourage

technological

innovation.

Need to differentiate

and update payments.

Moderate need for peer

review to counter

overuse and underuse.

Calculation of an

appropriate price is

very difficult administratively .

Logistics of implementation may be difficult .

Logistics of distribution and financial

flows may pose moderate administrative

problems.

Manufacturers/ participation uncertain.

Logistics of dividing

market and financial

flows may pose difficult administrative

problems.
14- Recombinant erythropoietin: Payment Options for Medicare

its assessment of the manufacturer’s costs.

The presence of a single manufacturer

would affect provider payment options as

well. If separate providers face a monopolist manufacturer of recombinant erythrooietin, they may not have sufficient market

leverage to influence the prices that they

must pay for the product. As a consequence, using methods of paying providers to encourage them to more prudently purchase the biologic would be

ineffective and might impair beneficiaries’

access and the quality of their care.

Therefore, under this market scenario, a

payment option that placed less risk on the

provider might be more appropriate. Also

implied here is the stronger need for

Medicare to apply directly its market

leverage to set a payment rate for the

product.

The presence of multiple manufacturers

of recombinant erythropoietin would pose

a contrasting market situation with different implications for payment options.

Although Medicare could then apply a

more competitive approach for obtaining a

lower payment rate for the product, there

would be less need for Medicare to use its

market leverage to achieve this objective.

With multiple manufacturers, provider

payment methods that encouraged prudent

purchasing might be capable of achieving

significantly lower rates for the product.

Indeed, whether it is desirable for

Medicare to set a rate that it pays manufacturers for recombinant erythropoietin

depends on whether any provider payment

method, by itself, would be sufficiently

effective across the range of dimensions to

be considered.

The options considered below are not

mutually exclusive. Options 1 and 2, the

general options on coverage and research,

could be implemented with any of the

other options. Any of the options for

paying providers of recombinant erythropoietin (options 3, 4, 5, and 6) could be

combined with any of the options for

paying for the product (options 7,8, and 9).

Even within the provider options and the

product options, more than one alternative

could be adopted. Furthermore, these

payment options are not limited to anemia

associated with chronic renal failure, the

only condition that Medicare currently

covers; these options and the analysis of

their implications apply to other conditions

for which the biologic may be covered in

the future.

General Options

Option 1: Amend the Social Security

Act to allow Medicare coverage of recombinant erythropoietin self-administered by

patients.

Title XVIII of the Social Security Act

prohibits Medicare coverage of most

pharmaceuticals, including recombinant

erythropoietin, insulin, and most prescription drugs, that beneficiaries administer

to themselves. Although these patients

manage to administer dialysis treatments

and related medical services at home, they

must travel to their supervising dialysis

facilities or physicians’ offices to receive

recombinant erythropoietin covered by

Medicare. The time and inconvenience

required may pose significant physical and

financial barriers for many patients. As

FDA approves and Medicare covers more

indications, these restrictions will

inconvenience more beneficiaries.

Under this option, Congress would

amend the Social Security Act to allow

Medicare to cover recombinant erythrooietin when self-administered by patients.
Chapter 1--Summary and Policy Options- 15

In regulations implementing the amendment, the Medicare program could specify

the conditions under which use would be

covered, such as for indications approved

by FDA and for a certain level of anemia.

The expanded coverage could be restricted

to patients who receive dialysis at home. In

fact, legislation pending in the Senate (S.

2098) and the House of Representatives

(H.R. 4247) would mandate Medicare coverage for home dialysis patients.

Dialysis patients could obtain their

recombinant erythropoietin and related

supplies from their dialysis centers or

dialysis distributors, which would both be

responsible for billing Medicare. Options

3,4,5, and 6 discuss different methods that

could be used to set payment rates for providers. If legislation covered selfadministered recombinant erythropoietin

for all FDA-approved conditions, these

provider payment options could also apply

to dialysis distributors and pharmacies.

Overall Medicare expenditures would

increase, if this option was implemented.

Easing financial and physical barriers to

access typically increases use and expenditures. Physicians would be more likely to

prescribe recombinant erythropoietin,

especially for patients who receive dialysis

at home or who have difficulty traveling.

Patients’ use would rise because of greater

convenience and reduced costs related to

travel and perhaps work loss.

The effect on program costs of beneficiaries who shift to self-administration from

administration in other settings is less

straightforward. Medicare pays supervising

physicians who receive monthly cavitation

payments for dialysis patients an additional

amount for the product, but not for

administering it. Medicare also pays nonsupervising physicians who administer

recombinant erythropoietin to dialysis

patients only for the product; these

physicians must bill the supervising

physicians for administering the biologic.

Therefore, the shift from physician to selfadministration resulting from this option

would not save the Medicare program any

expenditures associated with administering

the product.

Medicare’s approved charge for the

product to physicians administering recombinant erythropoietin in their offices,

however, may exceed the amount that

Medicare currently pays dialysis facilities

($40 per 10,000 units or fewer of the

biologic). If, as specified in S.2098 and

H.R. 4247, home dialysis patients were

required to obtain the biologic from their

supervising dialysis facilities or dialysis distributors and these providers were paid the

same lower rate, Medicare’s per patient

expenditures could be lower. If the option

applied to patients other than those on

dialysis, Medicare could restrict the

payment rate to the lowest paid in any

setting.

Reductions in blood transfusions and

other services for anemic patients would

partly offset any increase in program

expenses from improving beneficiaries’

access to recombinant erythropoietin. One

study estimated total annual savings for

blood and related services at about $1,600

per transfusion-dependent patient and

savings for androgens at about $900 per

patient receiving them (68). Savings might

also arise from reductions in untoward consequences of transfusions, such as therapy

for hepatitis contracted through transfusion. In addition, transfusions may

induce antibodies that lower the likelihood

of successful kidney transplantation. Since
16- Recombinant Erythropoietin: Payment Options for Medicare

costs to Medicare of patients with successful transplants are substantially less

than those remaining on dialysis, over time

Medicare may reap additional savings for

averted transfusions.

If Medicare restricted coverage under

this option to recombinant erythropoietin

obtained from a dialysis facility or distributor, out-of-pocket expenses for

patients on home dialysis would be the

same as those for patients receiving dialysis

in facilities. Under current Medicare

payment to dialysis facilities, patient outof-pocket costs for up to 10,000 units are

limited to $8 (20 percent of $40) per

treatment with recombinant erythropoietin.

If Medicare extended coverage under this

option to indications other than dialysis

and limited payment to the rate paid

dialysis facilities, beneficiaries would incur

the same level of out-of-pocket expenses.

Patients who self-administer the biologic

would save other direct costs relating to

time and travel to physicians’ offices and

dialysis facilities. Beneficiaries who would

otherwise not have received the product

would now incur the related out-of-pocket

costs, but they would also gain whatever

health benefits resulted from taking recombinant erythropoietin.

In response to a query from the Senate

Finance Committee, the Congressional

Budget Office (CBO) during the process of

budget reconciliation in fall 1989 estimated

the effect on Federal expenditures of

covering self-administration of recombinant erythropoietin for dialysis patients

(71). Assuming that half of an estimated

24,000 home dialysis patients would opt for

self-administration, CBO concluded that

coverage for dialysis patients would raise

Federal outlays about $40 million for fiscal

year 1990 .

18 This estimate made n o

allowance for reductions in blood transfusions and other services or for patients who

are currently receiving recombinant

erythropoietin from a dialysis facility or

physician’s office. Using updated figures

on home dialysis patients, CBO is reestimating the budgetary implications of

covering self-administration.

The net effect of this option on the

quality of care would combine positive

health benefits from alleviating anemia in

newly treated beneficiaries with any negative effects associated with self-administration. How Medicare administered the

benefit could greatly influence the quality

of care. Medicare has already instructed its

intermediaries to restrict payment to claims

demonstrating hematocrit levels in a

certain range and could apply those restrictions to self-administered use as well. If

safety was a concern, Medicare could

require that patients obtain recombinant

erythropoietin from a medical provider

during the induction phase and stipulate

that the program would cover selfadministration only after a maintenance

dose is achieved. Peer review organizations (PROS) or end-stage renal disease

(ESRD) networks could also assess the

appropriateness of recombinant erythropoietin use, whether the drug was administered by a patient or a medical provider

(see ch. 4).

The literature contains limited information on self-administration of recombinant erythropoietin. A few clinicians

18 Since coverage would have begun on Jan. 1, 1990, expenses

related to only part of the fiscal year. CBO’S original estimate

included about $5 million additional expense for fiscal year 1990

as a result of Medicare payments associated with limits on beneficiaries’ liability that were related to provisions of the Medicare

Catastrophic Coverage Act of 1988 (71). Those provisions no

longer apply because that Act has been repealed.
Chapter 1-–Summary and Policy Options- 17

have reported that patients on home

dialysis administered the biologi c

intravenously or subcutaneously with no

unusual safety problems (see ch. 2).

To the extent that expanded coverage of

recombinant erythropoietin increased the

market for the product, further innovation

in this and related fields would be stimulated. In addition, implementation of this

option would be possible within current

administrative structures. To determine

payment rates for the product, Medicare

could combine the techniques and information used to set payment rates for

recombinant erythropoietin in other settings. As noted, under S.2098 and H.R.

4247, home-dialysis patients self-administering this biologic would be required to

obtain it either from their dialysis facilities

or distributors, both of which would be

paid according to the same method.

Applying existing procedures, PROS and

ESRD networks could review the quality of

care for home dialysis as well as for other

patients taking recombinant erythropoietin.

Option 2: Mandate the Medicare

program to set different payment rates for

providers who participate in approved

clinical trials of recombinant erythropoietin.

Although clinical trials have shown

recombinant erythropoietin to be efficacious in correcting anemia among patients

with chronic renal failure, some important

clinical questions remain unanswered.

Clinicians require clarification mainly

about appropriate dosing regimens, both

for intravenous and subcutaneous administration, and also about the safety and effectiveness of patients’ self-administering the

biologic. Beyond these immediate needs is

information on the efficacy and safety of

the product for other indications, including

autologous blood transfusions and anemia

associated with HIV.

Resolution of these outstanding questions could result in cost savings for the

Medicare program. It is not uncommon for

the effective dose of a drug eventually to be

found to be substantially lower than the

amount originally approved by FDA. For

example, doses about half those first

approved have been shown to be effective

for treating acquired immunodeficiency

syndrome (AIDS) with zidovudine (162).

Many clinicians are now starting their

dialysis patients on doses of recombinant

erythropoietin that are much lower than

those approved by FDA (see ch. 2).

Despite the potential advantages from

improved information, providers are often

reluctant to participate in clinical trials for

an unapproved technology. Not only do

participants incur higher costs associated

with recordkeeping and protection of

human subjects, but also third-party payers,

such as Medicare, may not pay for the technology or associated services. In the case

of recombinant erythropoietin, which FDA

has approved for patients with chronic

renal failure and Medicare covers for the

approved indication, providers caring for

patients with this condition may have no

financial incentive to participate in trials.

Under this option, Congress would

mandate the Medicare program to use different payment arrangements to encourage

providers’ participation in approved proto-
18- Recombinant Erythropoietin: Payment Options for Medicare

cols to refine clinical information on

recombinant erythropoietin.*9 Working

with clinicians, manufacturers, and FDA,

Medicare could identify the specific

information desired, with priority to

research questions that had implications

for improving patients’ health an d

moderating Medicare’s costs. These

research questions could pertain to chronic

renal failure or to other indications not yet

approved by FDA and covered b y

Medicare. For treating medical conditions

not approved by FDA, Medicare could

make payment to providers under this

option conditional on their participation in

a research protocol that had been approved

by the FDA.

For patients with medical conditions not

approved by FDA, Medicare could offer to

pay for recombinant erythropoietin on the

same basis that it pays for patients with

chronic renal failure. Since Medicare

already covers recombinant erythropoietin

for chronic renal failure, however,

Medicare would have to offer a higher

payment rate or a payment method more

desirable to providers in order to entice

their participation in clinical trials. To

determine payment, Medicare could use

any of the methods discussed in options 3

through 6.

The immediate effect on Medicare costs

would be to increase expenditures by the

amount of the demonstration plus payments for conditions not approved by FDA

and whatever additional payments resulted

lg’lle Social Security Amendments of 1983 (Public Law 98-21)

gave the Secretary of Health and Human Services the authority

to pay for research and experimentation related to Medicare’s

prospective payment system (21 USC 1395y(l)(D)). HCFA could

use this authority to pay providers who agreed to gather needed

information in the context of clinical trials.

from paying providers higher rates for

patients with chronic renal failure. Over

time, however, the information gathered

could influence Medicare’s payment rates

and expenditures on recombinan t

erythropoietin. Although the dosing

regimens that will eventually be considered

appropriate are uncertain, many clinicians

have been treating dialysis patients at substantially lower doses than those recommended in the labeling approved by FDA

(11,17,47). Although not substantiated, it

has also been suggested that subcutaneous

administration requires lower and less frequent use than intravenous administration

(see ch. 2). Conducting more research

more quickly on the efficacy of lower doses

could provide a more informed basis for

setting payment rates, especially for nondialysis patients who receive the biologic

through subcutaneous administration in

physicians’ offices. Any savings for chronic

renal patients might be offset by additional

expenditures for treating anemia associated

with other conditions. If the research data

generated by this option led to more rapid

approval by FDA of recombinant erythropoietin for other conditions, Medicare

might experience an earlier rise in expenditures for these additional conditions.

The net effect on Medicare expenditures

would thus depend on changes in the

payment rate for recombinant erythropoietin, which would reflect the level and

frequency of dosing; the increase in use for

beneficiaries with covered conditions; and

any reductions in expenditures from correcting anemia, such as fewer blood transfusions. The effect on beneficiaries’ costs

would parallel changes in Medicare expenditures and depend on the specific method

and level of payment that Medicare

adopted.
Chapter 1-–Summary and Policy Options- 19

On the other hand, this option might

only transfer the costs of further research

from the manufacturers of recombinant

erythropoietin to the Medicare program

and its beneficiaries. At least three

manufacturers are conducting studies

pertaining to safety for chronic renal

failure and to efficacy and safety for certain

conditions not approved by FDA. In

addition, at least one manufacturer is

studying different dosage levels administered subcutaneously in predialysis

patients. The manufacturers bear the full

cost of this research, including the cost of

the biologic; physician, testing, and other

clinical services; and administrative services associated with the research. Several

completed studies are also being prepared

for publication. Moreover, none of the

manufacturers has reported difficulty in

finding researchers, clinicians, or patients

to participate.

The information developed from this

option might improve beneficiaries’ access

to recombinant erythropoietin. If data

were collected and other conditions were

approved by FDA more quickly, beneficiaries with these conditions would gain

improved financial access to the product.

Also in the direction of better financial

access, any reductions in Medicare’s

payment rates for recombinant erythropoietin because of lower dosing regimens

would reduce beneficiaries’ cost-sharing.

A major advantage of this option lies in

its potential to improve the quality of care

received by Medicare beneficiaries.

Encouraging providers to participate in

research protocols could be a quick and

efficient way to gather data to refine

appropriate dosing regimens for intravenous and subcutaneous administration

and to develop information on efficacy and

safety for conditions besides chronic renal

failure. The quality of beneficiaries’ care

would clearly benefit from bette r

information on efficacy and safety.

Clinicians would have a more valid basis on

which to prescribe recombinant erythropoietin, and the Medicare program would

have a more valid basis by which to

evaluate appropriate use. The outstanding

question, however, is whether this option

would produce the desired information

more quickly than the manufacturers’ own

testing, and if so, whether the benefits

would be worth the extra cost to the

Federal Government.

Developing better information on

efficacy and safety more quickly could

improve equity among beneficiaries. As

that information led to decisions about

FDA approval and Medicare coverage for

other conditions, use by beneficiaries with

conditions that, like chronic renal failure,

would benefit from recombinant erythropoietin would also be covered. One would

expect equity among providers to improve,

as the new information enabled Medicare

to reimburse providers for efficacious and

safe uses of recombinant erythropoietin

and to withhold payment for other uses.

It is not clear how the research results

on balance would affect the size of the

market for recombinant erythropoietin and

consequent incentives for future technological innovation. Other medical conditions might receive FDA approval more

quickly, but the appropriate dose might

prove to be lower. More important than

the market size for this particular product

would be the potential for using this
20- Recombinant Erythropoietin: Payment Options for Medicare

mechanism to stimulate assessments of new

technologies. Patient groups, clinicians,

third-party payers, researchers, and

manufacturers have lamented the financial

obstacles to producing valid information on

new technologies or on new uses of existing

technologies. Using this mechanism to

generate research on recombinant erythropoietin would be viewed as a test case for a

possible model to develop the information

needed for assessments.

Although this option would require that

HCFA and its contractors establish some

new procedures, much of the required

administrative apparatus is already in

place. FDA and Institutional Review

Boards already approve in advance the

design of clinical trials on human subjects

for biologics seeking approval for new conditions or changes in existing labeling.

HCFA could notify its carriers and intermediaries that dialysis facilities and

physicians engaged in approved trials were

eligible for different payment rates, and the

contractors would have to institute procedures to identify these providers. A

necessary element not yet in place,

however, is a locus for synthesizing the

research results and applying them to

refine Medicare policy. Such a role would

be consistent with the mandate of the

recently created Agency for Health Care

Policy and Research, which is charged with

developing information on the effectiveness of medical technologies and, in

concert with the medical community, with

setting guidelines for clinical practice.

Payment to Providers

At present, dialysis facilities are the

principal providers of recombinan t

erythropoietin to beneficiaries, a situation

that reflects FDA approval and Medicare

coverage only for chronic renal failure.

Beneficiaries with chronic renal failure,

whether in the predialysis or dialysis phase,

may also receive the biologic from

physicians’ offices. Hospitals’ provision of

recombinant erythropoietin to inpatients is

covered by payments that are fixed by

diagnosis-related group, while provision of

the biologic by health maintenance organizations (HMOs) and other competitive

medical plans is covered by Medicare’s

monthly cavitation payment. Amgen has

been selling Epogen exclusively to

wholesalers, who in turn sell it to dialysis

facilities, physicians’ offices, and others

who provide the biologic to patients.

Wholesalers may also sell to other intermediate suppliers, such as pharmacies. If

FDA approves recombinant erythropoietin

for other conditions or if legislation extends

coverage to self-administration, a s

described in option 1, dialysis distributors

and pharmacies could also provide the

product to beneficiaries. If additional

manufacturers enter the U.S. market, they

may choose to sell directly to other intermediate suppliers or to dialysis facilities

and other providers.

Options 3, 4, 5, and 6, respectively,

pertain to methods that Medicare might

adopt to set rates paid to providers:

payment per recombinant erythropoietin

treatment; inclusion of payment for recombinant erythropoietin in the composite rate

for dialysis facilities and the cavitation rate

for supervising physicians; payment based

on customary, prevailing, and reasonable

charges; and payment according to a fee

schedule. All of these options could be

applied to dialysis facilities, physician providers, and dialysis distributors. The set of
Chapter 1--Summary and Policy Options-21

feasible options for pharmacies is more

limited. Option 4 does not apply to

pharmacies and, although option 3 is

theoretically possible, options 5 and 6

would be most practical for pharmacies.

Options for hospitals, competitive medical

plans, and nursing homes are not considered separately in this report.

Medicare’s payment to dialysis facilities

and physicians would include compensation

for several components: the biologic itself;

any associated supplies or services; and the

physician’s or other health professional’s

services to administer the product to a

patient. If Medicare coverage wa s

extended to self-administration, a s

described in option 1, payment to dialysis

distributors and pharmacies would compensate for the biologic, any associated

supplies or services; and any professional

counseling.

In the next section, options 7, 8, and 9

discuss methods that Medicare could use to

set the rate that it pays for the product

itself. If the payment rate for the product

is set by Medicare through an agreement

with a manufacturer or manufacturers,

then it would be logical to incorporate that

rate into the calculation of provider

payment levels. On the other hand, if

Medicare does not set the rate for the

product or if a manufacturer conveys price

concessions directly to Medicare rather

than to providers, then some alternative

basis for determining provider payment

levels would be” necessary. To set current

payment rates for dialysis facilities, HCFA

estimated providers’ costs of obtaining

recombinant erythropoietin based on

HCFA’s assessment of Amgen’s costs of

producing the biologic and other factors

affecting the costs of providing the service,

such as expected dosage levels.

Other methods are also possible for

estimating providers’ costs for the product

as an ingredient in setting Medicare

payment rates to providers. For example,

Medicare might use the average wholesale

price (AWP) for the product. Some

Medicare carriers may be using the AWP

to derive an approved charge for physicians

who administer recombinant erythropoietin

in their offices. Average wholesale prices,

however, are usually list prices instead of

the transaction prices that providers

actually pay for pharmaceuticals. Although

the level of Medicare payment to providers

has major importance, the options presented here are structured according to

methods of payment and do not consider in

depth how to calculate the level of payment.

A general issue that applies to providers

of recombinant erythropoietin is whether

they should be required to accept assignment. Under assignment, a provider agrees

to accept a beneficiary’s rights to benefits,

to bill the Medicare carrier instead of the

patient, and to accept Medicare’s payment

rate as full payment for the service

rendered. Current law requires providers

to accept assignment for patients of dialysis

facilities and dialysis distributors and for

inpatients in hospitals. Furthermore, in the

context of mandating transition t o

Medicare payment for physician services

according to a fee schedule, the Omnibus

Budget Reconciliation Act of 1989 (Public

Law 101-239) established limits on the

extent that physicians who do not accept

assignment may bill beneficiaries in excess

of Medicare’s set rate. If pharmacies

become providers in the future, Medicare

could require them to accept assignment or

could restrict the extent to which their

charges to beneficiaries may exceed

Medicare’s approved rate.
22- Recombinant erythropoietin: Payment Options for Medicare

Another consideration in setting provider payment rates concerns the choice

between uniform and differentiated payments. Under the latter approach ,

payment levels would vary to reflect fundamental differences among providers. Providers of recombinant erythropoietin may

serve different markets and consequently,

may incur different costs of providing this

service. Differentiated payments are

generally more equitable, especially if they

afford more even access to beneficiaries

(84).

Financial incentives inherent in different

payment methods influence providers’ and

patients’ decisions about using medical services, such as recombinant erythropoietin.

Payment methods that place greater

financial risk on providers contain stronger

incentives for them to constrain use and

could result in underprovision of the

product and poorer quality care. Such

methods would also more strongl y

encourage providers to prudently purchase

recombinant erythropoietin. On the other

hand, payment methods that place providers at less financial risk contain stronger

incentives for greater use and perhaps

overprovision of the product and poorer

quality care. Generally, the financial risks

to providers are stronger the larger the

units on which payment is based. For

example, payment per treatment with

recombinant erythropoietin places more

financial risk on the provider than payment

per unit of the product.

Levels of payment also affect use and

the quality of care received by beneficiaries. For any given payment method,

lower payment levels are likely to discourage use, while higher levels encourage

greater use. The extent to which use varies

with payment levels also depends on the

incentives inherent to each payment

method. For example, when the amount of

payment does not vary with the volume of

service, higher payment levels are less

likely to result in more use than when the

amount of payment does vary with volume.

As noted above, options 3, 4, 5, and 6

are not mutually exclusive; Medicare can

and does use different methods to pay providers in different settings. On grounds of

efficiency and equity, however, it is

preferable that Medicare pay the same

amount for the same service, regardless of

the setting in which it is provided. Paying a

higher amount in one setting, such as a

physician’s office, provides a financial

incentive for a provider to administer the

service in the most lucrative setting,

regardless of where the service could be

most effectively and efficiently provided.

Paying different amounts for different settings may also be inequitable, if beneficiaries and providers in similar circumstances are treated differently.

Option 3: Mandate the Medicare

program to set a fixed rate per recombinant erythropoietin treatment.

Medicare currently pays dialysis

facilities a fixed amount of $40 per recombinant erythropoietin treatment, which

increases to $70 if the dosage level exceeds

10,000 units (see ch. 4). S. 2098 and H.R.

4247 would apply this payment method to

dialysis distributors for recombinant

erythropoietin self-administered by home

dialysis patients. This method could also

be applied to physicians, but would be least

practical for pharmacies.

Since under this option the amount

reimbursed would not vary with the

quantity of recombinant erythropoietin
Chapter 1--Summary and Policy Options-23

administered in each treatment up to a

threshold, this payment method contains a

financial incentive for providers to control

and even skimp on use. The fixed payment

also encourages providers to make prudent

purchases of the product.

Providers would also have a financial

incentive to treat patients who would

require especially low doses but who would

gain little marginal benefit from treatment.

The costs of such cases would be substantially below the payment per treatment.

The consequence of this behavior would be

greater numbers of beneficiaries receiving

treatment and higher costs to the Medicare

program. ESRD networks and PROS could

monitor use for appropriateness, but PROS

have had little experience in the outpatient

arena.

There is some financial incentive to

provide higher than the clinicall y

appropriate dosage levels to cases just

below the 10,000 unit threshold, especially

if medical consequences are minor. Slight

increases in dosage could nearly double the

payment per treatment. Depending on the

strength of this financial incentive and the

proportion of cases near the threshold,

costs to the Medicare program could

increase significantly. Review of these

claims by PROS or ESRD networks might

counter overuse near the threshold.

Providers may have a financial incentive

under this payment method to deny access,

that is, not to administer recombinant

erythropoietin when it is medically

appropriate. This would not apply to

patients requiring smaller dosage levels,

who are likely to cost less than the payment

amount. Denial of treatment might occur

for patients requiring doses that are below,

but closer to, the 10,000 unit threshold.

Medical ethics may constrain suc h

behavior. Although denial of access would

reduce the costs of recombinant erythropoietin to the Medicare program, the costs

of alternative medical services, such as

blood transfusions, might increase.

If financial incentives of this option led

providers to skimp on use, reduced quality

of care could result, if doses fell below

clinically appropriate levels. Again, this

tendency would most likely depend on the

seriousness of the medical consequences

and the effectiveness of peer review.

It should be noted that at present,

appropriate dosage levels are unclear.

Dialysis facilities paid by Medicare through

February 1990 averaged about 2,700 units

of recombinant erythropoietin per patient

per treatment, and facilities surveyed by

Amgen from mid-December 1989 to midJanuary 1990 averaged about 2,900 units

per treatment (47,117). These rates are

much lower than those recommended in

the FDA-approved labeling or the 5,000-

unit mean dose expected by HCFA when it

set the present payment rate (5,85). These

doses are also much below the mean dose

that clinical trials found necessary for a

response (55) (see ch. 2). Administering

lower doses is consistent with the incentives

of this payment method to skimp on the

quantity used and to treat patients only

marginally anemic. That initial doses are

apparently much lower than expected,

however, cannot be attributed entirely to

financial incentives inherent in this

payment method. Although clinical trials

have shown that some patients need much

greater doses of recombinant erythropoietin to respond, at present clinicians

cannot determine a priori the effective

dose. Consistent with usual medical

practice in the face of such uncertainty,
24- Recombinant erythropoietin: Payment Options for Medicare

clinicians appear to be starting with lower

doses and, presumably, will raise the dose

for poor responders. Over time, however,

the average dose will combine the effects

of newly treated patients in the induction

phase, poor responders with increased

doses in the induction phase, and other

patients on a maintenance dose.

Under this payment method, out-ofpocket costs to most beneficiaries are fixed

at $8 per treatment ($1,248 per year with 3

treatments per week). For those with

doses in excess of 10,000 units, out-ofpocket costs are fixed at $14 per treatment

($2,184 per year with 3 treatments per

week). Some beneficiaries may consider

this distribution of out-of-pocket costs to be

inequitable. For example, a beneficiary

requiring very modest treatment with

recombinant erythropoietin might view a

$1,248 increment in out-of-pocket costs as

quite unfair. This inequity would be

somewhat remedied if payments to providers under this option varied to reflect

differences in patient characteristics, such

as weight, that affected dosing levels.

Equitable compensation of providers

requires that payments be differentiated to

reflect market-related differences in their

costs. Some providers may treat cases who,

on average, require higher dosage levels.

Other providers may, because of geographic location, pay higher wages or incur

higher acquisition costs for recombinant

erythropoietin. Because of markups of

wholesalers and other intermediate suppliers, differences in providers’ acquisition

costs may occur even if, as under the

options in the next section, Medicare sets

the price of the product with the manufacturer.

20 Under these circumstances,

uniform payments might lead some providers to reduce doses below clinically

appropriate levels, or to treat patients with

only marginal anemia. Therefore, equity

for both providers and patients and access

by beneficiaries would be improved if payments were differentiated to reflect case

mix and other market-related differences in

cost.

This option may be less appropriate for

physician providers of recombinant

erythropoietin than for dialysis facilities.

Because physicians treat smaller numbers

of patients, they face greater financial risk

from a few patients who require high doses.

Since payment does not generally vary with

dosage level under this option, physicians

may experience considerably mor e

incongruity between payments and costs for

this service. For all providers, adjusting for

patient characteristics predictive of high

use is likely to prove difficult, as

exemplified by problems in adjusting

cavitation payment to competitive medical

plans and DRG payments to hospitals.

Paying pharmacies under this option would

raise similar problems.

This option might affect technological

innovation. If providers’ incentives to

lower dosage levels led to lower purchases

and considerably lower revenues for

manufacturers than expected, incentives to

further develop this and other products

Zol’he wholesaler markup usually accounts for a small fraction

of provider acquisition costs. According to a survey by the Office

of the Inspector General conducted between November 1989 and

March 1990, dialysis facilities are paying about $41 for 4,000 units

of recombinant erythropoietin (85). During this period, Amgen’s

price to wholesalers was $10 per 1,000 units (117).
Chapter 1--Summary and Policy Options- 25

used extensively by Medicare might be

dampened. The opposing financia l

incentive for providers to treat more lowdose cases, however, would somewhat

mitigate these effect.

The administrative difficulty of this

payment alternative depends on what

refinements are introduced. Under the

current method, payments are fairly

uniform and, consequently, administratively simple. Administrative difficulty

could increase substantially if payments

were differentiated. Given its experience

with the prospective payment system for

reimbursing hospital operating expenses,

the Medicare program is well aware of

such difficulties. Differentiated payments,

if feasible, may nevertheless be necessary

to reduce the negative effects of payment

methods that encourage providers to be

more cost conscious. Because payment

rates would be set prospectively under this

option, it would also be necessary continuously to update payment levels in

response to dynamic changes in the market

for recombinant erythropoietin or changes

in clinically appropriate dosage levels.

Option 4: Mandate the Medicare

program to include payment for recombinant erythropoietin in the composite rate

paid dialysis facilities and dialysis distributors and the monthly cavitation rate paid

physicians for dialysis patients.

This option applies only to the payment

of recombinant erythropoietin provided to

dialysis patients by dialysis facilities,

dialysis distributors, and physicians.

Dialysis facilities and dialysis distributors

are currently paid a prospective amount

per dialysis treatment, which varies

according to factors such as area wage

costs.

21 This covers nearly all services

relating to dialysis (see ch. 4).22 Physicians

treating dialysis patients are paid a monthly

cavitation payment for services directly

relating to this condition (34). This

amount applies to patients receiving

dialysis at home as well as those in

facilities.

Under this alternative, the composite

rate for dialysis facilities and dialysis distributors and the physician cavitation for

home dialysis patients would be increased

to cover the costs of recombinan t

erythropoietin. For dialysis facilities and

dialysis distributors, the increase in the

composite rate would be based on an

estimate of the average amount of the

product used during each dialysis session.

For physicians, the increase in the

cavitation amount would be based on an

estimate of the average number of patients

administered recombinant erythropoietin

per month and the average dosage.

The principal difference between this

option and option 3 is that payment would

not depend on whether recombinant

erythropoietin is administered. Because

payment under this option depends neither

on the administration of recombinant

erythropoietin nor on its dosage, there are

no financial incentives to treat more cases

or to provide larger doses of this biologic

than is clinically appropriate. This option

contains stronger incentives than option 3,

21 Consideration of the rate paid for dialysis treatment lies

outside the scope of this OTA study. The Institute of Medicine

Committee To Study the Medicare End Stage Renal Diseas e

(ESRD) Program is addressing certain aspects of the rate-setting

process, but is not conducting a full-scale rate-setting study (118).

22 In addition to recombinant erythropoietin, other items such

as the whole bled used in transfusions are paid separately.
26- Recombinant erythropoietin: Payment Options for Medicare

however, to skimp on use. Providers would

also have a strong incentive to make

prudent purchases of recombinant erythropoietin. The significance of this incentive

is greater if Medicare does not set the price

paid by providers for the product.

2 3

Because of the strong incentives for

economy under this option, costs to the

Medicare program and direct costs to beneficiaries would be kept at fixed levels.

Financial access for beneficiaries might

also be greatly improved because out-ofpocket extremes would not be possible.24

Access may be adversely affected in

other ways under this alternative. Since

payment is independent of treatment, providers may have a strong financial incentive

to deny recombinant erythropoietin to

some patients for whom its application

would be clinically appropriate. Because

medical consequences would be less

serious, this behavior is more likely to

occur with patients who are only slightly

anemic. Although peer review may address

this problem, inappropriate decisions

regarding such patients would be difficult

to detect. The financial incentives to deny

access are stronger here than under the

other options for provider payment. By

denying access under this method, providers would save the full cost of treatment.

Under option 3 they would reap only the

difference between the cost and the

payment per treatment.

23 Even if the manufacturer’s price were set, providers would

still have a strong incentive, under this option, to shop for the

lowest wholesaler markups.

24AII dialysis patients would incur the same increase in out-ofpocket costs under this option. The increment would be 2(I

percent of the increase in the composite rate or physician

cavitation. The increase in out-of-pocket coats per beneficia~

would also be lower under this option than under option 3, since

the costs of recombinant erythropoietin would be spread across

all dialysis patients rather than only those treated with this

biologic.

There may also be a strong financial

incentive for providers to administer doses

of recombinant erythropoietin that are

below clinically appropriate levels. By

doing so, they would increase net revenues

or reduce losses. Again, such behavior

would most likely depend on the seriousness of medical consequences and the

effectiveness of peer review. Under option

3 providers have the opportunity to

improve net revenues by treating more lowdose patients. Since revenue does not rise

with treatment under this option, there

might be a greater tendency to reduce

dosage levels.

Under this payment method, beneficiary

out-of-pocket costs would be totally unrelated to recombinant erythropoietin use.

Even patients who are not treated with this

biologic would incur out-of-pocket

expenses relating to its costs. For this

reason, beneficiaries are likely to view this

payment alternative as being far less equitable than option 3.

This payment method is likely to be

even more inequitable to providers than

option 3. The adequacy of compensation

not only continues to vary with average

dosage levels, but also varies with the proportion of dialysis cases given recombinant

erythropoietin. As with option 3, inequitable compensation could also result if

providers, because of different markets,

incur different acquisition costs for recombinant erythropoietin, labor, or other

inputs. These compensation inequities

could be addressed by differentiating payments to reflect these differences among

providers.

This option is even less appropriate for

physician providers than option 3. Because

payment is affected by neither the adminis-
Chapter 1--Summary and Policy Options- 27

tration of recombinant erythropoietin nor

its dosage level, physicians are likely to

experience even greater incongruity

between revenues and costs over time.

Adverse effects on patient quality and

access could also be greater. The same difficulty regarding an adjustment to physician

payments for relevant patient characteristics also applies here.

Given incentives for providers to skimp

on use, this option could adversely affect

technological innovation. If the total

demand for recombinant erythropoietin fell

substantially below manufacturer expectations, manufacturers could be discouraged

from investing in similar therapies or in any

therapies for which Medicare is a dominant

payer. Because incentives to underprovide

recombinant erythropoietin are stronger

under this payment alternative than under

option 3, the threat to technological

innovation is also greater. Since higher

payment levels would have little effect on

use under this option and since all of its

inherent incentives are for economy, there

is no possibility for an excessive stimulus to

technological innovation.

As with option 3, the administrative difficulty of this payment method depends on

whether payment rates are differentiated to

reflect fundamental differences among providers and on the extent of these refinements. Also like option 3, there is the

added administrative burden of updating

payment levels in response to dynamic

changes in the market for recombinant

erythropoietin or changes affecting

appropriate dosage levels. Lastly, because

of its very strong incentives for economy, it

would be necessary under this option to

reinforce peer review to better ensure

against underprovision.

Option 5: Mandate the Medicare

program to pay providers of recombinant

erythropoietin on the basis of customary,

prevailing, and reasonable charges (CPR).

Under this option, Medicare payment to

a provider would vary according to the

number of units of recombinant erythropoietin administered to a patient. The

CPR method, which Medicare currently

uses to pay physicians, would pay each provider an amount for the therapy that is the

lesser of the actual charge, the customary

charge based on the provider’s previous

billings, and the prevailing charge for the

service by comparable other providers.

Medicare could continue to permit providers who do not accept assignment to bill

patients for amounts in excess o f

Medicare’s approved charges, or Medicare

could restrict providers’ additional billing.

As noted in option 1, physicians who

receive monthly cavitation payments for

supervising dialysis patients and other

physicians administering the biologic to

dialysis patients may charge only for the

product and related supplies, not for

administering it. The CPR method could

also be used to reimburse dialysis facilities,

dialysis distributors, and pharmacies. For

these providers and for physician s

administering the biologic to other than

dialysis patients, payments under this

option would compensate for administration or dispensing services and supplies

as well as the product.

This option gives providers and patients

the weakest incentives to constrain utilization and prudently purchase recombinant

erythropoietin. The main difference

between this method and reimbursement

based on actual charges is that a ceiling is

placed on the amount that Medicare will
28- Recombinant erythropoietin: Payment Options for Medicare

pay. This ceiling, however, is not very

effective. What is considered customary,

prevailing, and reasonable is based on

actual charges that with a lag determine

Medicare’s approved rates. Therefore,

knowing that their inflated bills will

increase CPR ceilings and the amounts that

Medicare will pay in the future, providers

have an incentive to inflate charges. The

only constraints on providing and charging

too much is the risk that patients will not

pay their bills or, over the longer term, will

seek lower cost providers.

As a type of fee-for-service payment, the

CPR method gives providers a financial

incentive to increase use, through higher

dosage levels and treatment for greater

numbers of patients, as long as the

payment per unit of service exceeds the

provider’s unit costs. The strength of this

incentive depends on the extent to which

payment levels exceed costs. Overprovision can take the form of doses of

recombinant erythropoietin that are in

excess of clinically appropriate levels and

treatment of marginal patients for whom

this therapy is inappropriate. If payment

just equals cost, providers experience no

financial gain from exceeding clinically

appropriate dosage levels or inappropriately treating patients. There may still

be overprovision in an economic sense,

however. The clinically optimal level of

recombinant erythropoietin is not necessarily equivalent to the economically efficient level. One more unit of the biologic

may have a clinical benefit, but this benefit

may be insufficient to warrant the additional cost. Medicare dollars might be

better used elsewhere. Thus, even if providers gain nothing financially, they may

still have an incentive to overprovide.

They incur no net costs from doing so and

the additional costs to the beneficiary are

limited by the 20-percent coinsurance rate.

Under this option, providers would have

little or no incentive to shop for a lower

price for recombinant erythropoietin. The

weakness of this incentive is especially significant if Medicare does not set the rate at

which providers may purchase the product.

Because of these generally weak incentives,

this option is likely to result in higher costs

to both the Medicare program and beneficiaries, well above those likely under

options 3, 4, and 6. Higher costs to beneficiaries mean less financial access.

Financial access might also be diminished

because of the greater likelihood of out-ofpocket extremes under this option.

The weakness of the CPR method is

well recognized. Recent amendments to

Title XVIII of the Social Security Act

(Public Law 101-239) require that, after a

phase-in period ending in 1996, Medicare

end the current CPR method of paying for

physician services and implement payment

according to a fee schedule. Under the

CPR method, providers would have a

financial incentive to exceed clinically

appropriate dosage levels and even to

administer the biologic to patients for

whom it is unnecessary. Given the possibility of adverse events, harmful effects

from overuse are certainly possible.

The preceding discussion of provider

incentives applies only to physicians and

dialysis facilities that administer recombinant erythropoietin. Financial incentives

to overuse pertain less to pharmacies and

dialysis distributors, which do not prescribe

treatment and dosage levels. The lack of

incentive under this option to shop for a

low price for the product, however, would

still be an important factor in evaluating its

appropriateness for these providers.

Because out-of-pocket costs vary with

the quantity of service, this payment

method may be perceived by beneficiaries
Chapter 1--Summary and Policy Options- 29

as more equitable than options 3 and 4.

There may still be some inequity, however,

because out-of-pocket expenses would continue to be affected by differences in

charges among providers for the same

service.

Since payments are related to providers’

charges up to Medicare ceilings, providers

incurring market-related differences in

costs are far more likely to receive commensurate payments. This method is also

neutral with respect to patient characteristics that affect use.

The incentives for overuse under this

option may result in higher revenues and

profits accruing for manufacturers and an

excessive stimulus to technological

innovation, especially for similar therapies

for which Medicare is a dominant payer.

Excessive stimulation could draw into

related research and development additional resources that would have greater

social value if used elsewhere. There is

little possibility that this payment method

would provide an inadequate stimulus for

technological change.

Although Medicare carriers and fiscal

intermediaries are already familiar with the

workings of this payment method, the

administrative burden is nonetheless substantial. Determination of the customary,

prevailing, and reasonable charge is a complicated procedure that must be applied for

each provider. Unlike options 3 and 4,

payment differentiation occurs automatically and is irrelevant as a potentially

necessary refinement .25 Also, unlike

options 3 and 4, payment rates are not

25 Difficulties have arisen, however, in rationalizing payment

differences between urban and rural physicians.

prospectively determined, eliminating the

need to update them in response to

dynamic changes in the market for recombinant erythropoietin. Lastly, although

underprovision is not a problem under this

option, there is still a considerable need for

peer review because of the strong incentive

for overprovision and the potential for

reduced quality.

Option 6: Mandate the Medicare

program to pay providers of recombinant

erythropoietin according to a fee schedule.

Under this option Medicare would set in

advance of the period in which they were to

apply a schedule of fees that it would pay

per unit of recombinant erythropoietin.

Unit amounts would apply to the product,

related supplies, and services to administer

or dispense it. The fees paid could be

uniform, or they could vary to reflect

market-related differences in providers’

cost. As noted in option 5, after a phase-in

period, Medicare will pay for all physician

services according to a fee schedule.

Separate fee schedules could be developed

for dialysis facilities, physicians, dialysis distributors, and pharmacies.

In comparison with options 3 and 4, the

fee-schedule method places less financial

risk on providers and patients and consequently, creates weaker incentives to

constrain use and to prudently purchase

recombinant erythropoietin. Like fee-forservice payment generally, if the payment

rate exceeds unit cost, physicians and

dialysis facilities would have a financial

incentive to provide additional units of the

product, especially if there are few or no

adverse consequences from doing so.

Although total payments would vary

directly with the quantity of recombinant
30- Recombinant erythropoietin: Payment Options for Medicare

erythropoietin provided, a fee-schedule

approach has other advantages over the

CPR method. One advantage is that

Medicare can control the amount paid per

unit of the service, whereas Medicare passively processes providers’ billings under

CPR. In addition, Medicare can encourage

or discourage the use of a particular service

by raising or lowering payment rates.

Because of the above incentives, costs to

the Medicare program and to beneficiaries

would likely be higher under this option

than under options 3 and 4. Higher out-ofpocket costs for beneficiaries imply less

financial access. Financial access might

also be less under a fee-schedule approach

than under options 3 and 4, because out-ofpocket extremes are more likely. This

payment method, however, would probably

result in lower costs to the Medicare

program and beneficiaries than the CPR

discussed under option 5. If the payment is

less than unit cost, providers may have a

strong financial incentive both to reduce

amounts of recombinant erythropoietin

below clinically appropriate levels and to

deny access.

Not all of the above incentives apply to

pharmacies and dialysis distributors. Since

pharmacies and dialysis distributors do not

make decisions regarding dosage, these

providers have less influence than physicians and dialysis facilities over use and

cost to Medicare and its beneficiaries. In

contrast to payment based on charges

billed, a fee-schedule approach would

encourage all providers to be prudent purchasers of the product. This situation

would be beneficial to Medicare to the

extent that providers’ actual acquisition

costs enter into the calculation of fee

schedules.

Incentives to overprovide or underprovide recombinant erythropoietin would

also be affected by whether payments were

uniform or differentiated. Differentiated

payments would be appropriate, for

example, if providers faced market-related

differences in wage rates and in the

acquisition costs for the product. Financial

gains and losses would then be smaller, and

incentives to both overprovide and

underprovide the service would be weaker.

A fee schedule may be the most equitable payment method from the beneficiary’s perspective. Out-of-pocket costs

would vary directly with and depend only

on the quantity of the product used. Differentiated payments, to account for

market-related differences in costs among

providers, might reduce rather than

improve beneficiary equity. Such adjustments would cause out-of-pocket costs to

vary also with provider unit costs and might

be viewed as unfair by beneficiaries.

A fee schedule is a more equitable

payment method for providers than options

3 and 4. Since payments vary directly with

the quantity of recombinant erythropoietin

used, differences among patients would not

result in uneven compensation. Uneven

compensation due to market-related differences in acquisition costs for the product

and other service costs, however, would

still exist. The compensation imbalances

under this option would be remedied if unit

amounts are differentiated to reflect

market-related differences in cost.

Unless payment amounts were generally

inadequate and well below unit costs, this

alternative should not adversely affect

industry incentives for technological

innovation. Utilization levels should be
Chapter 1--Summary and Policy Options- 31

sufficiently high to satisfy industry sales

requirements. On the other hand, the relatively weak constraints on use inherent in

this payment method could result in

overuse of recombinant erythropoietin.

This could give the industry an excessive

stimulus for investment.

This option would be less burdensome

to Medicare carriers and fiscal intermediaries than option 5, because determination

of the appropriate payment for each provider would be considerably easier. Like

options 3 and 4, however, this option

requires the calculation of prospective

rates and their periodic updating in

response to dynamic changes in the market

for recombinant erythropoietin. Also, like

options 3 and 4, there is a potential need to

differentiate these rates, which further adds

to the administrative burden. Lastly,

because of the potential for both overprovision and underprovision and the

resulting diminutions in the quality of care

relating to each, peer review is no less

necessary under this option than under the

other provider payment options.

Payment for the Product

This section reviews three methods that

Congress could require Medicare to use to

determine the rate that it will pay for the

product recombinant erythropoietin. Setting a payment rate for the product, in

addition to setting rates for providers, may

enhance Medicare’s overall ability to

control the costs of this therapy. Better

control of costs- implies more effective use

of limited Medicare resources and, therefore, more potential benefits to patients.

An important consideration in implementing payment for the product component of recombinant erythropoietin

therapy is the mechanism through which a

payment rate for the product would be

realized by Medicare. The product flows

from the manufacturer through one or

more wholesalers or other intermediate

suppliers before it reaches the ultimate

providers. A rate agreement between

Medicare and manufacturers and the consequent financial flows may or may not

involve intermediate suppliers.

One possibility for handling the financial

flow is that the manufacturer or manufacturers of recombinant erythropoietin pay

rebates directly to Medicare. Rebates

could be based on a specific amount per

unit sold to Medicare providers. Volume

information could be obtained from copies

of claims submitted to Medicare carriers

and fiscal intermediaries. If there is more

than one manufacturer, specific volumes

would have to be verified for each. This

should not pose a problem, since each

manufacturer’s brand of recombinant

erythropoietin could be identified from a

code appearing on each claim.

A more important difficulty with this

approach would arise if some manufacturers of recombinant erythropoietin did

not have a rate agreement with Medicare.

Since the providers of recombinant

erythropoietin would not benefit from the

rebates, they would have no incentive to

purchase recombinant erythropoietin from

Medicare-designated manufacturers. This

follows from the fact that rebates paid by

manufacturers to Medicare need have no

direct bearing on the prices that manufacturers would charge to providers. The total

cost savings to Medicare would, therefore,

be more limited and would depend on the

portion of Medicare providers who chose,

for whatever reason, to purchase from
32- Recombinant erythropoietin: Payment Options for Medicare

Medicare-designated manufacturers. As a

remedy, Medicare could lower payments to

providers who failed to purchase from

Medicare-designated manufacturers or

deny them payment altogether.

Another possibility to address this

problem would be for the manufacturer to

provide rebates to Medicare providers of

recombinant erythropoietin rather than to

the Medicare program. Providers would

also be identifiable from claims. Under

this alternative, providers would have a

financial incentive to purchase recombinant erythropoietin produced b y

Medicare-designated manufacturers,

because Medicare’s payments to all providers would be based on the low prices

negotiated with manufacturers. A major

difficulty, however, is that manufacturers

would be burdened with the task and cost

of periodically providing rebates to thousands of dialysis facilities, physicians,

dialysis distributors, and perhap s

pharmacies. Alternatively, rebates could

flow from the manufacturer to Medicare

carriers and fiscal intermediaries which, in

turn, could transfer them to providers.

Medicare carriers and fiscal intermediaries

already directly deal with providers on a

regular basis. Since this new responsibility

would raise the costs of carriers and intermediaries, it might be necessary for

Medicare to raise payments to these contractors.

Option 7: Mandate the Medicare

program to base payment rates for recombinant erythropoietin on manufacturer

costs.

Under this approach Medicare would

determine a price for recombinan t

erythropoietin based on a thorough review

of manufacturer costs. This alternative is

most applicable to a market with a single

manufacturer. Although it could also be

used for multiple manufacturers, the complexities involved in determining an

appropriate payment rate would make it

impractical relative to other alternatives.

If it wished to obtain an explicit rate

agreement from the manufacturer,

Medicare could use its calculated rate as a

target toward which to negotiate. What

actual rate emerged from negotiation, and

how closely it approached the target rate,

would depend on the strength o f

Medicare’s market position relative to that

of the manufacturer. Alternatively,

Medicare could simply use the target rate

as an input in calculating payments to providers of recombinant erythropoietin.

Medicare employed a variant of this

method to set the current payment rate to

dialysis facilities. This latter alternative,

however, would be less effective in controlling product costs, since Medicare

would have no direct influence over the

rates charged by manufacturers.

Calculation of a payment rate for

recombinant erythropoietin on the basis of

manufacturer costs poses certain difficulties. First, since manufacturers are

usually developing and producing many

products, it is quite difficult to allot

common costs, such as basic research and

development and overhead expenses, to

the product in question. Common costs are

costs that cannot be traced to specific products. It is typical in the pharmaceutical

industry that multiple discoveries emerge

from the same basic research (70).

Although measurement of common costs is

difficult, their allocation to specific products is more so.
Chapter 1--Summary and Policy Options- 33

Accounting methods, such as the

allocation of common costs according to

the projected sales volumes of the related

products, are unlikely to result i n

appropriate payment rates (1976). In the

pharmaceutical industry, the related products sold by a firm usually differ in

therapeutic significance. Products

emerging from the same basic research and

development process are further developed

and marketed, if sufficient revenues to

cover incremental costs are expected. This

often yields a hierarchy of related products

in terms of therapeutic significance and

strength of market demand (31). Larger

shares of common cost are efficiently allocated to products with stronger market

demands (128). 26 A product has a strong

market demand if it can command a high

price and if the quantity purchased is

largely insensitive to price. Therefore, to

allocate efficiently common costs to recombinant erythropoietin, it is necessary to

estimate the strength of its market demand

relative to that of related products produced by the firm or firms in question.

This determination is further complicated

by the fact that demand is measured over

time and common costs must also be

apportioned according to the expected

market life of each product.

A second issue complicating this

payment option concerns the determination of an appropriate profit rate for the

manufacturers of recombinant erythropoietin. The average profit rate for the

pharmaceutical industry may be inappro26 The efficient allocation of common costs is essentially equivalent to pricing according to what the market will bear.

Therefore, pharmaceutical firms automatically achieve this

objective in their pursuit of profits. Although this may lead to

product prices that are efficient relative to one another, absolute

prices may still result in excessive profits if firms possess considerable market power overall.

priate if common costs are allocated using

accounting methods. 27 Accounting methods would allocate too small a portion of

common research and development and

other expenses to products with stronger

market demands. Consequently, the

application of the average industry profit

rate to the investment base for these products would yield profits that were too low.

Profit rates for individual pharmaceutical

products, when calculated using an

accounting allocation of common costs,

have been shown to vary widely, with many

being very low or negative (78). Therapeutic breakthroughs, such as recombinant

erythropoietin, generally have high

accounting profits. If common costs were

appropriately allocated among related products, profit rates would be more uniform.

It has been argued that large accounting

profits on successful products are necessary

to offset accounting losses on unsuccessful

ones, and that only through these can firms

earn an adequate overall rate of return

(169). Therefore, if accounting methods

are used to allocate common costs, and

they may be the only practical methods to

use, it maybe more appropriate to apply to

recombinant erythropoietin the average

profit rate for significant therapeutic breakthroughs rather than the average rate for

the industry. Actual profit rates, whether

for specific classes of products or for the

pharmaceutical industry as a whole, are

appropriate for the rate calculation in this

option only if competition in the industry is

sufficient to keep overall profits at reasonable levels.

zlAccounting methods would tend to allocate common costs on

the basis of the projected volumes for each product and would

not take into account the product’s value to consumers and their

sensitivity to price.
34- Recombinant Erythropoietin: Payment Options for Medicare

Despite considerable research (3,32,36,

39,1 15,169), the degree of competition in

the pharmaceutical industry is still unclear.

Consequently, it is difficult to know

whether industry profit rates are acceptable

for calculating a product rate under this

option. An analysis of the average profit

rate for the industry might reveal something about the degree of competition.

Interindustry comparisons of profit rates

are often used in such evaluations.

Extreme caution, however, should be

applied in making comparisons. Differences could be justified by differences in

risk and the timing of returns. Also, profit

rates in the pharmaceutical industry should

be carefully interpreted and compared with

those in other industries, because they are

very sensitive to accounting practices and

other assumptions made in their calculation (9,22,30,135).

A third complication affecting this

payment option concerns inefficient uses of

resources. In addition to price competition, some pharmaceutical firms may

compete in other ways that are wasteful.

Such behavior is possible in an industry

that is not purely competitive but is characterized by the imperfect competition associated with brand names and product differentiation. Inefficiency arises if products

are marketable at prices that cover

incremental costs, only because of “persuasive” promotion. Persuasive promotion

is distinct from “informative” promotion,

which serves the important function of educating potential users regarding the merits

and possible side effects of a product. Persuasive promotion goes beyond conveying

to potential buyers the information

necessary for making rational purchasing

decisions (88) and attempts to encourage

purchase by distorting information or by

offering benefits unrelated to the product’s

price. In addition to encouragin g

imprudent purchases, expenditures on persuasive promotion are in themselves

wasteful of resources. Studies have shown

persuasive promotion to be a significant

factor in the pharmaceutical industry

(73,74). To the extent that this behavior

applies to the manufacturers of recombinant erythropoietin, price determinations

under this option might limit allowance for

promotion and other expenditures relating

to products marketed in this manner.

The implications of this option depend

on whether Medicare succeeded in calculating a payment rate that reflected the

costs of efficient production, including a

normal profit. Whether this result would

occur, however, is not predictable. If the

calculated rate was substantially higher or

lower than the rate that reflected efficient

production, a number of problems could

arise. A high rate would mean fewer

benefits per dollar allocated to recombinant erythropoietin and higher costs to

the Medicare program. Depending on how

Medicare set payment rates for providers,

it might also result in 1) the substitution of

less effective therapies, such as blood transfusions, with perhaps deleterious effects on

patients’ health, 2) higher out-of-pocket

costs for beneficiaries and consequently,

less financial access and lower quality of

care, and 3) an excessive stimulus to the

pharmaceutical industry for technological

innovation. A low rate might be harmful,

because it could also distort the selection

of therapies and provide an inadequate

stimulus for technological innovation. In

addition, a low rate could cause the

manufacturer of recombinant erythro-
Chapter 1--Summary and Policy Options- 35

poietin to shift costs to other markets or

products, depending on how these prices

were determined.

A principal drawback of this option is

the difficulty of calculating a payment rate

that compensates fairly and encourages the

efficient use of resources. Although this

consideration is crucial, it also adds significantly to administrative difficulty.

Other factors contributing to the administrative costs of this option include the staff

resources needed to obtain and update

information for periodically recalculating

the payment rate for the product. Recalculations would be needed to reflect

changes in product volumes, input costs,

and other factors that in turn affect the

costs of producing and distributing the

biologic.

Option 8: Mandate the Medicare

program to set the payment rate at the

lowest price for recombinant erythropoietin listed in the Federal Supply

Schedule.

The Federal Supply Schedule (FSS) is a

catalog of single- and multiple-source products that are available from various

manufacturers to the health care facilities

of certain agencies of the Federal Government, such as the Department of

Veterans Affairs (VA), the Department of

Defense, the Public Health Service, and

the Centers for Disease Control. The FSS

is distinct from products directly purchased

by the VA and distributed to facilities

through its depot system. Administrative

responsibility for the FSS has been

delegated by the General Services Administration to the Department of Veterans

Affairs Marketing Center (107,120).

The FSS represents prices negotiated

with manufacturers.

28 Federal Go vernment medical centers may buy products

at FSS prices directly from these manufacturers. The prices listed on the supply

schedule are less than or equal to the

lowest prices charged to the same class of

trade in non-government transactions.

Each manufacturer wishing to list on the

FSS must provide the VA Marketing

Center with complete and confidential

information on the prices charged to other

customers. The final price is arrived at

after negotiation between the V A

Marketing Center and the manufacturer

(107,120).

Federal Government medical centers

are ordinarily required to purchase the

lowest priced item on the FSS that meets

their needs. Product orders are placed

directly with and are shipped from the

manufacturer. The Federal Government

does not ordinarily guarantee that any

specific volume of the product will be purchased by Government medical centers

from the manufacturers listing in the FSS.

In addition, facilities may purchase from

suppliers not on the FSS if the prices

charged by these are lower than the lowest

priced products on the FSS (107,120).

As a payment option, Medicare dialysis

facilities and perhaps other providers of

recombinant erythropoietin could be

allowed to purchase this product at the

price listed in the FSS. This approach, of

course, assumes that at least one recom28 FSS prices now include delivery to Government medical

centers. A different arrangement could be negotiated for

recombinant erythropoietin and Medicare dialysis facilities.
36- Recombinant erythropoietin: Payment Options for Medicare

binant erythropoietin product is listed. 29

The FSS approach has the advantage of

applying the weight of the Federal Government’s purchasing power. In this

respect it is superior to option 7, in which

Medicare would negotiate independently

with the manufacturer or manufacturers of

recombinant erythropoietin. Nevertheless,

the FSS approach may still be a weak

method for obtaining the best possible

prices from manufacturers.

There seems to be no strong incentive

for manufacturers of recombinant erythropoietin either to participate in the FSS or

to offer the lowest prices that they will

accept, if they do choose to participate.

Since manufacturers can later reduce

prices and since the Government ordinarily

makes no sales commitments to low

bidders, the best strategy for a manufacturer may be to offer an FSS price that is

considerably higher than the lowest price

that the company would accept. High FSS

prices give manufacturers the option of

either sticking to those prices or selectively

offering prices lower than the FSS ones, if

competitive pressures warrant. At present,

the Government, chiefly through Medicare

beneficiaries, accounts for most of the U.S.

market for recombinant erythropoietin (see

ch. 3). It does not seem that, under such

circumstances, a manufacturer would list in

the FSS at a significantly discounted price,

unless compelled to do so by the threat of

lost sales. This situation may change if the

non-Medicare market expands.

In any case, there may be some advantages to manufacturers of recombinant

erythropoietin from appearing on the FSS

as relatively low-priced sellers. Because of

wide exposure, it could significantly reduce

the need for direct marketing. It could also

build good will with both the Government

and providers.

Another difficulty that applies specifically to recombinant erythropoietin is the

limited information on prices paid by comparable non-government purchasers. For

the only indication that the FDA has

approved to date, chronic renal failure, the

Federal Government is by far the dominant

domestic payer. Also, because of difficulties relating to the translation of

foreign currencies into U.S. dollars and

because of foreign government regulation

of prices for recombinant erythropoietin,

foreign prices may not be appropriate for

comparison (see ch. 4 for foreign prices of

recombinant erythropoietin adjusted for

purchasing power parities among foreign

currencies). Therefore, adequate reference

prices from which to negotiate Government price concessions may not be

available. This limitation, however, should

be eased as more indications for recombinant erythropoietin receive FDA approval.

There appears to be little or no possibility under this option for FSS prices for

recombinant erythropoietin to be too low.

As argued, however, incentives are such

that they could be well above the lowest

prices that manufacturers would accept.30

2 g Effective Jan. 1, 1990, Amgen listed recombinant

erythropoietin on the FSS. The Federal Government was given a

2-percent discount off Amgen’s list price of $20 per 2,000-unit

vial, $40 per 4,000-unit vial, and $100 per 10,000-unit vial

(117,139).

so Pharmaceuticals listed in the FSS average 41 percent below

the average wholesale price (AWP) for single-source products

and 67 percent for multiple source ones (138). The AWP is an

inappropriate benchmark, however, since it is a list price and is

not usually charged to any purchaser. Moreover, recombinant

erythropoietin is a recent therapeutic breakthrough, and the

above discounts may not apply to such products.
Chapter l--Summary and Policy Options- 37

As discussed in option 7, higher prices

mean fewer benefits per dollar allocated to

recombinant erythropoietin and higher

costs to the Medicare program and beneficiaries. Higher beneficiary costs may

reduce access to this product and result in

lower quality care. High prices may also

provide a socially inappropriate stimulus to

technological change.

Although this option has the advantage

of the FSS’ already being in place, it may

still pose some administrative difficulties.

These difficulties apply less to dialysis

facilities and distributors than to other providers of recombinant erythropoietin. The

Government facilities currently purchasing

from the FSS are relatively large and few in

number. Therefore, the logistics of distributing products to these facilities at FSS

prices are manageable. Also, because

these facilities serve government-related

personnel only, there is little risk to

manufacturers that products purchased at

FSS prices will be used for non-government

purposes. If additional indications for

recombinant erythropoietin are approved

and Medicare coverage is broadened, very

large numbers of physicians and retail

pharmacies could be involved. The distribution logistics implied may be far more

complicated than those for existing FSS

purchases. In addition, the above providers

of recombinant erythropoietin serve other

than government-related beneficiaries.

This could significantly increase the risk to

manufacturers that recombinant erythropoietin purchased at FSS prices would be

used for unintended purposes.

Both of the above problems, however,

would be considerably reduced if the FSS

approach were applied only to dialysis

facilities and distributors. In 1989, there

were about 1,800 dialysis facilities that

served primarily beneficiaries of government programs (see ch. 4) (156).

Option 9: Mandate the Medicare

Program to set payment rates for recombinant erythropoietin through competitive

bidding.

Under this option prices for recombinant erythropoietin would be obtained

through a bidding process established by

Medicare. Although competitive bidding

could take place with as few as two suppliers, its effectiveness generally increases

with the number of bidders. Medicare

could set the rules and payoffs of the

bidding process, and these would influence

how closely price offerings approach the

lowest price that each manufacturer would

accept. A crucial requirement of the competitive bidding approach is that awards be

clear and irrevocable. This means that

Medicare must guarantee, through contract, recombinant erythropoietin volumes

to the winning bidder or bidders. Otherwise, as with the FSS, suppliers would have

little incentive to offer their lowest

acceptable prices.

Two basic bidding approaches have

been identified and evaluated (95). Under

one approach, manufacturers of recombinant erythropoietin would openly quote

prices to Medicare with the freedom of

making reductions in response to each

other’s bids. Since bidders are unlikely initially to know the lowest acceptable prices

of their rivals, prices would be lowered

through successive rounds of bidding. Each

bidder, for fear of losing, would have an

incentive to gravitate toward its lowest

acceptable price, and each bidder, except

the winner, would eventually be compelled
38- Recombinant Erythropoietin: Payment Options for Medicare

to reveal this price. The winner would

have to bid only slightly below the previous

bid in order to win. Therefore, the timing

bid could exceed the lowest price that the

winner was willing to accept by some

unknown amount.

Under a second approach, manufacturers of recombinant erythropoietin would

offer sealed bids to Medicare. The principal difference here is that manufacturers

would not be able to adjust offers in

response to the observed bids of rivals. If

bidders have little or no information

regarding each other’s lowest acceptable

prices, bids would reflect each manufacturer’s tradeoff between the probability of

winning and winning with a price that, in

retrospect, is unnecessarily low. The more

severe the consequences of losin g

Medicare sales, the closer will bids be to

each manufacturer’s lowest acceptable

price.

Without additional information, it is

unclear which bidding approach would be

more advantageous to Medicare. Open

bidding would yield a price slightly below

the lowest acceptable price of the secondlowest bidder. Depending on the financial

consequences faced by manufacturers,

sealed bidding would yield a price that is

either higher or lower than the above price.

Sealed bidding would be more advantageous to Medicare if the manufacturers of

recombinant erythropoietin would incur

major financial losses from not winning a

contract. Manufacturers would probably

be very averse to losing Medicare sales if

Medicare accounted for the dominant

share of the market for recombinant

erythropoietin and if this biologi c

accounted for a large portion of each firm’s

total sales. Alternatively, if the Medicare

market was of considerably less importance, manufacturers’ aversion to losing

Medicare sales might also be less. Under

these circumstances, open bidding might be

superior. Under either approach, a larger

number of bidders (manufacturers of

recombinant erythropoietin) would be

advantageous to Medicare, because it is

more likely to result in the winning bid’s

being closer to the winner’s lowest

acceptable price.31

The issue of single or multiple winners

should also be considered. Multiple

winners are possible even if there are only

two manufacturers of recombinant erythropoietin. Although the price would be set at

the lowest bid, guaranteed sales to the

lowest bidder should be significantly

greater. This approach is necessary to

maintain manufacturers’ incentives to

reveal their lowest acceptable prices and to

discourage collusive behavior. Although a

single winner may provide maximum incentives, this approach could be very harmful

to losers, the market for recombinant

erythropoietin, and the industry. If

Medicare accounts for all or nearly all of

the market, exclusion of losers might result

in their permanent elimination. This would

make the market less competitive and

could result in higher prices for recombinant erythropoietin in the long run.

A possible disadvantage of multiple

winners pertains to the logistics of dividing

the Medicare market among manufacsl For open bidding, the difference between the winner’s lowest

acceptable price and that of the preceding bidder would most

likely diminish as the number of bidders increased. For sealed

bidding, a larger number of bidders would reduce the probability

that each would win with any given bid. This should induce

manufacturers to lower their bids, putting them closer to their

lowest acceptable prices.
Chapter 1-–Summary and Policy Options- 39

turers. A relatively simple approach would

be geographically to divide the Medicare

market for recombinant erythropoietin.

The lowest bidder, for example, could be

guaranteed the largest portion (percentage

of sales) of the Medicare market and the

freedom to choose which geographic areas

would be included in this share. The

remainder of the Medicare market could

be divided in a similar manner, with the

second-lowest bidder getting the next

largest share, and so forth. Medicare would

require all participating manufacturers to

sell the biologic at the winning price bid.

To receive payment, Medicare could

require providers in each geographic area

to purchase the brand of recombinant

erythropoietin that Medicare designated

for that area.

Difficulties might arise, however, if one

organization had dialysis facilities in areas

designated for different areas. Such an

organization might be faced with obtaining

recombinant erythropoietin from more

than one source, a situation that could

reduce the organization’s ability to

negotiate a lower price from suppliers.

Another complication would arise if the

brands of recombinant erythropoietin are

not therapeutically equivalent and if these

differences are protected by patent. This

implies that for some patients, the different

brands would not be interchangeable. In

that case, totally excluding a brand from a

geographic area would not be feasible. As

a solution, physicians could be required to

justify a specific brand for those patients

for whom substitution would be clinically

inappropriate e. Manufacturers being

awarded geographic contracts should be

allowed to produce and distribute all versions of the product within legal limits.

As long as manufacturers of recombinant erythropoietin do not refuse to participate in a Medicare bidding process, this

option would appear to be an effective

method for obtaining competitive prices.

There is little reason to believe that

resulting prices would be too high. It is

possible, however, that prices could be too

low. For example, if Medicare’s market

position was very strong and a single

timer was specified, manufacturers might

make bids that were below the costs of efficient resource use.

Any price that would at least cover the

incremental costs of producing and distributing recombinant erythropoietin could

emerge under this option. Such a price,

however, might contribute little or nothing

to common costs, that is, the costs of

resources that are used by more than one

product. As argued, this is inefficient for a

product, such as recombinant erythropoietin, that would face a strong demand

under normal market circumstances.

Medicare can prevent manufacturers from

bidding prices that are too low by reducing

the risks from not doing so. Risks to

manufacturers would be reduced if multiple awards were made and if the differences among awards were smaller.

Prices that are too low can provide

inadequate incentives for technological

innovation, both for the class of products in

which recombinant erythropoietin is

included and for all pharmaceuticals for

which Medicare is a dominant payer. Low

prices may also cause manufacturers of

recombinant erythropoietin to shift costs to

other markets and products.

Competitive bidding has been used by

State and local governments to set payment
40- Recombinant erythropoietin: Payment Options for Medicare

rates for health care services, but the

results have been mixed (96). Although

public and private organizations that

deliver health care have obtained certain

services or products through competitive

bidding, the results of similar attempts by

governments acting as third-party payers

have been disappointing. Despite the

potential, it is not clear that these arrangements have resulted in lower prices or

lower expenditures for the programs.

In some cases, manufacturers or suppliers have refused to participate. For

example, brand-name manufacturers did

not offer bids in response to a solicitation

from the Kansas Medicaid program

regarding pharmaceutical products (9a).

Compared with this situation, however, the

Medicare program represents a different

market with different incentives for

manufacturers. With the Kansas Medicaid

program, manufacturers had to weigh the

possibility of lost sales to that program

against the possibility of much larger

revenue losses if price concessions had to

be shared with other State Medicaid programs. Given Medicare’s current predominance as a payer of recombinant erythropoietin therapy, the possibility of lost payments from Medicare would most likely

outweigh negative effects on other markets.

Quality problems that have plagued

some other competitive bidding programs

would be less likely to apply to recombinant erythropoietin under Medicare.

Past difficulties seemed to have stemmed

in large part from an inability to define

precisely the service. Recombinan t

erythropoietin, however, is a more specific

product whose quality is already controlled

by FDA requirements.

The administrative responsibilities of

conducting a competitive bidding process,

monitoring the contracts, and distributing

rebates from manufacturers would entail

additional costs for HCFA. Also unique to

this option are administrative difficulties

regarding the division of the Medicare

market, if multiple winners are specified.

Medicare has not previously negotiated a

price for an intermediate product that is

used by medical providers rendering services to beneficiaries. In many cases, a

demonstration project within a limited

geographical area enables HCFA to

evaluate the feasibility of an innovation,

but such a demonstration project would not

provide a fair test of this option. If the

option applied only to a given region,

manufacturers would have less incentive to

participate and to tender low bids. It

would be more reasonable initially to

implement the option for dialysis facilities,

which currently treat most of the beneficiaries receiving recombinant erythropoietin. Administrative procedures

regarding rebates, for example, would be

more manageable for the smaller number

of dialysis facilities than if physicians’

offices were also included. If successful,

the option could subsequently be expanded

to physicians.

CONCLUSION

Selecting payment options for Medicare

payment of recombinant erythropoietin

requires balancing desirable and undesirable implications. The most important tradeoffs relate to improving access to

and quality of care for beneficiaries vs. constraining costs to Medicare and its beneficiaries.

Of all the options analyzed, option 1

(extending Medicare coverage to selfadministration of the biologic) would most

improve access to care, especially for home
Chapter 1--Summary and Policy Options- 41

dialysis patients. Such an extension of

coverage would reduce beneficiaries’

expenses, but raise those of the Medicare

program. Option 2 (setting payment rates

to encourage providers to engage in further

research) has the potential to improve substantially the quality of care that beneficiaries receive over time. However, this

option might merely transfer costs from

manufacturers to the Medicare program.

Among options for paying providers of

the biologic, option 4 (including payment

for recombinant erythropoietin in the composite rate paid to dialysis facilities and in

the cavitation rate paid physicians for

dialysis patients) has the greatest potential

to constrain Medicare expenditures and

beneficiaries’ out-of-pocket expenses. This

option, however, also contains the strongest

incentive for providers to skimp on use,

which could damage the quality of care that

beneficiaries receive. Along with option 4,

option 5 (basing Medicare payment on

customary, prevailing, and reasonable

charges (CPR)) has the worst implications

for the quality of care, but from a different

direction. The CPR method threatens the

quality of care by rewarding overuse of the

biologic and at the same time has the

greatest potential to fuel inflation in

Medicare expenditures and beneficiaries’

cost-sharing. Option 3 (paying a fixed rate

per recombinant erythropoietin treatment),

the present method, is likely to produce

moderate expenditures for Medicare and

its beneficiaries. This option moderately

rewards providers who skimp on dosage, a

practice that is subject to quality review.

Option 6 (paying according to a fee

schedule) may contain moderate incentives

encouraging use, with implications for

expenditures and the quality of care.

These drawbacks can be addressed, however, by judiciously setting payment levels

and by monitoring use. Adoption of this

option would apply to recombinant

erythropoietin the same payment method

that the Omnibus Budget Reconciliation

Act of 1989 recently mandated for

Medicare payment of physician services

generally.

Under present policy, Medicare varies

the level and method of payment for

recombinant erythropoietin therap y

according to the setting in which it is provided. Equity among beneficiaries and

providers and incentives for efficient use of

medical services would argue for paying the

same amount for the same service,

regardless of where it was provided.

If Congress adopted an option for

paying for the product itself, the resulting

payment rate for the product could be

incorporated into the level of payment for

providers. Of the product payment

options, option 9 (setting payment for the

product through competitive bidding) has

the potential in the short term to result in

the lowest price for Medicare and the

lowest expenditures for the program and its

beneficiaries. Less clear, however, are its

feasibility and the likely effects over time

on the viability of companies heavily

dependent on Medicare revenue and hence

on the competitiveness of the industry.

The viability and advisability of the particular options for product payment must

be considered within the dynamic context

of the market for recombinant erythropoietin. With only one manufacturer about

to enter the market, HCFA used option 7

(basing product payment on manufacturer

costs) to set current payment rates for providers, but the impracticality of this option
42- Recombinant erythropoietin: Payment Options for Medicare

increases with the number of manufacturers. Given Medicare’s predominant

position as a payer of recombinant

erythropoietin therapy, it is unlikely that,

under option 8 (using the Federal Supply

Schedule), manufacturers would give substantial price concessions. To be viable,

option 9, which calls for competitive

bidding, requires at least two manufacturers. Indeed, any contractual agreement

between Medicare and a manufacturer

would have to take into account the

stability of market conditions and the effect

on the long-term competitiveness of the

industry. If additional manufacturers were

poised to enter the market, for example,

Medicare would probably benefit from

delaying its contracts or limiting them to a

short period.

Whatever payment options are adopted,

HCFA will have to be able to exercise

flexibility in monitoring and responding to

changing market conditions. In this

dynamic market, the number of manufacturers, FDA-approved medical indications

for use, and, eventually, Medicare’s predominance are likely to evolve over time.

The appropriate level and perhaps even

the method of payment may well change

with market conditions. HCFA’s responsiveness to continuing changes promises to

influence the quality of care, Medicare and

beneficiary expenditures, and the positions

of manufacturers and providers.
Chapter 2

Clinical Significance of Recombinant erythropoietin

INTRODUCTION

The purpose of this chapter is to summarize and

analyze the clinical literature on the safety and

efficacy of recombinant erythropoietin. First, the

etiology of and treatment method for anemia associated with chronic renal failure are discussed. Next,

the efficacy of recombinant erythropoietin is analyzed with information from clinical trials in chronic

renal failure patients. Issues discussed include the

effect of recombinant erythropoietin on physiologic

parameters, such as hematocrit level, and on the

quality of life. This section also examines the efficacy

of various doses and routes of administration of the

product, including intravenous and subcutaneous

routes. Other anemic conditions in which recombinant erythropoietin may be clinically useful are

reviewed. The final section considers safety issues

related to the use of recombinant erythropoietin,

including adverse reactions.

TREATMENT FOR ANEMIA

ASSOCIATED WITH CHRONIC

RENAL FAILURE

Anemia is characterized by a significant reduction

in red blood cell mass and a corresponding decrease

in the oxygen-carrying capacity of the blood (23).

Red blood cells are the cellular components of blood

responsible for the transport of oxygen to body

organs and tissues. Sustained lack of tissue

oxygenation results in hypoxia, which is characterized

by fatigue, weakness, lethargy, decreased ability to

exercise, difficulty breathing, loss of appetite, and a

overall decreased sense of well-being. Severely

anemic patients may have these symptoms at rest and

be unable to tolerate any level of exercise. Some

may develop heart failure or transient loss of consciousness, while individuals with mild cases of

anemia may or may not exhibit these symptoms.

In addition, due to decreased blood flow to the

skin, anemic patients are often sensitive to cold and

have pale skin color. Anemic males may complain of

impotence, while anemic females may have irregular

menstrual cycles. Other signs of anemia are dizziness due to lack of oxygen to the brain, irritability,

and difficulty in sleep and concentration (23).

One criterion for the diagnosis of anemia is the

hematocrit level, which is the volume of red blood

cells expressed as a percentage of total blood

volume. The average hematocrit level in men is 42-

53 percent, and in women 37-47 percent (12).

There are many causes of anemia: loss of red

blood cells, decreased production of red blood cells,

and increased destruction of red blood cells

(hemolytic anemias). Bleeding from surgery or

trauma are examples of anemia associated with red

blood cell loss. In hemolytic anemias, red blood cells

are rapidly destroyed by the body and have a short

survival time. Decreased production of red blood

cells may occur through lack of iron, vitamins, or naturally occurring hormones, such as erythropoietin.

When the body detects hypoxia, erythropoietin, a

hormone produced primarily by the kidneys, is

released into the blood stream. 1 This hormone

stimulates the release of red blood cell precursor

cells from the bone marrow into the blood stream.

These precursor cells work with iron stores in the

body, assuming these are sufficient, to develop into

mature red blood cells, and the hypoxia is corrected

(23).

Successful treatment for anemia depends on the

underlying causes of the condition in the patient.

One method for treating anemia caused by iron

deficiency is through the administration of supplemental iron. Other anemias, such as those due to

insufficient bone marrow stores of precursor cells, or

insufficient endogenous erythropoietin, are usually

irreversible and have been historically treated with

other measures, primarily periodic blood transfusions.

IAbout 90 pereent of endogenous erythropoietin is produced by

the kidneys, and 10 percent is produced by the liver (63).

-43-
44- Recombinant erythropoietin: Payment Options for Medicare

Box 2-A--Dialysis Treatment Methods

The two major forms of treatment for individuals with chronic renal failure are kidney transplantation and

some form of dialysis. The term dialysis refers to any process in which the components of a liquid or solution

are separated on the basis of the selective movement of different kinds of molecules through a semipermeable

membrane. The movement of the molecules through the membrane is caused by the differences in concentrations of salts and toxins in the blood and in the dialysate that is used to cleanse the blood (27).

The different methods of dialysis and the frequency of their use in the U.S. dialysis population are listed in

table 2-1. The most commonly used form of dialysis is hemodialysis, in which a machine pumps blood from the

patient’s body and returns it through an external blood loop. Waste products and other molecules are passed

through a semi-permeable membrane, so that blood can be faltered and cleaned. Hemodialysis patients usually

require a total of 13 to 15 hours of dialysis weekly, for sessions of about 3.5-4 hours each (27). In 1988, approximately 85 percent of all dialysis patients, both Medicare and non-Medicare, used this method of dialysis (156).

Table 2-l--Dialysis Treatment Methods Used in the United States by

Medicarea and Non-Medicareb Patients, December 31, 1988

Hemodialysis

In-unit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,250

Home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,197

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89,447

Peritoneal

In-unit intermittent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365

Home intermittent . . . . . . . . . . . . . . . . . . . . . . . . . 326

Home CAPD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,318

Home CCPD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,922

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,931

Self-Training

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 580

Total U.S.

dialysis population . . . . . . . . . . . . . . . . . . . . . . . . 105,958

(81.7%)

(3.0%)

(84.7%)

(0.4%)

(0.3%)

(13.0%)

(2.0%)

(15.0%)

(0.3%)

(loo%)

a As of Dec. 31, 1988, 91,820 dialysis patients were covered by Medicare and 6,371 had Medicare coverage

pending. The percentage distribution of dialysis patients by dialysis method is for the total U.S. dialysis

b population.

Patients in the non-Medicare category may include those who are covered by the Veterans Administration, private insurance (including those who have employer group health insurance coverage for the

first year of ESRD, with Medicare’s becoming the primary insurer thereafter), and Medicaid; foreign

nationals; and individuals with no coverage.

KEY: CAPD = continuous ambulatory peritoneal dialysis; CCPD = continuous cycling peritoneal

dialysis.

SOURCES: Sagel, 1990 (124); US DHHS, HCFA, 1989 (156).

Although most patients receive hemodialysis treatments in dialysis facilities, some have been trained to

perform hemodialysis at home. Home dialysis requires self-reliance, but permits freedom from a facility’s

dialysis schedules. Because of the possibility of medical complications resulting from hemodialysis, patients

with severe medical problems are usually not considered candidates for home hemodialysis (27). Only 4

percent of all dialysis patients are on home hemodialysis (157).
Chapter 2--Clinical Significance of Recombinant erythropoietin - 45

Box 2-A--Dialysis Treatment Methods--Continued

In the other major dialysis method, peritoneal dialysis, a dialysate or cleansing fluid is introduced into a

permanent catheter that has been inserted into the abdomen or peritoneal cavity (146). After remaining in the

cavity for a period of time, the dialysate is drained out and discarded. Approximately 15 percent of patients

utilize some form of peritoneal dialysis (157).

There are three commonly used forms of peritoneal dialysis. Intermittent peritoneal dialysis involves the

use of a machine to deliver sterile dialysate to the patient’s peritoneal cavity and, after the prescribed time, to

remove the dialysate. This technique, which can be performed both in the facility and at home, is usually

carried out for 10 to 12 hours 3 times weekly (146). As the patient’s renal function declines, longer treatments

are needed with this method.

Continuous ambulatory peritoneal dialysis (CAPD) involves continuous, manual exchange of dialysate,

roughly every 4 to 6 hours. CAPD requires no machine, and the patient can usually perform the task without

additional assistance. In CAPD, the patient empties a 2-liter bag of dialysate fluid into the peritoneal cavity and

then proceeds with usual activities for the next 4 to 8 hours or overnight (146). At the end of the cleansing time,

the dialysate is drained. The process is repeated 3 to 5 times daily, 7 days a week. The patient must be cautious

to use sterile technique at all times. Due to the number of bag changes, the major risk to the patient with this

form of dialysis is peritonitis, an infection of the lining surrounding the abdomen.

Continuous cycling peritoneal dialysis (CCPD) is a combination of the intermittent and CAPD methods.

CCPD uses a machine to warm and cycle the dialysate in and out of the peritoneal cavity automatically about

every 4 hours as the patient sleeps. The dialysate is instilled in the cavity in the morning and remains there until

connection to the machine in the evening. Although still small in total number of patients, CCPD is the fastest

growing method of dialysis, increasing 26 percent in use during the period 1982-1987. This method does not

predispose the patient to peritonitis as much as CAPD, due to the fewer number of connection changes to the

dialysis machine (146). Both CAPD and CCPD are home methods of peritoneal dialysis.

The choice of patient dialysis treatment and setting depends on the patient’s medical condition, ability to

participate in self-care, the level of support from friends and family at home, and treatment preferences (16).

Home dialysis can give those patients needing dialysis a certain measure of independence and may reduce the

cost of in-unit personnel needed for dialysis. Approximately 18 percent of all dialysis patients utilize some form

of home dialysis (157). Home hemodialysis training takes from 3 weeks to 3 months, and home peritoneal

dialysis training takes from 1 to 2 weeks. A profile of home dialysis patients is provided in table 2-2.

Table 2-2--Home Dialysis Treatment Methods Used in the United States

by Medicare and Non-Medicare Patients, December 31, 1988

Dialysis Number of Percent of home

method patients dialysis patients

Hemodialysis . . . . . . . . . . . . . . . . . . . . . . . . . . 3,197 17

Peritoneal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,566 83

Intermittent . . . . . . . . . . . . . . . . . . . . . . 326 2

CAPD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,318 71

CCPD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,922 10

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,763 100

KEY: CAPD = continuous ambulatory peritoneal dialysis; CCPD = continuous cycling peritoneal dialysis.

SOURCE: US DHHS, HCFA, 1989 (156).
46- Recombinant Erythropoietin: Payment Options for Medicare

Anemia is frequently associated with chronic

renal failure, a progressive condition that results in

permanent and irreversible destruction of the

kidneys. Chronic renal failure progresses from a

predialysis phase, where the kidneys continue to

function but at a reduced rate, to a later phase,

where there is little or no kidney function and continuous dialysis is needed to remove waste products

from the blood stream (21) (see box 2-A and tables

2-1 and 2-2).

In most chronic renal failure patients, the survival

time of red blood cells is only slightly decreased, and

anemia results primarily from underproduction of

red blood cells. This is due to insufficient production

of endogenous erythropoietin by failing kidneys (21).

The anemic condition worsens as kidney function

declines?

zOther factors associated with the anemia of chronic renal

failure include unavoidable blood loss during the dialysis procedure, decreased red blood cell suMval time, and iron deficiency

(80).

The prevalence of anemia in dialysis patients is

substantial. Among approximately 13,000 dialysis

patients tested by National Medical Care (NMC)3 in

1989, for example, approximately 93 percent had a

hematocrit level less than 35 percent, 74 percent had

a hematocrit less than 30 percent, and 70 percent had

a hematocrit between 20-29 percent (see table 2-3).

For predialysis patients, estimates of the prevalence

of anemia vary widely, from 10-44 percent (see ch 3.

and table 3-5). The symptoms of anemia associated

with predialysis are, in general, not as debilitating as

the symptoms of anemia associated with later-stage

chronic renal failure (123).

Until recently, the treatment of anemia associated with chronic renal failure had been limited to

the use of blood transfusions, androgen therapy, and

administration of supplemental iron (57).

3 NMC is the nation’s largest chain of dialysis centers (11).

Table 2-3-Distribution of Hematocrit Levels of Dialysis Patients, by Age, January 1988a

Percentage of patients with specified hematocrit level

Cumulative

Age < 1 4 15-19 20-24 25-29 30-34 —>35 percent by ageb

0-14 . . . . . . . . . . . . . . . 0.00

15-24 . . . . . . . . . . . . . . 0.00

25-34 . . . . . . . . . . . . . . 0.05

354.. . . . . . . . . . . . . 0.02

45-54 . . . . . . . . . . . . . . 0.02

55-64 . . . . . . . . . . . . . . 0.02

65-74 . . . . . . . . . . . . . . 0.00 —> 75... . . . . . . . . . . . . 0.00

0.02

0.32

0.63

0.48

0.50

0.75

0.41

0.25

0.07

1.00

2.92

4.06

4.60

6.97

6.51

3.66

0.11

0.57

2.73

4.68

6.06

10.01

11.26

5.68

0.02

0.14

0.99

2.07

3.06

4.94

5.11

2.20

0.02

0,05

0.43

o.%

1.36

2.03

1.75

0.54

0.23

2.30

10.05

22.38

37.97

62.69

87.73

100.06

Cumulative

percent by

hematocrit

level . . . . . . . . . . . . . . . 0.10 3.46 33.25 74.34 92.87 100.00

aBased on data from approximately 13,200 patients tested by National Medical Care. Data do not distinguish among patients’ method of

dialysis.

b Total does not sum to 100 because of rounding.

SOURCE: Berger, 1989 (11).
Chapter 2-Clinical Significance of Recombinant erythropoietin - 47

It is estimated that one-fourth of dialysis patients

undergoing hemodialysis require regular or intermittent blood transfusions to maintain acceptable

hematocrit levels (57). At initial administration,

blood transfusions produce a quick increase in

hematocrit, but as the red blood cells die, the

hematocrit level drops and another transfusion is

required. Thus, it is difficult to stabilize a patient’s

hematocrit level with blood transfusions. In addition,

many risks are associated with repeated blood transfusions, such as iron overload and the potential for

transmission of various types of hepatitis virus or the

human immunodeficiency virus (HIV) (65). A more

detailed discussion of the risks associated with blood

transfusions is found later in this chapter. Whether a

patient receives a blood transfusion depends on

several factors, such as the patient’s hematocrit level,

signs and symptoms of anemia, and the clinician’s

judgment. Androgens are male hormones capable

of stimulating erythropoiesis, but are associated with

side effects, such as liver toxicity and masculinization,

and are used infrequently (104).

EVALUATION OF THE EFFICACY OF

RECOMBINANT erythropoietin

A safe and efficacious treatment for anemia

associated with chronic renal failure has been

unavailable. Efficacy refers to the probability of

benefit to individuals in a defined population from a

medical technology applied for a given medical

problem under ideal conditions of use (143).

The efficacy of recombinant erythropoietin has

been assessed primarily by physiologic factors,

including changes in hematocrit level and reduction

in the need for blood transfusions, an indication that

anemia has been alleviated. Although information

from studies does not indicate that use of recombinant erythropoietin increases length of life, evidence suggests that the biologic increases the

hematocrit level, reduces the need for blood transfusions, and improves aspects of the quality of life of

dialysis patients, such as well-being and activity level.

The efficacy of recombinant erythropoietin for conditions besides chronic renal failure is being explored.

Physiologic Effects of Recombinant

erythropoietin in Chronic

Renal Failure Patients

Studies in the United States to determine the

efficacy of recombinant erythropoietin were first performed in chronic renal failure patients, including

dialysis and predialysis patients. Three different

classes of studies were done: randomized studies in

which there was an untreated or placebo-treated

control group; randomized studies in which there was

no untreated control group and a before and after

effect was examined; and studies in which there was

no randomization, and a before and after effect was

examined.4 Important characteristics of some of

these studies are listed in table 2-4.

The studies indicate that recombinant erythropoietin produces a dose-dependent increase in

hematocrit levels and can reduce or eliminate the

need for blood transfusions in most patients.5 The

time required to increase the hematocrit level (rate

of increase) and the amount of increase depend on

the dose.

In June 1989, the Food and Drug Administration

(FDA) approved recombinant erythropoietin for

administration by the intravenous route in dialysis

patients 6 and by both the intravenous and subcutaneous routes in predialysis patients (160).

A In a randomized trial, patients are randomly assigned to a

control group, which receives standard or no therapy, or to an

experimental group, which receives the intervention being

assessed. In a before and after trial, the patients’ physiological

parameters serve as the baseline to assess the impact of the

intervention.

5 According to the Food and Drug Administration (FDA),

transfusion-dependency was defined as requiring at least six

transfusions per year (159).

6 The intravenous route of administration of recombinant

erythropoietin was used in hemodialysis patients because of the

availability of an access site to the blood stream to which the

dialysis machine is connected. The subcutaneous route of

administration of recombinant erythropoietin, which is used for

both predialysis patients and peritoneal dialysis patients, is more

practical for these patients because of the unavailability of an

intravenous access site.
48- Recombinant Erythropoietin: Payment Options for Medicare

Table 2-4-Efficacy and Safety Studies in Chronic Renal Failure Patients

Study Number of Target Doses Significance

design patients hematocrit used and results level (p value) Sourcea

A

A

B

c

A

A

A

A

B

c

89 HD

101 HD

131 HD

333 HD

14 PD

12 PD

93 PD

117 PD

17 PD

5 CAPD

(Pediatric)

see

results

32-38

see

results

32-38

3541

36

38-40

3540

3740

32-38

IV dose of 100 units/kg produced

increase in hematocrit from 22

to 34 vs. placebo (22 to 23).

IV dose of 150 units/kg or placebo

TIW for 12 weeks. 97 percent

reached target hematocrit.

IV doses of 25 units/kg, 100 units/k&

and 200 units/kg increased the

hematocrit from 22 to 28,21 to 32,

and 21 to 32 respectively over 138 days.

IV doses of 300 units/kg; or 300 units/kg

reduced to 150 units/k& or 150 units/kg

for 12 weeks. Mean maintenance

dose was 108 units/kg. 97 percent

reached target hematocrit.

IV doses of 50, 100, and 150 units/kg

compared with placebo in 14 patients.

Over 8 weeks, increases in hematocrit were

27 to 35,27 to 36,28 to 41, and 24 to 28,

respectively.

SC dose of 100 units/kg or placebo.

Hematocrit increased in 11 patients

from 25 to 36 after 3 months. 92 percent

reached target hematocrit.

SC dose of 100 units/kg (45) or placebo (48).

58 percent reached target hematocrit.

IV doses of 50,100, and 150 units/kg were

compared with placebo in initial phase.

Hematocrit increased 0.13,0.20,0.26,

and -0.01 points/day respectively.

Patients then treated SC or IV

(75-150 units/kg) in maintenance

phase. 94 percent reached target

hematocrit.

SC doses of 50-100 units/kg and IV dose

of 150 units/kg in initial phase;

SC maintenance doses at levels to sustain

hematocrit.

SC dose of 150 units/kg TIW increased

hematocrit from 22 to 33.

0.0005

NA

o.0005b

Sobota, 1989 (131).

U.S. DHHS FDA 1989 (160).

Sobota, 1989 (131).

Eschbach, et al., 1989 (56).

O.0001 Lim, et al., 1989 (92).

0.001

NA

NA

O.0001

0.001

Teehan, et al., 1989 (140).

U.S. DHHS FDA 1989 (160).

U.S. DHHS FDA, 1989 (160).

Eschbach, et al.,1989 (58).

Sinai-Trieman, et al., 1989 (130).

aNumbers in parentheses refer to list of references.

bCompared to patients’ initial hematocrit levels.

KEY: A = randomized clinical trial that employed placebo or untreated control; B = randomized clinical trial that did not employ

placebo or untreated control and a before and after effect was examined; C = nonrandomized trial in which a before and after

effect were composed; CAPD = continuous ambulatory peritoneal dialysis; HD = hemodialysis; IV = intravenous;

kg = kilogram; NA = not available; PD = predialysis; SC = subcutaneous; TIW = 3 times weekly.
Chapter 2--Clinical Significance of Recombinant erythropoietin - 49

FDA’s approved labeling for recombinant erythropoietin recommends that there be initial dosing and

maintenance dosing phases. According to the

labeling, therapy should start with 50-100 units/kg of

recombinant erythropoietin 3 times a week by

intravenous administration for 6 to 12 weeks. When

the hematocrit reaches the target range of 30-33

percent, or rises by more than 4 points in any 2-week

period, the labeling recommends that the dose be

reduced by 25 units/kg. An individual should be

maintained in the target range by adjusting the

dosage by 25 units/kg of body weight at 2-6 week

intervals (160).7 The maintenance dose is usually

lower than the induction dose once the target

hematocrit is attained.

At doses of 50 units/kg, the hematocrit increased

0.11 points/day, and at 100 units/kg, it increased 0.18

points/day, clearly establishing a dose-response relationship (160). To maintain patients in the 34-36

percent hematocrit level, 65 percent of patients

required fewer than 100 units/kg 3 times weekly; 10

percent each required either fewer than 50 units/kg

or more than 200 units/kg 3 times weekly (160).

FDA reviewed data to show the comparability of

intravenous and subcutaneous administration for

chronic renal failure (62). However, neither the

FDA Summary Basis of Approval nor the FDAapproved labeling addresses the relative efficacy of

the intravenous route vs. the subcutaneous route of

administration, or the relationship between efficacy

and dose by these respective routes.

Studies clearly indicate that intravenous recombinant erythropoietin produces a significant rise in

hematocrit level in those patients who are treated as

compared with those not treated. Although the populations used in the studies may be representative of

the age distribution of the dialysis population as a

whole, little differentiation was made in the interpretation of the results of the studies, however, of the

effect by age group. Evaluating this dimension

becomes particularly important as the number of

elderly dialysis patients increases (46).8

In a large clinical study, 101 anemic hemodialysis

patients were randomized to receive either placebo

or intravenous recombinant erythropoietin, 150

units/kg of body weight 3 times weekly for 12 weeks

(160). In the second 12-week phase, the control

group was given the same dose of recombinant

erythropoietin as the experimental group. The target

hematocrit of 35 percent was attained by a

cumulative 95 percent of the patients, with the target

hematocrit’s being achieved by 97 percent of patients

in the original treatment group and 93 percent of

patients in the control group after crossover to experimental treatment. Information on statistical significance levels was not presented.

In another study without an untreated or placebotreated control group, 333 patients (ages 18-81) were

randomized to receive doses of either 300 or 150

units/kg, which was then reduced to 75 units/kg

when the target hematocrit of 32-38 percent was

reached (56). In 97.4 percent of patients, hematocrit

increased from 22.5 percent to 35 percent

(p<.0005) within the first 12 weeks. The average

hematocrit level was maintained at 33.8 percent after

6 months of treatment (p<.0005) and 35.5 percent

after 10 months of treatment (p< .0005). The group

receiving the higher dose reached the target

hematocrit more quickly than did the group receiving

the lower dose (6-8 weeks for the higher dose group

vs. 10 weeks for the lower-dose group).

8 Elderly patients are more susceptible to the adverse and toxic

7 As an alternative to using a higher dose during the initial phase effects of most drugs. Changes with aging in body composition

and a lower dose in the maintenance phase, a model was recently and in drug distribution, metabolism, excretion, and response

developed that may allow clinicians to determine an optimal dose make elderly people more vulnerable to adverse reactions. Since

from the initiation of therapy. The model is based on survival most clinical trials and pharmacological studies are performed in

time of red blood cells in the body and dose-response cures that younger people, it is often hazardous to apply drug treatment

were developed in earlier studies (67). standards developed for these populations to the elderly (12).
50- Recombinant erythropoietin: Payment Options for Medicare

In the same study, after 8 weeks of therapy, none

of the treated patients was dependent on blood transfusions, including 116 previously transfusiondependent patients. An average 0.52 units of blood

per patient per month had been required before

initiation of recombinant erythropoietin therapy.

These requirements were reduced to 0.1 units per

patient per month after the first 4 weeks of therapy,

and 0.04 units or fewer per patient per month during

the study.9 (The impact of recombinant erythropoietin on reducing blood transfusion requirements

in chronic renal failure patients is described in table

2-5).

9 This study did not specify the volume in a unit of blood. For

dialysis patients, a transfusion usually consists of 250 ml. of

packed red blood cells (77).

In a before and after study, recombinant

erythropoietin was intravenously administered over a

range of doses between 15 and 500 units/kg to 25

anemic hemodialysis patients (ages 21-69,

hematocrits 15 percent to 24.5 percent) (57). Dosedependent increases in erythropoiesis were noted

over 3 to 7 months. Blood transfusions were no

longer needed by 12 patients, the only patients that

received them before recombinant erythropoietin

was used.

A before and after study of 5 transfusiondependent pediatric peritoneal dialysis patients ages

12-18 was undertaken. In the 6 months preceding

recombinant erythropoietin therapy, each patient had

received between 5 and 18 blood transfusions to

Table 2-5-Reduction in Blood Transfusions with Recombinant erythropoietin Therapy

Study Number of

design patients Results Sourcea

A 244 HDU

B

c

c

131 HD

333 HD

25 HD

c 5 CAPD

In first randomized arm, the transfusion requirements of Sobota, 1990 (132a).

113 treated patients receiving 100 units/kg of recombinant

erythropoietin were reduced from 0.17 units per patient

per week to 0.09 per week over 6 weeks versus the placebo

group, which remained at 0.19 units, per patient per week.

In the second randomized arm, transfusion requirements of

131 patients were reduced from 0.09 units per patient per

week to 0.04 units per patient per week over 6 weeks vs. the

placebo group, which increased from 0.18 units per patient

per week to 0.22 units per patient per week after 6 weeks.

After 4 weeks, 4 patients treated with 25 units/kg had Sobota, 1990 (132a).

a reduction in total transfusions from 69 to 25; 44 patients

treated with 100 units/kg had a reduction in total transfusions

from 70 to 12; 43 patients treated with 200 units/kg had

a reduction in total transfusions from 93 to 18.

Patients needed an average 0.52 units of blood per month Eschbach, et al., 1989 (58).

prior to therapy; this decreased to 0.1 units per patient

per month after 4 weeks, and virtually all patients were

transfusion-independent after 12 weeks.

18 patients required transfusions in the 6 months prior to Eschbach, et al., 1987 (57).

therapy, and 12 were transfusion-dependent, requiring

transfusions at least twice a month. These requirements

were eliminated in all patients after therapy.

In the 6 months before therapy, patients needed 5 to 18 Sinai-Trieman et al., 1989 (130).

blood (Pediatric) transfusions each; these requirements

were eliminated after 12 weeks.

‘Numbers in parentheses refer to list of references. Another report estimated that tranfusion-dependent patients required 7.1 units per

year and that these could be eliminated with recombinant erythropoietin therapy (117).

b

Study consisted of two separate randomized arms.

KEY: A = randomized clinical trial that employed placebo or untreated control; B = randomized clinical trial that did not employ

placebo or untreated control and a before and after effect was examined; C = nonrandomized trial in which a before and after

effect was examined; CAPD = continuous ambulatory peritoneal dialyis; HD = hemodialysis; kg = kilogram.
Chapter 2--Clinical Significance of Recombinant Erythropoietin - 51

maintain a hematocrit of 20 percent and treat

symptoms of anemia. The children were treated at

home with 150 units/kg recombinant erythropoietin

subcutaneously 3 times weekly for 5 to 8 months. The

hematocrit level increased from an average of 22

percent to an average of 33 percent (p< 0.001), and

was maintained in the 32-38 percent range for 5 to 8

months. When the patients reached the target of 35

percent, the dose was decreased in increments of 25

units; when the level reached 40 percent, treatment

was discontinued until the hematocrit dropped below

40 percent. The patients were then reinstated on a

dose of 150 units/kg once or twice weekly subcutaneously to maintain their hematocrit levels.

Further blood transfusions were not required when

the target hematocrit was reached (130).

Reflecting the dose-response relationship to

recombinant erythropoietin, the time to reach a

target hematocrit level and the number of patients

reaching any specified target depend on the dose

used (see table 2-6). Although the study designs are

not presented, it appears from the data that doses of

100 units/kg are needed for 90 percent or more of

patients to respond. The data also suggest that with

doses of 44 units/kg, slightly more than 50 percent of

patients respond. Lower doses seem to produce a

lower response rate in a smaller number of patients.

In one case, approximately 70 percent of patients

(n= 116) in a before and after study without randomization increased their hematocrits to 30 percent over

12 weeks with only 50 units/kg 3 times weekly (18).

Studies to date, as indicated in table 2-7, suggest

that subcutaneously administered recombinant

erythropoietin is also efficacious at both increasing

and maintaining the hematocrit level of most patients

to whom it is administered. The current evidence is

more voluminous for the efficacy of the subcutaneous route of administration in predialysis

patients than in dialysis patients. One report does

indicates efficacy in dialysis patients (17).

The evidence is clearly convincing that both the

subcutaneous and intravenous routes are efficacious

in increasing hematocrit levels. Although some have

suggested that target hematocrit levels can be

attained with lower doses by the subcutaneous route,

there are not enough data to fully support this conclusion. No study compared the same doses by different routes of administration. In most of the

studies, both the routes of administration and the

doses were varied, making comparison difficult.

In some cases, lower doses of subcutaneouslyadministered doses of recombinant erythropoietin

were able to achieve a similar therapeutic response

as higher doses of the intravenously-administered

product. This usually occurred, however, over a

longer period of time. For example, in one study, the

target hematocrit was reached in 8 weeks with 150

units/kg intravenous recombinant erythropoietin as

compared with 12 weeks with 100 units/kg of subcutaneous recombinant erythropoietin (58). one

possible explanation is that subcutaneously adminTable 2-6-Dose Response to Intravenous Recombinant erythropoietin

Dose used Number of Percent

(units/kg) patients responding Source

300/150

200

120

100

80

50

44

40

25

309

43

2%

44

2a

116

236

29

44

97

>90

93

>90

82

71

55

28

<25

Eschbach, et al., 1989 (58).

Sobota, 1989 (131).

Kuhn, et al., 1988 (186).

Sobota, 1989 (131).

Kuhn, et al., 1988 (186).

Blagg, 1989 (17).

Roxas, 1989 (122).

Kuhn, et al., 1988 (186).

Sobota, 1989 (131).

a Response was considered an increase in hematocrit to over 30 percent in 3 months.

Numbers in parentheses refer to list of references.

KEY: kg = kilogram.

SOURCE: Eschbach, and Adamson, forthcoming, 1990 (55).
52- Recombinant Erythropoietin: Payment Options for Medicare

Table 2-7-Studies of Subcutaneous Administration of Recombinant erythropoietin

Study Number of Significance

design patients Dosea Results level (p value) Source b

A 14 PD SC doses of 100 Average hematocrit increased 0.004 Kleinman,

units/kg for treated group from 2 et al., 1990 (83).

or placebo 35.8 percent over 12 weeks.

Average hematocrit remained

at 28 percent for placebo group.

A 12 PD SC doses of 100 Hematocrit increased in 11 0.001 Teehan, et al.,

units/kg or patients from 25 percent to 36 1989 (140).

placebo percent after 3 months.

.-—.--—

A

---——--- ------ —

93 PD SC doses of 100 Hematocrit of 38-40 percent NA US DHHS, FDA,

units/kg (45) attained by 58 percent of 1989 (160).

or placebo (48) treated vs. 4 percent placebo

in 12 weeks.

— - — ——-——— -

A 117 PD

———-—

SC or IV doses of Hematocrit maintained in 36-38 NA US DHHS, FDA,

75-150 units/kg percent range for 6 months in 1989 (160).

in maintenance 94 percent of patients.

phase after target

hematocrit of 35-40

percent reached.

— - -——----------——— —

B

—-..—.-----------—.——. -—-—-...—--

17 PD IV doses of 50-100 Hematocrit increased from 28 0.0001 Eschbach, et al.,

units/kg and SC percent to 37 percent in 12 1989 (58).

doses of 150 units/ weeks by SC and 8 weeks by IV.

kg in initial phase.

Maintenance dose

given SC at levels to

sustain increase in

hematocrit.

c 5 CAPD SC doses of 150 Hematocrit increased from 22 0.001 Sinai-Trieman, et al.

(Pediatric) units/kg percent to 33 percent. 1989 (130).

---.—-—--——-—-- ————-—-——. —

c 12 CAPD

.——.-——

Initial SC doses of Hemoglobin increased 2 g/dl NA Stevens, et al.,

100 and 150 units/k& over 26+ weeks, reaching 11 to 1989 (134).

reduced to 50 11 1/2 g/all in 11 patients.c

units/kg.

c 86 HDa

IV doses averaged Patients treated IV maintained Blagg, 1990 (17).

101 units/kg in target HCT for 23 months; patients

55 patients and treated SC maintained HCT for 21

SC doses averaged months.

108 units/kg in

31 patients. —--—-———— —

c

——----

29e

-—— —

Doses, routes, and Hemoglobin was maintained in target NA Besarab, et al.,

frequency of (10.5 < Hb < 13) at doses of 80 1990 (13).

administration were units/kg SC weekly in 13 patients

varied. and 164 units/kg SC twice weekly

in 16 patients.

administered three times weekly, unless otherwise noted. b Numbers in parentheses refer to list of references.

c Hemoglobin is the oxygen-carrying protein of red blood cells. Normal average hemoglobin levels in men are 14-18 g/all (grams/deciliter)

and 12-16 g/all for women (12). d study compared administration in home dialysis with in-center dialysis patients.

‘Abstract did not report the patients’ methods of dialysis.

KEY: A = randomized clinical trial that employed placebo or untreated control; C = nonrandomized trial in which a before and after

effect was examined; CAPD = continuous ambulatory peritoneal dialysis; HCT = hematocrit; HD = hemodialysis;

IV = intravenous; kg = kilogram; NA = not available; PD = predialysis; SC = subcutaneous; TIW = three times weekly.
Chapter 2–Clinical Significance of Recombinant Erythropoietin - 53

istered product is stored in the muscle tissues and

released into the blood stream over a period of time,

in contrast to intravenous product, which is released

into the blood stream immediately upon injection.

The benefit of very high peak serum levels after an

intravenous injection seems to be questionable (105).

The differences in the doses used maybe the primary

reason for this phenomenon, however. In the final

analysis, additional randomized trials with control

groups in larger patient groups are needed to

compare the relative efficacy of these two routes.

Patients that perform dialysis at home are most

likely to self-administer recombinant erythropoietin

by the subcutaneous route. If the patient selfadministers the product correctly, there is every

reason to believe that the product will be efficacious.

Training to perform self-administration will most

likely come from the patient’s physician and will

include instructions on how to store the product (e.g.,

refrigeration), how to draw up the product from the

vial using sterile technique, and how to inject the

needle. In addition, it will be important for patients

that self-administer the product to have their

hematocrit and iron stores checked regularly (17).

Evidence of the efficacy of self-administration of

recombinant erythropoietin by patients is limited to a

few reports. In one before and after report, 5

hemodialysis patients (ages 18-55) who selfadministered recombinant erythropoietin intravenously through the arteriovenous graft over a 3-

month period had a mean rise in hematocrit from

18.4 percent to 32.6 percent (110). None of the

patients required further blood transfusions. In

another before and after report, 17 patients maintained their target hematocrit by administering

recombinant erythropoietin subcutaneously at home

(82). The dose used to maintain the target

hematocrit was tailored to the individual patient’s

needs. Finally, in a study comparing 55 in-unit

dialysis patients treated intravenously with an

average of 101 units/kg with 31 home dialysis

patients, the home patients were able to maintain for

21 months the hematocrit level attained in the

dialysis center in a self-administration program with

intravenous doses of 108 units/kg of recombinant

erythropoietin (18).

Effect of Recombinant Erythropoietin

on Quality-of-Life in Chronic

Renal Failure Patients

The efficacy of recombinant erythropoietin

therapy may be measured by its impact on an individual’s quality of life, a multifaceted, multidimensional concept. The quality of life may be

assessed by measures that relate to such aspects as

ability to work, level of functional impairment, wellbeing, psychological attitude, and life satisfaction

(59).

The quality of life of chronic renal failure patients

may be affected by several factors, such as the

severity and number of the patient’s underlying

illness or illnesses, the treatment approach (dialysis

vs. transplantation), the symptoms associated with

anemia of chronic renal failure, and the characteristics of the dialysis and transplant centers, since

patients at certain centers seem to be better rehabilitated than those at other centers (59).

The symptoms of anemia may impair the wellbeing and functioning of dialysis patients. Hypoxia

due to anemia associated with chronic renal failure

often leads to persistent lethargy, decreased exercise

tolerance, poor appetite, and decreased sexual performance. From a theoretical point of view, any

increase in the hematocrit should result in increased

central and peripheral oxygen availability and

enhance exercise capabilities and the quality of life.

Because of the many medical and social problems

confronting dialysis patients, however, alleviating the

symptoms of anemia may only partially contribute to

an improved quality of life. Treatment for this

anemia, generally consisting of blood transfusions,

can produce adverse reactions that effect patients’

quality of life. In addition, therapies used to treat

other underlying medical conditions, such as drugs,

may have debilitating side effects. For example, drug

therapy for treating diabetes and hypertension may

produce side effects such as lethargy or sexual

impotence, which are also common symptoms of

anemia.

The time involved in undergoing regular dialysis

treatments at home or traveling to a center to receive

such treatments may prevent dialysis patients from
54- Recombinant Erythropoietin: Payment Options for Medicare

developing and maintaining a regular work schedule.

This can affect a patient’s perception of self-worth

and result in financial hardships that affect lifestyle.

Thus, when the efficacy of recombinant erythropoietin is considered, it is important to recognize that

multiple factors contribute to the quality of life of

dialysis patients.

With one exception, the information on recombinant erythropoietin’s impact on quality of life

comes primarily from randomized or before and

after studies of hemodialysis patients in which there

was no control group. These quality-of-life studies

suggest that correction of anemia associated with

chronic renal failure with recombinant erythropoietin

can improve the functional abilities of chronic renal

failure patients (see table 2-8).

One randomized study examining the quality-oflife involved 118 hemodialysis patients. After 6

months of treatment with recombinant erythropoietin, clinically and statistically significant improvements in the sickness impact profile (p< 0.02), stress

test (p< 0.0018), and other quality-of-life indicators

were noted (physical symptoms, fatigue, relationship

with others) as compared with the control group

(26).

A randomized study evaluated quality-of-life

changes in 17 predialysis patients (58). Investigators

described subjective improvement in well-being and

appetite in the patients. Predialysis patients continued to work and be active, even though their renal

functions continued to deteriorate. The quality of

life of patients who were not on therapy was not

reported, however, making comparison to the treated

group impossible.

A recent before and after study examining the

relationship between recombinant erythropoietin

therapy and quality of life in 333 hemodialysis

patients supports earlier findings. Statistically significant increases in hematocrit were noted in

patients treated with recombinant erythropoietin

over a 4.4 month period and sustained over an

average of 10.3 months (p < 0.001). Improvements

in the quality of life were measured by the Karnofsky

index (p < 0.01) and subjective quality-of-life

indicators, such as well-being (p < 0.004), psychological affect (p < 0.03), and life satisfaction (p c

0.017). The use of the Nottingham Health Profile

produced mixed results, with statistically significant

improvements in some measures (energy, emotional

reaction) and not in others (pain, sleep, mobility).

The number of patients who returned to work after

the 10.3 months of treatment was not significantly

different from those working at baseline (61).

After the first period, patients reported statistically significant improvements in activity and energy

levels (p<0.01), which were correlated with statistically significant increases in hematocrit over baseline

(p< 0.01). Patients reporting low energy levels at the

beginning of the study dropped by half after the first

period of the study. Improvements reported after

the first period of the study were maintained through

the entire study period of about 10 months.

A Nottingham profile index was used to measure

patient energy levels. A measure of O indicated “no

limits” on energy levels, while a measure of 100 indicated complete limits. The patients’ average energy

level limitation score at the beginning of the study

was 47, fell to 31.5 after the first phase of the study,

and measured 17.7 at the end of the study (p< 0.01).

Information on the mean age and other underlying

disease states in the patients was not reported. The

increase in energy levels was not reported by age

group.

A Karnofsky score index was used in another

before and after to measure the rehabilitation of 29

dialysis patients (64). (A score of 91-100 indicates

ability to engage in full activities without significant

effort, while 81-90 indicates ability to engage in usual

activities with some effort.) The mean score for the

patients increased from 76 to 86.6. Although the significance level was not included, a statistically significant increase in the score was reported for all

patients in age groups 20 to 69, but not for those

patients aged 70 or over.

In summary, reports to date suggest that recombinant erythropoietin has the potential to improve

dialysis patients’ quality of life. Long-term studies in

the chronic renal failure population are needed, and

the relationship between recombinant erythropoietin
Chapter 2--Clinical Significance of Recombinant erythropoietin - 55

Table 2-8-Quality-of-Life Studies

Study Number of Physiologic Quality-of-Life Significance

design patients results results level (p value) Sourcea

A

c

c

c

c

c

c

c

c

c

118 HD

333 HD

68 HD

130 HD

45 HD

37 HD

8 HD

17 HD

17 HD

17 PD

After 5 months

hemoglobin averaged

7.4 g/all for the

placebo group,

10.2 g/all for one

treatment group

(target 95-10.0

g/all), and 11.7

g/all for the other

treatment group

(target 11.5-13.0

g/all).

Sickness Impact Profile improved, 0.02

stress test improved 0.018

Canadian EPO Study Group, 1989 (26).

Karnoksfy score increased from

27 percent to 48 percent.

Ability to work:

-patient reported

-staff reported

Subjective quality of life

-well-being

-psychological affect

-life satisfaction

0.0l b Hematocrit rose

from less than

30 to 35 after 4.4

months and stayed

at 34 after 10.3

months.

Evans, et al., 1990 (61).

0.69

0.93

0.004

0.03

0.017

Eschbach and Adamson, 1989 (54)c.

Evans, et al., 1989 (60)C.

Hematocrit rose

from 22.9 to 33.5.

Increase in energy, body temperature,

appetite sleep, hair growth,

sexual interest.

NA

Hematocrit rose

from 23.7 to 34.2

(after 5.6 months)

to 33.9 (after 9.7

months)

Increase in categories of no complaints,

activity energy, and energy limit,

as measured by Nottingham

profile.

0.01

Hematocrit rose from

19.3 to 39.8

Delano, et al., 1989 (42)C.

Gibilaro, et al., 1989 (64)C,

Appetite, cold tolerance, sleep, sex NA

function, skin color, hair growth

increased.

Hematocrit rose from

19.3 to 31.5. 32

patients remained in

study for 2 years.

Well-being appetite, sexual function NA

increased. Karnofsky score used to

measure increased range of activities.

Hematocrit rose

from 17.3 to 33.3.

Improvement in exercise capacity 0.002 Meyer, et al., 1988 (100).

Nissenson, et al., 1989 (106)d.

Wolcott, et al., 1989 (173)d

.

Eschbach, et al., 1989 (58).

Hematocrit rose

from 22.7 to 36.6.

Central nervous system functional status NA

increased.

Statistically significant

increase in hematocrit

noted.

Conceptual and visual motor skills NA

increased.

Statistically significant

increase in hematocrit.

Well-being and appetite increased. NA

a Numbers in parentheses refer to list of references.

b P values from baseline to 10.3 months.

c This study reported on a subset of the 333 patients in Evans, et al., 1990 (61).

Nissenson, et al., 1989 (106) and Wolcott, et al., 1989 (173) report on the same 17 patients.

KEY: A = randomized clinical trial that employed placebo or untreated control; B = randomized clinical trial that did not employ

placebo or untreated control, but a before and after effect was examined; C = nonrandomized trial in which a before and after

effect was examined; HD = hemodialysis; NA = not available; PD = predialysis.
56- Recombinant Erythropoietin: Payment Options for Medicare

therapy and the ability to work in the case of

predialysis patients or ability to return to work in the

case of dialysis patients needs to be explored.

Determining the long-term effect of recombinant

erythropoietin on the quality of life is important

because a number of factors contribute to this

dimension. Recombinant erythropoietin may

produce initial short-term improvements in patients

that may or may not persist in the long-term. Finally,

future studies should report impact on quality of life

by age group, particularly the elderly, since they will

constitute a larger percentage of the dialysis population in the near future, and previous studies have

presented little information on this age group.

The potential to undertake quality-of-life studies

increases as the number of patients on long-term

recombinant erythropoietin therapy increases. The

ability to find patients that are not being treated with

recombinant erythropoietin for the purpose of

serving as a control group for such studies, however,

may become difficult or impossible. Patients may

have to serve as their own control group, or the

results from past quality-of-life studies of dialysis

patients may serve as potential controls.

Other Potential Uses of

Recombinant erythropoietin

The literature suggests that recombinant

erythropoietin may be effective in correcting anemias

associated with other medical conditions. Because

insufficient endogenous erythropoietin production

may only partially contribute to these anemias,

careful evaluation of the efficacy of recombinant

erythropoietin must be made for each condition.

Studies of the safety and efficacy of recombinant

erythropoietin in other medical conditions are in

various stages. Furthest along in the process are

studies in anemia: associated with HIV, which is

responsible for acquired immunodeficiency syndrome (AIDS). Ortho Pharmaceutical Corporation

submitted a Product Licensing Application (PLA) to

FDA for this indication in February 1989 (l).

Anemias Associated With the Human

Immunodeficiency Virus (HIV)

Anemia associated with HIV appears to be

prevalent among infected people. Recent data

indicate that up to 71 percent of patients with AIDS

are anemic (hemoglobin value of less than 14 g/dl).10

In addition, patients with other HIV-related

symptoms also have some level of anemia. For

example, about 63 percent of AIDS patients with

Kaposi’s sarcoma,

1 1

 20 percent of patients with

AIDS-related complex (ARC),12 and 8 percent of

patients who are infected with the HIV virus and

asymptomatic, are also anemic (175).

In contrast to anemia associated with chronic

renal failure, multiple factors are responsible for

anemia in people infected with HIV. These include

insufficient bone marrow stores as an adverse effects

of drug treatment. For example, anemia is a

common complication of therapy with zidovudine

(37), the only drug currently approved as effective 13 FDA has approved zidovudine for against HIV.

treating AIDS and ARC and, more recently for

retarding progression of the disease in certain

infected people who have not yet developed

symptoms (163).

10 Hemoglobin is the oxygen-carrying protein of red blood cells

and can also be used as a measure of anemia. Normal

hemoglobin values in men are 14-18 g/all (grams/deciliter) and

12-16 g/all for women (12).

11 Kaposi’s sarcoma is a multifocal, spreading cancer of connective tissue, principally involving the skin; it usually begins on

the toes or the feet as reddish blue or brownish soft nodules and

tumors. Previously seen in older men of Jewish or Mediterranean descent, Kaposi’s sarcoma is now one of the opportunistic

diseases occurring in AIDS patients.

12 AIDS-related complex is a variety of chronic but nonspecific

symptoms and physical findings that appear related to AIDS and

that may consist of chronic generalized lymphadenopathy,

recurrent fevers, weight loss, minor alterations in the immune

system, and minor infections.

13 Zidovudine is the generic name for Retrovir, also known as

AZT.
Chapter 2--Clinical Significance of Recombinant erythropoietin - 57

A randomized study of AIDS patients treated

with AZT (1,500 mg/day) or placebo for up to 24

weeks indicates the extent to which AZT can cause

anemia. More than half of the 83 AZT-treated

patients (46) required transfusions during the

treatment period vs. only 15 of the 74 placebotreated patients (119).

One randomized study with a control group has

evaluated the efficacy of subcutaneously administered recombinant erythropoietin in 63 AIDS

patients taking zidovudine. The trial produced mixed

results; as one would expect, those patients with low

levels of endogenous erythropoietin responded better

than those patients with high levels. At the beginning

of the study, 23 of 29 patients receiving recombinant

erythropoietin required blood transfusions. At the

end of the study, 11 of these patients still needed

transfusions. In the control group of 34 patients, 27

required transfusions before the study and 21 still

required them after the study. Some patients in the

treated group reported improvement in energy level,

work capacity, and quality of life (108).

The results of another randomized trial support

the notion that recombinant erythropoietin corrects

anemia associated with zidovudine treatment in only

a subset of the population, primarily those individuals with low endogenous stores of erythropoietin.

There were statistically significant changes in the

hematocrit level (p=0.0002) from baseline for

patients with low circulating erythropoietin levels

(less than 500 milliunits/milliliter) vs. placebotreated patients. Alternatively, patients with high

levels (greater than 500 milliunits/milliliter) did not

have a statistically significant increase in hematocrit,

nor was the increase in hematocrit statistically different from the placebo-treated patients in the same

group (174).

In contrast to chronic renal failure patients

treated with recombinant erythropoietin, there was

little relationship between hypertension, seizures,

and the use of recombinant erythropoietin in HIVinfected patients (174).

Anemia Associated With Rheumatoid Arthritis

Another potential use of recombinant erythropoietin is to treat anemia associated with rheumatoid

arthritis, a progressive, chronic, inflammatory disease

that can lead to irreversible joint damage. Anemia

associated with arthritis usually results from the bone

marrow’s inability to respond to endogenous erythropoietin (23). Therefore, exogenous erythropoietin

may have limited therapeutic use in this condition.

In one observational study, 2 patients with

rheumatoid arthritis treated over a 5-month period

(with 100-200 units/kg intravenously three times a

week) experienced an increase in hematocrit level

from 32 and 30 percent to 43 and 39 percent, respectively, during the treatment period (98).

Autologous Blood Transfusions

Recombinant erythropoietin may be used for

patients who want to donate their own blood for

potential transfusions during elective surgery, commonly referred to as autologous blood transfusion.

The transfusion of homologous blood, or blood from

another person, may be associated with various

adverse effects, including rejection of the blood if

improperly matched and risk of transmission of

certain viral infections. The use of autologous blood

also reduces the demand on the nation’s blood

supply.

Current autologous blood donation averages only

2.2 units of blood over a 2-to 5-week period (141). In

addition, there is usually a significant time lag

between donations, which could delay surgical procedures. The American Association of Blood Banks

recommends a minimum hematocrit value of 34

percent and a 7-day period between donations of

blood from autologous donors (72). In a randomized

controlled study of 47 adults scheduled for elective

orthopedic surgery, either recombinant erythropoietin (600 units/kg 2 times a week intravenously)

or placebo was administered for 21 days. The mean

number of units of blood collected was 5.4 for the

group treated with erythropoietin and 4.1 for the

placebo group (p<0.05) (66).
58- Recombinant erythropoietin: Payment Options for Medicare

Other Anemias disorder of lipid metabolism (121), and in treating

The use of recombinant erythropoietin in cor- anemia of preterm infancy (87). No studies on

efficacy have been done in these conditions to date. recting cancer-related anemias is currently under

investigation. Cancer-related anemia usually results

from increased destruction of red blood cells and

decreased erythropoiesis due to kidney damage from

cancer treatments, such as radiation and chemotherapy. A recent abstract suggested that anemia of

cancer may be due to the malignancy itself or may be

caused by antineoplastic agents (101). The data suggested that both treated and untreated cancer

patients may have low levels of endogenous erythropoietin.

Recombinant erythropoietin has also been used

in treating anemia of Gaucher’s Disease, an inherited

Table 2-9-Adverse Reactions to

EVALUATION OF THE SAFETY OF

RECOMBINANT erythropoietin

Adverse Effects of

Recombinant erythropoietin

In evaluating the safety of recombinant

erythropoietin, it is important to distinguish among

those adverse effects that are attributable to the

product itself versus those that result from the

natural progression of chronic renal failure. For

example, both hypertension and seizures, adverse

effects attributable to recombinant erythropoietin,

Recombinant erythropoietin

Study Number of

design patients Adverse reactions reported Sourcea

A

B

14 PD

17 PD

Lim, et al., 1989 (92).

Eschbach, et al., 1989 (58).

A 375 HDb

The most frequently reported adverse reactions for all Sobota, 1989 (131).

patients were nausea, fever, chest pain, fatigue, pain,

dizziness, dyspnea, vomiting, upper respiratory infection.

92 percent of treated patients in randomized phases had one

or more adverse reactions vs. 83 percent untreated patients.c

The incidence of headache and clotting of placebo of the

access site appeared to be related to treatment.

An increase in antihypertensive medication was

needed in 3 treated patients.

14 of 17 patients were taking antihypertensives. 9 had an

increase in blood pressure with additional antihypertensives

needed. 2 originally normotensive patients needed

antihypertensives.

c 333 HDd

44 percent of normotensive patients (n = 71) developed

hypertension and 32 percent of the 71 patients needed

antihypertensives.

72 percent of hypertensive patients (n= 180) had an increase

in blood pressure, and 32 percent of the 180 patients

needed additional antihypertensives.

43 percent developed iron deficiency (would have been

20 percent greater if some patients were not iron

overloaded from blood transfusions).

5.4 percent had seizures (in 18 of 333 patients; 10 of 18

occurred in first 3 months of therapy).

Eschbach, et al., 1989 (56).

a Numbers in parentheses refer to list of references.

b The trial consisted of an initial randomized dose-response phase (n=131) without placebo control. Two later phases were randomized,

placebo-controlled (n=244). The total number of patients in study was 375.

c An adversereactionwas defined as any event that occurred to patients,whether relatedor unrelated to the intervention.

Of 333 patients in the study, data for 251 patients were sufficient to evaluate changes in blood pressure.

KEY: A = randomized clinical trial that employed placebo or untreated control; B = randomized clinical trial that did not employ

placebo or untreated control and a before and after effect were examined; C = nonrandomized trial in which a before and after

effect were examined; HD = hemodialysis; PD = predialysis.
Chapter 2--Clinical Significance of Recombinant erythropoietin - 59

Table 2-10-Percent of Patients Reporting

Adverse Reactions from

Recombinant erythropoietina

Treated Placebo

Adverse patients patients

reaction (n=200) (n= 135)

Hypertension . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.0 18.5

Headache . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.0 11.9

Muscle aches . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.0 5.9

Nausea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 8.9

Swelling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0 10.4

Access to graft

clotted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8 2.3

Seizure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 1.1

Cerebrovascular accident . . . . . . . 0.4 0.6

Table 2-1 l-Adverse Reactions to Recombinant

erythropoietin Per Patient Yeara

Total

Reaction treatedb

Placebo

Hypertension

Dialysis patients . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.69 0.33

Predialysis patients . . . . . . . . . . . . . . . . . . . . . . . . 1.70 3.28

seizure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0473 0.037

Clotting of arteriovenous graft ........ 0.249-0.273 0.59

a In U.S. and non-U.S. trials.

Levels of statistical significance are unavailable.

SOURCE: US DHHS, FDA, 1989 (160).

a Based on events reported in placebo-controlled studies in

patients with chronic renal failure. Levels of statistical significance are unavailable.

SOURCE: Amgen, Inc., 1989 (5); US DHHS, FDA, 1989 (160).

are common complications of chronic renal failure.14

In addition, it is important to detect any differences

in adverse reactions between predialysis patients and

dialysis patients, and differences in adverse reaction

between patients receiving recombinant erythropoietin by the intravenous route as compared with

the subcutaneous route.

Adverse reactions from recombinant erythropoietin therapy are reported in table 2-9. In chronic

renal failure patients using recombinant erythropoietin, hypertension is the most prevalent adverse

effect and seizures are the most serious adverse

effect. Iron deficiency also occurs frequently .15

Other side effects that have been reported include

headache, muscular pain, nausea, hyperkalemia,l6

and clotted access to the arteriovenous graft (160).

The potential for the development of hypertension with recombinant erythropoietin is important

because of the high rate of cardiovascular morbidity

14Up to 90 percent of patients in renal failure are hypertensive

(38). Overall, deaths from cardiovascular disease account for

more than half of all mortality in renal failure patients, whether

treated by dialysis or transplantation (113). Seizures occur in

approximately 5-10 percent of chronic renal failure patients (160).

lsChronic renal failure patients become iron deficient because

effective erythropoiesis with recombinant erythropoietin requires

iron.

16patients on recombinant e~hropoietin generally experience

an increase in appetite. Hyperkalemia, an increase in serum

potassium, results primarily from an increase in foods that are

potassium-rich. The condition, left untreated may cause cardiac

problems and muscular problems (91).

and mortality in chronic renal failure patients.

Although data in FDA’s Summary Basis of Approval

seem to indicate that there is a higher absolute

incidence of hypertension in treated than untreated

patients, it did not specify whether the difference is

statistically significant (see table 2-10). In addition,

table 2-11 indicates the incidence of adverse reactions per patient year among total U.S. and non-U.S.

treated patients vs. placebo. The incidence of hypertension per patient year was twice the rate in dialysis

patients as compared to placebo, but only half the

rate in predialysis patients.

The literature suggests that an increase in hypertension is most likely to occur in those patients who

are already hypertensive (28). Whether the development of hypertension is also related to the rate of

increase in hematocrit is inconclusive (40).17’

18 Since

ITIssues of dosing of recombinant erythropoietin are important

because the adverse reactions may be dose-related and the

product is expensive. The target hematocrit in the FDA-approved

labeling is 30-33 percent, which is lower than the hematocrit

targets of most of the clinical studies, The FDA Blood Products

Advisory Committee decided that the 30-33 percent range was a

more appropriate hematocrit range for chronic renal failure

patients because of potential side effects (62). Based on clinical

studies, Amgen, Inc. initially proposed a dose of 150 units/kg 3

times weekly intravenously. FDA proposed a 50 units/kg starting

dose. The committee thought the FDA-proposed initial dose was

too conservative, but thought Amgen’s recommended dose was

too high. The committee decided on a dose of 50-100 units/kg

(62).

18The increase in hypertension with recombinant erythropoietin

may be attributable to two factors: the increase in blood viscosity

resulting from an increase in red blood cells and an increase in

peripheral vascular resistance (52).
60- Recombinant erythropoietin: Payment Options for Medicare

most patients in the trials had their hypertension

controlled by drugs, there is little clinical information

to indicate the effect of recombinant erythropoietin

on patients with uncontrolled hypertension. Nor

have the studies reported the incidence of this side

effect by racial or age groups.

A major unresolved issue in predialysis patients

is whether exacerbation of hypertension from recombinant erythropoietin accelerates renal disease. The

correction of the anemic condition in predialysis

patients might result in better oxygen perfusion of

organs, such as the kidney; alleviate symptoms of

anemia; and increase the length of time the kidneys

are able to function. Some investigators have

observed that a further increase in blood pressure in

hypertensive patients does not necessarily accelerate

the progression of renal disease (58).

Although seizures clearly represent a significant

adverse reaction to recombinant erythropoietin, it is

not clear if the overall seizure rate in patients treated

with recombinant erythropoietin is different from

those treated with placebo or not treated at all. The

rate of seizures in treated patients appears to be

slightly higher in treated patients, as indicated in

table 2-10; however, statistical significance data are

unavailable. According to the FDA’s Summary Basis

of Approval, the seizure rate in treated vs. untreated

or placebo-treated patients is the same; the rate is

higher in the first 90 days of therapy compared with

untreated or placebo-treated patients (160). There

was no apparent relationship found, however,

between the rate of rise of hematocrit and seizures

for chronic renal failure patients experiencing a

seizure during the first 90 days of treatment.

Finally, the rate of artervenous graft clotting was

almost twice the rate in the placebo group as compared to the rate range in the treated group.

According to the FDA’s Summary Basis of Approval,

the rate of graft clotting in patients treated with

recombinant erythropoietin was no greater than that

reported in two large independent surveys of

untreated dialysis patients (160).

It is unlikely that different types of adverse reactions would occur based on the route of administration of recombinant erythropoietin. There may be

some minor administration-related effects, such as

pain and swelling at the site of injection after a dose

of subcutaneous recombinant erythropoietin. There

is some evidence to suggest that, if adverse reactions

to recombinant erythropoietin are dose-related, then

incidence of adverse reactions can be minimized if

lower doses of recombinant erythropoietin can be

given by the subcutaneous route. A slower, steadier

increase in hematocrit by using low doses of the

intravenous route or by using the subcutaneous route

can allow clinicians to monitor response, adjust dose,

and avert any cardiovascular crisis, such as seizures,

if needed.

Based on clinical data available, and discussions

with clinicians, it appears that self-administration of

recombinant erythropoietin is relatively safe for

home dialysis patients. A small number of patients

successfully self-administered recombinant erythropoietin at home after only a brief explanatory session

by their physician (110).

In another study of home patients whose target

hematocrit level was attained and stabilized in the

dialysis facility, a dose of 50 units/kg was used to

maintain the hematocrit. Researchers in the study

cautioned that blood pressure should be wellcontrolled and measured 3 times daily in patients

that self-administer recombinant erythropoietin

(171). The nature and extent of any adverse reactions were not reported, however. Another study

compared the incidence of adverse reactions in 55

home hemodialysis patients who self-administered

recombinant erythropoietin with 31 patients who

received recombinant erythropoietin in a dialysis

facility. At an average dose of 101 units/kg, 9 of the

facility patients experienced seizures over 23 months,

and at an average dose of 108 units/kg, 1 selfadministration patient experienced a seizure. Data

on differences among the patient groups, which may

have accounted for different rates of adverse effects,

were not given. In another study, 2 patients that selfadministered recombinant erythropoietin subcutaneously had pain at the injection site (82). It

thus appears that home use of recombinant

erythropoietin is relatively safe, if a patient’s

hematocrit has been stabilized, and if patients are

provided instructions on how to properly administer

the product and monitor response.
Chapter 2--Clinical Significance of Recombinant Erythropoietin - 61

Recombinant erythropoietin

and Blood Transfusions

The use of recombinant erythropoietin to treat

anemia associated with chronic renal failure may

substantially reduce or obviate the need for periodic

blood transfusions. One nephrologist has estimated

that 25 percent of dialysis patients require periodic

or intermittent blood transfusions to maintain an

acceptable hematocrit level (57). Use of recombinant erythropoietin instead of blood transfusions

has multiple benefits. Although now relatively low,

the risk of contracting blood-borne infections, such

as HIV and various types of hepatitis, can be further

minimized. Measures adopted in recent years to

limit the spread of HIV through the nation’s blood

supply have minimized the risk of contracting these

viruses. In 1989, screening procedures for HIV

antibodies have lowered the risk of post-transfusion

HIV infection to between 1 in 40,000 and 1 in

250,000 per transfusion. Post-transfusion hepatitis B

infection occurs at the rate of 1 per 2,000 transfusions, and the risk associated with non-A, non-B

hepatitis (NANBH, some of which is hepatitis C) is

approximately 1 in 125 transfusions. The incidence

of NANBH should further decrease in the near

future with the development of a NANBH assay (4).

Eliminating or reducing blood transfusions may

also increase the number of dialysis patients who can

become candidates for successful renal transplantation. The development of transfusion-induced

antibodies is a major factor limiting dialysis patients

from receiving kidney transplants (27). Eliminating

or reducing the need for blood transfusions could

eliminate the development of these antibodies. In

the long term, given a sufficient supply of transplantable organs and patient preference for this

treatment, Medicare ESRD expenditures could decrease since expenditures for dialysis patients are

about three times as much as transplantation (45).

Despite the high -initial costs of transplantation,

lower costs of maintaining patients with functioning

transplants implies that Medicare recovers the costs

of transplantation in about 3 years. In addition,

transplant patients tend to have a better quality of

life than do dialysis patients.

Finally, the use of recombinant erythropoietin

could decrease Medicare’s expenditures for blood

and blood products. It is not evident, however, if the

use of recombinant erythropoietin as a substitute for

blood will ultimately reduce expenditures for the

Medicare program. Recombinant erythropoietin

may actually cost Medicare more than blood transfusions. Medicare covers 80 percent of the cost of

blood transfusions after a beneficiary has met a 3-

pint deductible under Part B of the program. That

is, the patient has to replace or pay for 3 pints of

blood before the program covers the cost of blood.

The cost of blood does not count toward the annual

Part B deductible, currently $75. In addition, blood

provided under Part B does not meet the 3-pint Part

A deductible (42 CFR 410.161).

SUMMARY OF SAFETY AND EFFICACY

OF RECOMBINANT erythropoietin

Recombinant erythropoietin administered

intravenously produces a dose-dependent rise in

hematocrit level and can reduce or eliminate the

need for blood transfusions in patients with anemia

associated with chronic renal failure. The number of

patient reaching a target hematocrit also depends

upon the dose. Current information suggests that

greater than 90 percent of patients will reach a target

hematocrit of 30 percent with a dose of 100 units/kg.

Some patients will reach the target with lower doses.

Further studies need to be done to evaluate longterm side effects and outcomes of therapy based on

age (e.g., the pediatric and elderly population), race

(outcomes among the various racial groups), and

other underlying disease states in chronic renal

failure patients. The effect of recombinant

erythropoietin on predialysis patients also needs to

be explored, that is, does the use of the product in

this group of patients have the potential to delay the

need for dialysis or does it accelerate the rate of

renal injury?

Although evidence suggests that subcutaneously

administered recombinant erythropoietin is efficacious, additional studies are needed to determine

whether lower doses may be used in lieu of currently

recommended doses, and whether lower doses can

minimize the incidence of adverse reactions.

Initial studies seem to indicate that the quality of

life of dialysis patients maybe improved with recom-
62- Recombinant Erythropoietin: Payment Options for Medicare

binant erythropoietin; however, additional studies are

being conducted to evaluate the long-term impact of

recombinant erythropoietin on the quality of life.

Many factors contribute to the quality of life of

dialysis patients, including the symptoms of anemia

and treatment for underlying disease states. In

addition, dialysis patients are generally taking drugs

for many of these underlying disease states, which

may have side effects that negate any positive impact

that can be attributable to recombinant erythropoietin. For example, lethargy and impotence are

common adverse reactions to antihypertensive

mediations. Studies also need to be done on recombinant erythropoietin’s ability to allow dialysis

patients to return to work. This factor may depend

more on current financial incentives for the patients

not to return to work than on their ability to work.

A notable number of patients developed hypertension during the course of clinical trials, a relatively

manageable adverse reaction to recombinant erythropoietin. Seizures appear to be the most serious

side effect, but the relative risk appears to be no

higher in treated patients than untreated patients.

This event may be related to the hypertensive state of

the patient and the rate of increase in hematocrit.

Available information does not indicate whether the

occurrence of adverse reactions in treated vs. nontreated patients, including hypertension and seizures,

is statistically significant. Hypertension and seizures

may also be associated with chronic renal failure.

Although recombinant erythropoietin has been

studied in patients since 1986, there are still a

number of outstanding issues that need to be

addressed related to dosing, side effects, and longterm effect on the quality of life. As additional

patients receive the product over a longer period of

time, and additional information is collected,

clinicians will be better able to address these and

other identifiable issues that relate to patient care.
Chapter 3

The Structure of the Marketplace

INTRODUCTION

A therapeutic product, such as a biologic,

becomes available in the health care marketplace

after many years of developing and researching the

product, testingit for safety and efficacy in humans

and animals, gaining marketing approval from the

Food and Drug Administration(FDA), and finally

developing a process for distributing and marketing it

to health care professionals and facilities.

This chapter describes the history of the development, production, and marketing of recombinant

erythropoietin in the United States. A complex set

of legal and regulatory forces are shaping the recombinant erythropoietin marketplace, including biotechnology patent issues, orphan product designations,

and licensing agreements among the various

manufacturers. Based on this information, this

chapter discusses the supply side of the market for

recombinant erythropoietin. The final sections of the

chapter outline arrangements for distributing the

biologic and discuss sources of demand for dialysis

patients and others.

HISTORY OF DISCOVERY

AND PRODUCTION

erythropoietin is an amino acid glycoprotein

hormone that is produced by the kidneys and liver in

humans and animalsl (102). Although the medical

significance of erythropoietin has long been recognized, a process to produce sufficient quantities of

pure erythropoietin for therapeutic purposes had

eluded scientists for almost 80 years.

It was first postulated in 1906 that erythropoietin

was the natural molecule responsible for the

regulation and control of red blood cell production in

the body (116,137). In 1957, it was discovered that

erythropoietin was produced by the kidneys and that

the anemia of chronic renal disease was caused, at

least in part, by deficiency of this renal hormone

(76).

IAlthough the kidney is the major producer of exythropoietin,

about 10-15 percent is produced by the liver (63).

Extended medical research on erythropoietin was

minimal, however, because of its scarce availability

from natural sources and the lack of a technique that

could sufficiently purify the compound for human

administration. Attempts to isolate and purify

erythropoietin from various sources yielded unstable,

biologically inactive preparations of the hormone.

Milestones in the development of recombinant

erythropoietin are listed in table 3-1. A major breakthrough for the potential production of erythropoietin for therapeutic use occurred in 1977, when

scientists developed a technique that isolated and

highly purified erythropoietin from the urine of

severely anemic patients (102). Although the

purification technique itself did not provide sufficient

material for therapeutic use, it lead to subsequent

work using genetic engineering.

In the 1980s, several biotechnology manufacturers

simultaneously pursued strategies to develop processes to produce recombinant erythropoietin for

therapeutic use. These included Amgen Inc. of

Thousand Oaks, California and Genetics Institute of

Cambridge, Massachusetts.

Amgen and Genetics Institute utilized biotechnology to develop a process to produce recombinant

erythropoietin for therapeutic use. Biotechnology is

the application of biological systems to technical and

industrial processes. It has been defined as any technique that uses living organisms or parts of living

organisms to make or modify products, to improve

plants or animals, or to develop microorganisms for

specific use (148). Biotechnology is now commonly

used by many industrial sectors, including plant agriculture, hazardous waste management, and human

therapeutics. In the pharmaceutical field it can be

substituted for conventional methods of making new

therapeutic entities by cloning cells that produce

human compounds and by producing large quantities

of scarce compounds. Pharmaceuticals made

through biotechnology are usually classified into one

of three categories: those that affect the immune

system, those that mediate human tissue repair, and

those that correct metabolic defects or alter metab-

-63-
64- Recombinant Erythropoietin: Payment Options for Medicare

Table 3-l-Milestones in the Development of Recombinant Erythropoietin

Date Milestone

1977

1983

1984

1984

Nov. 30, 1984

January 1985

Sept. 30, 1985

Oct. 8, 1985

April 1986

June 30, 1987

August 1987

October 1987

Oct. 27,1987

November 1987

May 17, 1988

July 1988

September 1988

February 1989

March 1989

June 1,1989

October 1989

December 1989

March 15,1990

Scientists discover a process that produce highly spurified erythropoietin, but a process for producing

significant quantities of the compound is still unavailable.

Amgen clones the gene for human erythropoietin.

Amgen and Kirin Brewery of Japan enter into a licensing agreement for recombinant erythropoietin.

Genetics Institute and Chugai Pharmaceuticals of Japan enter into a licensing agreement for

erythropoietin.

Amgen applies for patent covering its cell line that produces recombinant erythropoietin in Chinese

hamster ovary (CHO) cells.

Genetics Institute applies for patents covering erythropoietin and recombinant erythropoietin.

Amgen and Ortho enter into licensing agreement for recombinant erythropoietin.

Genetics Institute and Boehringer-Mannheim enter into a licensing agreement for recombinant

erythropoietin in European markets.

Amgen receives orphan drug designation for use of recombinant erythropoietin for anemia associated

with ESRD.

Genetics Institute patent granted.

Ortho receives orphan drug designation for use of recombinant erythropoietin for anemia associated

with ESRD.

Chugai Pharmaceuticals of Japan receives orphan drug designation for use of recombinant erythropoietin

for anemia associated with ESRD.

Amgen’s patent granted.

Amgen files a PLA and ELA with the FDA for use of recombinant erythropoietin for anemia associated

with ESRD.

Chugai Pharmaceuticals of Japan and Upjohn Company of Kalamazoo, Michigan form Chugai-Upjohn of

Rosemont, Illinois.

Ortho receives orphan drug designation for use of recombinant erythropoietin for anemia of preterm

infancy.

Chugai-Upjohn files a PLA and ELA with FDA for use of erythropoietin for anemia associated with

chronic renal failure.

Ortho files a PLA and ELA for use of recombinant erythropoietin for anemia associated with chronic

renal failure and for infection or treatment of human immonodeficiency virus (HIV).

Ortho receives orphan drug designation for use of recombinant erythropoietin for anemia associated with

HIV infection or treatment.

FDA approves Amgen’s PLA and ELA for use of recombinant erythropoietin (Epoetin alfa) for anemia

associated with chronic renal failure.

FDA informs Amgen that it has 7 years of market exclusivity for use of Epoetin alfa in anemia of chronic

renal failure (retroactive to June 1, 1989).a

Boston court rules that central claims of Amgen’s and Genetics Institute’s recombinant erythropoietin

patents are valid, and certain other parts are invalid.

Boston court orders Genetics Institute and Amgen to submit royalty-free cross-licensing agreement to

court within 60 days and resolve dispute over orphan product designations.

- -

aAmgen originally filed a PLA for the use of recombinant erythropoietin in the anemia of End Stage Renal Disease (ESRD). At the

request of the FDA, and prior to approval, this indication was expanded to chronic renal failure. The Office of Orphan Products

Development then awarded orphan drug status to Amgen’s Epoetin alfa for the broader indication of chronic renal failure (142).

KEY: ELA = establishment licensing application; PLA = product licensing application; ESRD = end stage renal disease.

SOURCE: Office of Technology Assessment, 1990.
Chapter 3–-The Structure of the Marketplace -65

olism unrelated to the immune system. Recombinant erythropoietin is classified as a recombinant

product for tissue repair, since replacement of red

blood cells is considered tissue regeneration (15).

The aspect of pharmaceutical biotechnology that

Amgen used to make recombinant erythropoietin is

genetic engineering, which is defined as the purposeful manipulation of an organism’s deoxyribonucleic acid (DNA) or hereditary material.2

Genetic engineering of recombinant erythropoietin is

a multistage operation requiring identification of the

gene that produces erythropoietin, isolation of the

gene, replication of the gene in an easily manipulated

microorganism, production of recombinant erythropoietin, and purification of recombinant erythropoietin in a stable, biologically active form (15).

Large-scale production of recombinant erythropoietin was accomplished through insertion of the

human erythropoietin gene into Chinese hamster

ovary (CHO) cells, which were then able to produce

recombinant erythropoietin (160).

Amgen entered into several licensing agreements

with other pharmaceutical manufacturers for recombinant erythropoietin, as indicated in table 3-2.3 For

example, it licensed its recombinant erythropoietin

rights in Japan to the Kirin Brewery in 1984. It also

entered into a licensing agreement in 1985 with the

Ortho Pharmaceutical Corporation, in Raritan, New

Jersey, a subsidiary of Johnson and Johnson (166).

Under the provisions of this agreement with Ortho,

Amgen retained the U.S. marketing rights to recombinant erythropoietin for anemia associated with

chronic renal failure in individuals requiring

z DNA is the molecule in chromosomes that is the repository of

genetic information in all organisms (with the exception of a

small number of viruses in which the hereditary material is

ribonucleic acid, known as RNA). The information coded by

DNA determines the structure and function of an organism.

3 In the legal context, a license is written authority granted by the

owner of a patent to another party empowering the latter to

make or use the patented article for a limited period of time or in

a limited territory (14). In a licensing agreement, a pharmaceutical manufacturer usually sells its rights to produce and

market a product or specific uses of a product to another

manufacturer in return for a fee and a royalty arrangement based

on sales of the product.

Table 3-2-Recombinant erythropoietin

Marketing Rights

Company holding

Company distribution/

holding patent Region marketing rights

Amgen Inc. USA (dialysis) Amgen Inc.

USA (non-dialysis) Ortho Pharmaceutical

Japan Kirin Brewery

Europe Ortho Pharmaceutical

Genetics USA Chugai-Upjohn

Institute Japan Chugai Pharmaceuticals

Europe Boehringer-Manheim

SOURCE: Retterson, 1989 (117); Sobota, 1990 (132).

dialysis, and Ortho obtained recombinant erythropoietin marketing rights for all other indications in

the United States, including anemia associated with

chronic renal failure for individuals who do not yet

require dialysis (predialysis). Ortho also gained the

rights to all uses of recombinant erythropoietin in

foreign markets other than Japan and China.4

Building on the 1977 purification technique

breakthrough, Genetics Institute developed a method

for producing erythropoietin in 1984. Genetics

Institute licensed its erythropoietin product rights to

the Chugai Pharmaceutical Company in Japan and to

the Boehringer-Mannheim Company in Europe

(127). In order to sell recombinant erythropoietin

in the United States, Chugai Pharmaceuticals of

Japan entered into a cooperative marketing

agreement in May 1988 with a major pharmaceutical

manufacturer, the Upjohn Company of Kalamazoo,

Michigan, to form the Chugai-Upjohn Company,

based in Rosemont, Illinois (see table 3-2).

The next steps in bringing recombinant

erythropoietin to market were for the manufacturers

to test the safety and efficacy of the product in

animals and humans and to submit the required data

to FDA for approval to market the product.

LIn March 1990, Amgen and Ortho were involved in binding

arbitration to settle disputes related to their 1985 licensing

agreement.
66- Recombinant Erythropoietin: Payment Options for Medicare

FDA APPROVAL OF RECOMBINANT

erythropoieti n

In order for a prescription drug or biologic to be

marketed in interstate commerce in the United

States, it must have FDA approval. A biologic is

defined as any virus, therapeutic serum, toxin,

antitoxin, or analogous product applicable to the prevention, treatment, or cure of diseases or injuries of

humans (21 CFR 600.3h).

The FDA approval process for new therapeutic

products, including biologics, involves a lengthy,

complex, and rigorous series of tests for safety and

efficacy (21 CFR 601.25dl). After tests in laboratory

animals indicate that a compound may have

therapeutic value in humans, three phases of clinical

trials are required prior to FDA approval (21 CFR

312.21).

Phase I trials involve the participation of a small

number of healthy volunteers or patients to

determine the safety of the product and appropriate

dosing ranges and intervals? The data obtained in

this phase should be used to design well-controlled,

scientifically valid studies in later phases. Phase II

trials include controlled clinical studies that involve

the participation of patients who have the disease the

product is supposed to treat. The purpose of these

studies is to determine the initial efficacy of the

product, dosing parameters in diseased patients, and

how the agent is metabolized and excreted by the

human body. Phase III trials include a series of controlled and uncontrolled studies in which a total of

several hundred to several thousand patients are

administered the product to gather additional

information about efficacy and safety. Phase III

studies also determine whether the product produces

a broader range of adverse effects than those

detected in the smaller Phase I and II studies. An

additional series of studies, known as Phase IV

studies, may be undertaken after the product is

marketed to determine long-term adverse effects that

may not have been detected during the first three

phases.

Sl%e number of participants required for each phase of clinical

trials depends on the numbers necessary to achieve sufficient

statistical power.

After the first three phases of clinical studies for

a biologic are completed, the manufacturer submits a

product Licensing Application (PLA) and Establishment Licensing Application (ELA) to the FDA.

A biologic cannot be marketed unless a PLA and

ELA are both approved by FDA. PLA approval is

based on safety and efficacy data generated from the

clinical trials. ELA approval is based on inspection

and certification by FDA personnel that the facilities

in which the biologic is to be produced are in compliance with FDA’s definition of good manufacturing

practices (21 CFR 601.10b).6

Amgen’s PLA and ELA for the use of recombinant erythropoietin for anemia associated with

end-stage renal disease (ESRD) were submitted to

FDA in October 1987 and approved June 1, 1989.7

FDA, however, approved the product for use in the

broader population of chronic renal failure, of which

ESRD is a subset.8 The brand name for Amgen’s

product is Epogen.

Ortho submitted a PLA and ELA to FDA in February 1989 for recombinant erythropoietin for

anemia associated with chronic renal failure and for

the anemia associated with human immunodeficiency

virus (HIV) infection and treatment (l). FDA has

not yet approved either application. The brand name

for Ortho’s product is Eprex (174).

Chugai-Upjohn submitted a PLA and ELA for its

recombinant erythropoietin in September 1988, and

neither has yet been approved (l). Chugai-Upjohn is

6According to regulations, licenses for the maintenance of

establishments for the manufacture and preparation of biologics

may be issued only upon showing that the establishment and the

products meet standards designed to ensure the continued safety,

purity, and potency of the products (42 USC 201).

I An inspection of the Amgen production facility was conducted

by the Center for Biologics Evaluation and Research on January

9-11,1989 (160).

8 FDA reasoned that ESRD is one phase along the continuum

known as chronic renal failure, and that chronic renal failure is

the more global term which adequately describes the spectrum of

renal insufficiency. Patients who are being dialyzed and patients

who are not being dialyzed may both be anemic and may require

transfusions, and with the development of recombinant

erythropoietin, may be candidates for treatment with the product

(159).
Chapter 3--The Structure of the Marketplace -67

seeking FDA-approval for the use of recombinant

erythropoietin for anemia associated with chronic

renal failure (l), and will use Marogen as the trade

name for its product (132).

FDA developed a nomenclature to distinguish

among the potential recombinant erythropoietin products of the various manufacturers. The term

epoetin is to be used for recombinant erythropoietin,

and a modifier, such as alfa, beta, gamma, etc., will

be added to identify the products of the various

manufacturers approved by the FDA (160).

Therefore, since Amgen’s recombinant erythropoietin was the first to be FDA approved, it is known

as Epoetin alfa. The next manufacturer’s product to

be approved by the FDA, if any, would be known as

Epoetin beta.9

RECOMBINANT erythropoietin

AND PATENT DISPUTES

Under the applicable U.S. laws, a patent maybe

issued to cover “any new useful process, machine,

manufacture, or composition of matter, or any new

and useful improvement thereof.” (35 USC 101).

The patentability of new synthetic pharmaceutical

entities is well established in the U.S. legal system.

The patent is a major mechanism by which

pharmaceutical manufacturers protect their

investment in research and development. Prior to

gAccordin to the upcoming edition of the United States

Adopted ames and the United States h Phannacopeia

Dictionary of Drug Names, Amgen’s product has been

designated Epoetin alfa and Chugai-Upjohn’s product Epoetin

beta, notwithstanding the fact that, by April 1990, FDA had not

officially given the designation of Epoetin beta to a specific

manufacturer’s product.

The FDA generally relies on USAN to adopt names for new

chemical entities and biological products. USAN is a private

organization sponsored by the USP, American Medical Association, and American Pharmaceutical Association and has been

engaged in the assignment of names to drugs since January 1964.

According to regulations, however, FDA retains the right to

publish official names of drugs in situations in which the USAN

or other official common name is unduly complex or is not useful

for another reason, or two or more official names have been

applied to a single drug, or to two or more drugs that are

identical in chemical structure or pharmacological action and that

are substantially identical in strength, quality, or purity (21 CFR

299c). It appears, therefore, that FDA will make the final

determinations of names for recombinant erythropoietin products.

1980, the U.S. patent office held that living organisms

were products of nature and outside the scope of the

office’s statutory subject matter. Based on this reasoning, the office did not grant patents on such products (148). This situation changed with a 1980

landmark Supreme Court decision, Diamond vs.

Charkabarty, in which the Court ruled that live,

microorganisms made by humans were patentable

(477 USC 303, 1980).

Uncertainty surrounding the actual protection

that a patent gives to biotechnology products continues to present potential barriers to further

innovation and commercialization in this industry

(148). The patent disputes that have developed

among Amgen, Chugai, and Genetics Institute are an

indication of the complexity and uncertainty of the

biotechnology patent law field.

On October 27, 1987, Amgen received a

patent on the intermediate product that is used to

make recombinant erythropoietin in CHO cells. It

applied for the patent on November 30, 1984.10

Genetics Institute received a patent on homogeneous

erythropoietin on June 30, 1987. It applied for the

patent on January 11, 1985.11 Also in January 1985,

Genetics Institute filed for a patent on recombinant

erythropoietin analogous to Amgen’s. Amgen,

Chugai, and Genetics Institute are all using recombinant technology to produce recombinant

erythropoietin in Chinese hamster ovary cells (48).

In October 1987, in a suit filed against both

Genetics Institute and Chugai Pharmaceutical,

Amgen claimed that the companies were infringing

on its recombinant erythropoietin patent. Genetics

Institute and Chugai Pharmaceutical counter sued

Amgen on the same grounds. In a complex decision,

a Boston court ruled in December 1989 that certain

claims of each patent were valid, but that other parts

of each patent were invalid (6). The court concluded

that each manufacturer was infringing on parts of the

loAmgen’s patent is No. 4,703,008, “DNA Sequencing Encoding

erythropoietin.” U.S. Patent Office Application No. 675,298.

11 Genetics Institute’s Patent is No. 4,677,195, “Homogeneous

erythropoietin.” U.S. Patent Office Application No. 690,8S3.
68- Recombinant Erythropoietin: Payment Options for Medicare

other manufacturer’s patent. Genetics Institute,

which was producing recombinant erythropoietin in

the United States for sale in Europe, was infringing

on Amgen’s patent, and Amgen, which was

producing recombinant erythropoietin for sale in the

United States, was infringing on Genetics Institute’s

patent. Because Chugai was producing recombinant

erythropoietin in Japan, however, it was not

infringing on Amgen’s recombinant erythropoietin

patent. According to the court, U.S. patent protection for Amgen’s intermediate product does not

extend to production of recombinant erythropoietin

by another manufacturer in a foreign country. If

Amgen had a patent on the process by which it produced recombinant erythropoietin, or a patent on

recombinant erythropoietin itself, then the court

might have ruled differently.

The issue of whether U.S. patent protection on

intermediate products extends to production outside

the United States had been raised in another dispute

between Amgen and Chugai. In January 1988,

Amgen asked the U.S. International Trade Commission (ITC) to block Chugai Pharmaceutical from

importing recombinant erythropoietin from Japan on

the grounds that Chugai Pharmaceutical wa s

infringing Amgen’s U.S. patent. Chugai Pharmaceutical was making recombinant erythropoietin by a

process similar to Amgen’s and importing it from its

Japanese production facilities for use in U.S. clinical

trials (165).

In January 1989, the ITC held that its jurisdiction

did not cover the use of a patented product abroad

(165). Although Chugai Pharmaceuticals indeed

utilized a process similar to Amgen’s in the production of Chugai’s product, Amgen had a patent on

one ingredient that was essential to making recombinant erythropoietin, not on the process by which it

was produced. Therefore, Chugai Pharmaceutical

could sell recombinant erythropoietin in the United

States once it had an approved PLA and ELA for its

facility in Japan from FDA, even if Chuga i

Pharmaceutical was making the product by a process

that used Amgen’s patented host cells. If Chugai

produced recombinant erythropoietin in Japan by a

process that Amgen patented in the United States

and attempted to market it here, however, it would

indeed constitute patent infringement.

Some analysts have speculated that a crosslicensing agreement between the two manufacturers

will result from this decision (136). Cross-licensing is

the exchange of licenses by two or more patent

holders in order that each may use or benefit from

the patents of the other (14). Cross-licensing could

enable both Amgen to remain on the market and

Chugai-Upjohn to enter and remain on the market.

On March 14, 1990, a Federal court judge in

Boston ordered Amgen and Genetics Institute to

submit to the court a royalty-free cross-licensing

agreement with 60 days. The judge indicated that he

would issue an injunction to prevent the manufacturer who was noncompliant with his order from

making and selling recombinant erythropoietin in the

United States (168). The judge indicated that the

orphan product status of the manufacturers’ products

should also be resolved in the agreement (7).

These circumstances surrounding the issuance of

two patents on recombinant erythropoietin products

are examples of the evolving nature of this body of

law. It appears, however, that the granting of two

patents will result in multiple sources of recombinant

erythropoietin.

RECOMBINANT erythropoietin

AND THE ORPHAN DRUG ACT

The Orphan Drug Act of 1983 (Public Law 97-

414) provides economic incentives for pharmaceutical manufacturers (sponsors) to research,

develop, and market products for rare conditions.

The term rare disease or condition was defined in a

1984 amendment to the Act (Public Law 98-551) as

any disease or condition that 1) affects fewer than

200,000 persons in the United States or 2) affects

more than 200,000 persons in the United States and

for which no reasonable expectation exists that the

cost of developing and making available in the

United States a drug for such a disease or condition

will be recovered from sales.

FDA’s awarding of orphan status to a particular

sponsor’s product is made independently of FDA’s

approving the product. Before it submits a PLA to

the FDA, a sponsor must apply for orphan product

status to the Office of Orphan Products Development (69). Several sponsors may obtain orphan
Chapter 3--The Structure of the Marketplace -69

product status for the use of a particular product for

a particular condition; however, only that sponsor

that receives FDA approval first receives 7 years of

marketing exclusivity for that product for that condition. Although regulations to implement the

Orphan Drug Act have yet to be put in final form,

the Office of Orphan Products Development has

been operating within the following guidelines in

granting orphan product designations.

Several pharmaceutical manufacturers ma y

obtain orphan product designations for a product’s

use for a particular condition. Only the sponsor

whose product FDA approves for marketing first,

however, is awarded the 7-year market exclusivity for

that product for the approved use. FDA may grant

market exclusivity to two versions of the same

product if each applies for a different rare condition.

In addition, FDA may grant market exclusivity to two

products for the same condition, if FDA considers

them different products (69).

For the purpose of orphan product designation, a

sponsor makes the estimate of the patient population

at the time of submission of the application, and the

Office of Orphan Products Development reviews the

sponsor’s estimate. The Act does not currently

permit FDA to remove an orphan product designation if the patient population subsequently exceeds

200,000. Marketing exclusivity may be removed,

however, if the manufacturer falsified claims in

making application for the designation or is unable to

produce sufficient quantities of the product for the

patient population.

Amgen, Ortho, and Chugai all have orphan drug

designations for the use of recombinant erythropoietin in various medical conditions (see table 3-3).

Since Amgen’s recombinant erythropoietin was the

first to be approved by FDA, it was designated

Epoetin alfa and has market exclusivity for chronic

renal failure.12

Ortho’s product has received orphan designation

for anemia associated with ESRD, HIV, and infant

prematurity, and Chugai’s has received orphan designation for anemia associated with ESRD. Regardless of FDA’s decision about whether other companies’ products are different from Amgen’s, if

Ortho’s Eprex obtains FDA approval for anemia

associated with HIV or infant prematurity, Ortho

could receive 7 years of marketing exclusivity for the

IL Amgen’s original orphan product designation was for anemia

associated with ESRD. After FDA approved Epoetin alfa for the

broader indication of chronic renal failure, the orphan product

designation and market exclusivity were expanded to reflect this

broadened indication (142).

Table 3-3--Recombinant erythropoietin Products

with Orphan Drug Designations, March 1990

Orphan Sponsor holding PLA and ELA Status

condition designation filed

Anemia of ESRD Amgen (Epogen, Epoetin alfa)a

11/87 approved, 6/89

Ortho (Eprex) 2/89 pending

Chugai Pharmaceutical (Marogen) 9/88 pending

McDonnell-Douglas suspended

Organon-Teknika suspended

Anemia of HIV Ortho (Eprex) 2/89 pending

Anemia of infant Ortho (Eprex) clinical trials

prematurity

a Amgen’s orphan product designation is for use of recombinant erythropoietin for anemia associated with chronic renal failure

(142).

KEY: ELA = establishment licensing application; ESRD = end-stage renal disease; HIV = human immunodeficiency virus;

PLA = product licensing application.

SOURCES: Turner, 1990 (142); US DHHS, FDA, 1989 (161); 54 CFR 16295, April 21, 1989.
70- Recombinant erythropoietin: Payment Options for Medicare

approved indication, because the same product may

have orphan status for different rare conditions. By

April 1990, FDA had not determined whether

Chugai’s or Ortho’s product is different from

Amgen’s. If FDA finds either product structurally

different from Amgen’s, that company’s product

could theoretically be granted 7 years’ exclusivity for

anemia associated with ESRD or chronic renal

failure. FDA had not decided by April 1990 whether

the broader indication of chronic renal failure rather

than ESRD would be granted to Ortho’s or Chugai’s

product, if either was deemed different from

Amgen’s, was given FDA approval for the same

indication, and was granted market exclusivity (142).

Thus, independently of the resolution of legal disputes among the companies, FDA’s decisions

regarding product differentiation and market exclusivity have the potential to affect the number of companies in the U.S. market and the indications for

which they may market recombinant erythropoietin.

THE SUPPLY SIDE OF

THE MARKET FOR

RECOMBINANT erythropoietin

Since the FDA approved Epogen in June 1989,

Amgen has been the sole supplier of recombinant

erythropoietin for the U.S. market. Although

Amgen has held a monopoly on the U.S. sale of this

biologic, certain factors have limited its market

power. In the short term, Amgen has faced the

Medicare program as the dominant payer of recombinant erythropoietin. Not only does Medicare

command substantial leverage because of its

coverage of dialysis patients, but also Amgen has

been particularly dependent on Medicare revenue

because Epogen is the company’s first and so far its

only product on the market.

The dynamics of this market also promise to limit

Amgen’s influence. Given developments in the legal

and regulatory arenas, it is possible that in the near

future, the United States will have two additional

sources of recombinant erythropoietin: Ortho’s

Eprex and Chugai-Upjohn’s Marogen. This situation

illustrates several possible sources besides clinical

significance from which products may draw market

power: patents, exclusivity as an orphan product,

agreements to divide the market among competitors,

FDA approval for certain medical indications, and

other differentiation from competing products.

The very purpose of a patent is to encourage

innovation by granting new products a period free

from competition. For products developed through

biotechnology, this period of patent-protected

monopoly power appears to be shorter than for other

products. In the ease of recombinant erythropoietin,

Amgen and Genetics Institute have been challenging

each other’s patents. Unable to resolve the dispute

through negotiation, the parties face a court order to

reach an agreement to cross-license their rights

without payment of royalties. Although attention has

focussed on U.S. patents, the scope is properly international, with patents in Japan and Europe relevant

to the overall package.

The court order also charges the companies to

address another source of market power, FDA’s

grant of 7 years’ exclusivity to an orphan product.

Similar to patents, this period of market exclusivity

was intended to protect orphan products from competitors and thereby to stimulate the development

and testing of products for rare medical conditions.

Controversy surrounds the appropriate scope of the

condition considered rare and the estimate of the

population afflicted. Thus, Chugai disputes the

validity of the exclusivity granted to Amgen’s

Epogen, and Amgen opposes FDA’s grantin g

Chugai’s Marogen exclusivity. Even more basic is

the advisability of granting exclusivity to a product

that two or more companies are developing for the

same condition. In the case of human growth

hormone, FDA’s grant of exclusivity to more than

one company, on the grounds that different structures rendered the products different entities, has

allowed competitors to enter the market (10).

Both Amgen and Genetics Institute have used

licensing agreements with other firms to segment the

market, both domestic and international. These

agreements may divide the market by medical

indication, such as Amgen’s retaining rights to the

U.S. dialysis market and licensing rights to the

predialysis population to Ortho. Or companies may
Chapter 3--The Structure of the Marketplace -71

divide the market geographically, such as Genetics

Institute’s licensing of Boehringer-Mannheim for the

European market. Especially agreements pertaining

to different medical indications may prove difficult to

enforce. As described below, physicians may prescribe different brands interchangeably.

FDA approval of a product for certain conditions

offers another related route to gain market power.

FDA approval allows a manufacturer to segment the

market, since a company may promote its product

only for approved indications. Ortho’s Eprex has

applied for approval for anemia associated with HIV

and with chronic renal failure.

Like the other bases of market power, this one is

also subject to encroachment. Chugai, for example,

has applied for approval for anemia associated with

end-stage renal disease, a medical condition that is a

subset of Amgen’s approved indication, anemia of

chronic renal failure. Perhaps even more telling, the

indications for which FDA approves different brands

of recombinant erythropoietin are unlikely to restrict

their clinical uses. Although FDA approves a

product only for a specific indication, physicians and

other providers may use it for a different indication,

especially if there are economic incentives and it is

clinically efficacious to do so. For example, even if

Eprex becomes the only brand approved for anemia

associated with HIV, physicians may prescribe

Epogen or Marogen for the condition. Similarly, it

may become common practice for physicians to use

recombinant erythropoietin to increase autologous

blood donations or to treat anemia associated with

cancer therapy even before FDA approves these

indications. To the extent that physicians do not

restrict their use of a particular brand of recombinant erythropoietin to the indication for which it

was approved, any market power that brand may

have derived from FDA approval for a specific

indication will be eroded.

A product may also gain market power through

other methods of differentiating itself from competitors, such as by physical characteristics or through

brand loyalty. By catering to the needs of different

users, manufacturers attempt to segment the market

and thus support higher prices and gain greater

revenue. This is an effective strategy for increasing

profits only to the extent that it outweighs the

advantages of serving a larger share of the market.

Manufacturers of recombinant erythropoietin are

already adding features to differentiate their products, such as Marogen’s use of a powder in contrast

to the liquid form of Epogen and Eprex. Manufacturers may vary the volumes of the product’s containers; some buyers may prefer large containers and

others small.

Promotional activities may seek to gain a larger

market share and users’ commitment to a certain

brand. As the first brand on the market, Epogen

may acquire brand loyalty independent of Amgen’s

promotional activities. Brand loyalty, however, can

be eroded with price concessions and other benefits

offered by competing brands.

DISTRIBUTION OF RECOMBINANT

erythropoieti n

Recombinant erythropoietin is currently provided

to patients in dialysis facilities (hospital-based or

free-standing) and physicians’ offices. If FDAapproved indications increase beyond chronic renal

disease and if legislation is enacted to allow

Medicare coverage for self-administration of this

biologic, then pharmacies and dialysis distributors

(when serving home dialysis patients) may also

become providers. Providers share the common

functions of administering or dispensing recombinant

erythropoietin to patients and submitting claims to

Medicare carriers or fiscal intermediaries, but only

physicians and dialysis facilities make decisions about

use.

Although manufacturers, wholesalers, and other

intermediate suppliers may distribute recombinant

erythropoietin to providers, Amgen has been selling

only to wholesalers, not directly to providers. Intermediate suppliers include wholesalers, dialysis distributors (when serving dialysis facilities), pharmacies (when serving physicians), and other suppliers

to physicians. Dialysis distributors specialize in

equipment and other supplies relating to dialysis.

Physician suppliers also deal in a wide range of products. Unlike providers, manufacturers and intermediate suppliers do not deal directly with patients and

are not responsible for billing Medicare. Although
72- Recombinant erythropoietin: Payment Options for Medicare

the unit cost of recombinant erythropoietin to each

provider is equal to the sum of the manufacturer’s

price and the intermediate supplier’s markup, the

manufacturer’s price is by far the larger component.

Chains of dialysis facilities maybe large enough

purchasers to bypass intermediate suppliers and

obtain a product such as recombinant erythropoietin

directly from the manufacturer. smaller organizations are by far more likely to purchase products

through wholesalers or dialysis distributors. Hospital

pharmacies, which often jointly purchase through a

buying group that deals with pharmaceutica l

wholesalers or directly with manufacturers, usually

supply hospital-based dialysis facilities. Physician

providers often obtain products from physician suppliers or pharmacies. Independent pharmacie s

would be likely to obtain a product such as recombinant erythropoietin from wholesalers, whereas

large chains might purchase it directly from the

manufacturer. Dialysis distributors would obtain the

product either from manufacturers or pharmaceutical wholesalers.

Medicare beneficiaries now receive recombinant

erythropoietin primarily from dialysis facilities and

also from physicians’ offices. If legislation is enacted

enabling Medicare to cover the self-administration of

recombinant erythropoietin, many home dialysis

patients may choose that alternative. Home dialysis

patients could obtain recombinant erythropoietin

from dialysis facilities, dialysis distributors, or, if new

arrangements were made, from physicians’ offices or

pharmacies (see ch. 4 for current policies). If selfadministration was covered, Medicare beneficiaries

in the predialysis phase of chronic renal failure or

with future medical conditions that might b e

approved could also obtain recombinant erythropoietin from physicians’ offices or from pharmacies.

THE DEMAND SIDE OF

THE MARKET FOR

RECOMBINANT erythropoietin

At present, Medicare is by far the dominant payer

for recombinant erythropoietin therapy. If FDA

grants approval for indications besides anemia associated with chronic renal failure, Medicare’s leverage

in the market will probably diminish, as other payers

become more prominent. In addition to Medicare,

other Federal Government programs or agencies,

such as Medicaid and the Departments of Veterans

Affairs and Defense, also purchase or pay for recombinant erythropoietin. If Medicare acted in concert

with these other Federal programs or agencies, its

market leverage would be reinforced.

Estimates of the patient populations that might

use recombinant erythropoietin range widely .

According to most estimates of current patients,

dialysis patients who are anemic comprise the largest

group, with estimates from about 59,000 in 1984 to

about 92,000 in 1990 (see table 3-4) (69,103,156).

The great variation in estimates of anemic

patients in the predialysis phase of chronic renal

failure reflects uncertainty about the number in the

predialysis phase and about the proportion who are

anemic.

13 Estimates of people in the predialysis

phase range from 71,000-110,000 (174) to 93,000

(164), to somewhat over 230,000 (68), to over 2

million (41). Applying estimates of the percentage of

people who are anemic to these figures yields,

respectively, 9,000-18,600 (10-20 percent anemic)

(51,164), 23,400 (10 percent) (68), 31,200-48,400 (44

percent) (174), and 740,000 (35 percent) (29) (see

table 3-4).

Although information is not available to assess

fully these estimates, it is likely that the estimate of

the predialysis population, made by the Degge

Group, Ltd., for Chugai-Upjohn, is too high. For

example, the numbers of individuals with different

comorbidities were summed to derive an estimate of

the total symptomatic predialysis population. Since

individuals are likely to have more than one of these

comorbidities, summing numbers for each comorbidity will overstate the total. This factor, however, does

not fully explain the large difference between the

Degge Group’s estimate and the other estimates.

For example, according to the Degge Group’s study,

the largest comorbidity, diabetic nephropathy, comprised an estimated 1.4 million people. If only these

people are considered and if a more conservative 20

percent rather than 35 percent are assumed to be

13 As for dialysis patients, not all predialysis patients who are

anemic may be candidates for recombinant erythropoietin

therapy (see ch. 2).
Chapter 3--The Structure of the Marketplace -73

Table 3-4-Estimates of Individuals With Selected Conditions Who Are Anemic

Range of Estimates

Condition Low Medium High

Dialysis Patients. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58,900a 92,000 b

Predialysis Chronic

Renal Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000-18,600 C

23,400 d 740,000f

31,200-48,400 e

AIDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000g

aBased on a 1984 estimate of dialysis patients submitted by Amgen to FDA (69) and an estimate that 75 percent of them are anemic,

which was calculated from 1989 hematocrit level distributions obtained from National Medical Care, Inc. (103).

bAn estimate of the total dialysis population was derived by projecting Medicare dialysis patients, who constitute about 93 percent of the

total, to 1990 (46) and adding the remaining 7 percent, who are non-Medicare patients (156). The estimate othat 75 percent of the total

are anemic was based on 1989 hematocrit distributions from National Medical Care, Inc. (103).

c

Estimate of predialysis population from the National Center for Health Statistics (NCHS) (164) and estimate of 10-20 percent of

predialysis population as anemic by Eschbach (51). The NCHS figure, 93,000, was based on 1983 discharges from short-stay nonfederal

hospitals for whom chronic renal failure, ICD-9-CM Code 585, was listed as a diagnosis. It should be noted that an individual with

chronic renal failure may have multiple hospitalizations in a given year, and individuals with this condition who were not hospitalized

were excluded.

‘Estimate of about 230,000 predialysis patients of whom 10 percent were estimated to be anemic (68).

‘Based on estimates from a survey of randomly selected nephrologists before recombinant erythropoietin was approved: 71,000-110,000

predialysis patients of whom 44 percent had symptomatic anemia. Of these 44 percent, respondents thought 40 percent would be candidates for the biologic (174).

‘Based on an estimate of over 2 million individuals with symptomatic chronic renal failure who are predialysis (41) and an estimate that

35 percent are anemic (132). The number of individuals with symptomatic chronic renal failure was based on prevalence estimates for

this condition among the several comorbidities with which it is commonly associated. The percent anemic was based on an estimate of

those with the condition who have a blood hemoglobin less than 10 g/all or hematocrit less than 30.

g calculated from an estimate of people living with AIDS in January 1990 (158) and the percent of these likely to become anemic subsequent to zidovudine use (119).

SOURCE: Office of Technology Assessment, 1990.

Table 3-5-Projections of Medicare-Eligible Dialysis Patients Who Are Candidates

for Treatment With Recombinant erythropoietin by Age Group, 1990-1995a

Age group 1990 1991 1992 1993 1994 1995

0-14 . . . . . . . . . . . . . . 607

15-24 . . . . . . . . . . . . . . 3,021

2.5-34 . . . . . . . . . . . . . . 7,385

3544 . . . . . . . . . . . . . . 11,126

45-54 . . . . . . . . . . . . . . 13,470

55-64 . . . . . . . . . . . . . . 19,421

65-74 . . . . . . . . . . . . . . 19,717

> 75 . . . . . . . . . . . . . . 10,789

TOTAL . . . . . . . . . . . . . . 85,536

605

3,135

7,401

11,786

14,624

20,715

20,927

11,860

91,053

600

3,224

7,347

12,434

15,867

22,100

22,232

13,052

%,856

593

3,291

7,230

13,059

17,180

23,543

23,588

14,333

102,817

583

3,335

7,059

13,652

18$41

25,011

24,957

15,673

108,811

572

3,357

6,837

14,203

19,932

26,476

26,303

17,042

114,722

aBased on current treatment guidelines to use recombinant erythropoietin for a hematocrit of less than 30 percent.

SOURCE: Office of Technology Assessment, 1990. Based on data obtained from Eggers, 1989 (46) and National Medical Care, 1989

(103).
74- Recombinant Erythropoietin: Payment Options for Medicare

anemic, the estimate would still be relatively high,

280,000. There is some question, however, about the

number of people with diabetic nephropathy who

have symptomatic chronic renal failure. Although

the Degge Group assumed that, overall, 22 percent

of those with diabetic nephropathy have chronic

renal failure, estimates cited in the literature start at

10 percent (41).

FDA is reviewing Ortho’s PLA for anemia associated with HIV and, specifically for anemia associated with treatment with zidovudine. In January

1990, people living with acquired immunodeficiency

syndrome (AIDS) numbered about 50,000 (158).

Compared with untreated AIDS patients, about 34

percent more AIDS patients treated with zidovudine

at 1,500 mg daily experienced a 25-percent or greater

decline in hemoglobin levels from an initial level of

9.5 g/all or higher (119). About 17,000 people with

AIDS could thus be candidates for recombinant

erythropoietin. Although this figure is probably an

underestimate of people infected with HIV who

would be candidates for recombinant erythropoietin,

it is difficult to estimate this population as well.

About 12 percent of people with AIDS-related

complex had similar declines in hemoglobin levels

from zidovudine treatment. FDA has recently

approved zidovudine for infected people with CD4-

cell counts below 500, even if they are asymptomatic

(163). But people earlier in the progression of

disease have been less likely to develop anemia from

treatment. Moreover, the recommended dose of

zidovudine has been greatly reduced, from 1,200 mg

to 500-600 mg daily (24, 162). Over time, as the HIV

epidemic progresses, the population infected with

HIV and those who develop AIDS will increase, but

lower doses of zidovudine may reduce the likelihood

that treated patients will develop anemia and use

recombinant erythropoietin. Development of an

effective and safe therapy for HIV infection that does

not induce anemia would also lower the potential use

of recombinant erythropoietin among this population.

Although Medicare expenditures for recombinant

erythropoietin will most likely continue to increase,

over time Medicare’s share of the U.S. market will

undoubtedly decline. Besides growth in Medicare’s

ESRD population, Medicare’s share of the market in

future years depends on FDA approval of additional

indications, the sizes of the additional population,

the proportions of these populations that are Medicare beneficiaries, and the extent to which other

third-party payers cover recombinant erythropoietin.

Only for Medicare’s dialysis population were data

sufficient to make projections for future years.

Future estimates of Medicare dialysis patients

depend on several factors: the number of patients

who initiate treatment in any one year; the number

of patients who have a successful kidney transplant in

each year and no longer need dialysis; the number in

each year who have a failed transplant and must

return to dialysis; and the number of patients on

dialysis who die. Using these factors, Eggers

developed a model that projects the number of total

ESRD, dialysis, and transplant patients to the year

2000 (46). For each projection year, a low, midline,

and high estimate of each population component was

provided. OTA used Eggers midline projections of

the dialysis component, to the year 1995, to estimate

the number of beneficiaries on dialysis who will be

candidates for treatment with recombinant erythropoietin (see table 3-5).

The calculations in table 3-5 assume that all

dialysis patients with a hematocrit level of less than

30 will be eligible for treatment. The proportions, by

age group, of dialysis patients with hematocrits below

30 were obtained from National Medical Care

(NMC), the largest chain of U.S. dialysis facilities

(11). These proportions were applied to Eggers’

projections to generate the estimates in table 3-5.

The information from NMC pertained to the largest

Medicare beneficiary and patient group for whic h

data were available; NMC treats about 20 percent of

Medicare dialysis patients and operates in over 30

States (11). There is no reason to expect that the

prevalence of anemia as an underlying condition in

dialysis patients will change, although use of recombinant erythropoietin during the predialysis phase

may increase the average hematocrit level of patients

starting dialysis.

The estimates in table 3-5 understate total

Medicare beneficiaries who may be candidates for

recombinant erythropoietin through 1995. These

estimates include neither beneficiaries in the

predialysis phase nor those with other indications

that might be approved by FDA.
Chapter 4

Medicare’s Current Payment Policies

INTRODUCTION

Since 1973, Medicare has paid for the medical

and related services for over 90 percent of the U.S.

population with End Stage Renal Disease (ESRD)

(147). The ESRD program has become costly for

Medicare. Expenditures have increased from $228

million in 1974 to an estimated $2.7 billion in 1989

(156). After a dialysis patient has met the annual

Medicare Part B deductible, either through payment

for dialysis or other covered medical services,

Medicare pays 80 percent of the cost of medical services, and the patient pays 20 percent. This chapter

describes Medicare’s payment policies for various

products and services provided to ESRD patients,

pharmaceuticals provided in different settings, and

recombinant erythropoietin itself. This background

information provides the basis for the analysis in

chapter 1 of payment options for recombinant

erythropoietin.

MEDICARE PAYMENT POLICIES

FOR ESRD SERVICES

Provisions for Medicare coverage and payment

for ESRD services were enacted in the Social

Security Amendments of 1972 (Public Law 92-603,

Sec. 2991). Congress provided that individuals with

ESRD, that is, permanent chronic kidney disease

requiring continuous dialysis or a kidney transplant

to maintain life, were deemed to be disabled and

entitled to Medicare coverage regardless of their age,

social status, or ability to pay (42 USC 246(l)(a)).

In 1988, 93 percent of the approximately 105,958

U.S. dialysis patients were approved for Medicare

coverage or had Medicare coverage pending (156)

(see table 4-l). Medicare coverage for dialysis

patients generally begins in the third month after the

month in which a regular course of dialysis is

initiated (42 CFR 426(l)(a).

ESRD patients are served by 1,915 kidney

transplant and dialysis centers, as listed in table 4-2.

The majority of these providers are dialysis facilities,

of which 63 percent are independent facilities and 37

percent are hospital based (156). The other 214 providers are kidney transplant facilities.

Table 4-l-Coverage for Dialysis-Related

Medical Services in the United States,

December 31, 1988

Number of Percent of

Coverage patients covered patients covered

Total Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,191 92.6

(Medicare approved . . . . . . . . . . . . . . . . . . . . . 91,820 86.6)

(Medicare Pending . . . . . . . . . . . . . . . . . . . . . . 6,371 6.0)

Department of Veterans Affairs.. 3,722b

3.5

Other c......... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,045 3.9

Total U.S. dialysis population . . . . . . 105,958 100.0

aMedicare coverage begins the third month after the month in

which the course of maintenance dialysis treatments begin.

Medicare coverage may begin in the first month of dialysis if the

patient participates in a self-dialysis training program in a

Medicare-approved training facility. The Medicare-pending

category includes those patients that have applied for and are

satisfying the three-month waiting period before dialysis benefits

begin (42 CFR 426-lb).

bDepartment of Veterans Affairs (VA) dialysis patients include

3,132 in-unit or home dialysis patients who are affiliated with VA

facilities and 590 patients who receive dialysis in Medicareapproved dialysis facilities for which VA makes payment to HCFA

(109).

c

Includes patients covered by Medicaid, private insurance

(including those who have employer group health insurance

coverage for the first year of ESRD, with Medicare’s becoming

the primary insurer after the first year), foreign nationals, and

individuals who do not have coverage for services. HCFA does

not collect separate data on Medicaid coverage of ESRD (123).

SOURCES: Otchin, 1990 (109); US DHHS, HCFA, 1989 (156).

Table 4-2--Dialysis and Kidney Transplant

Service Providers in the United States,

November 1989a

Type of Number of

provider providers

Total providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,915

Total kidney transplant providers . . . . . . . . . . . . . . . . . . . 214

Total dialysis providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,807

Hospital-based dialysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 661

Independent dialysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,146

Inpatient dialysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

aBecause some facilities fall into more than one classification, the

sum of the individual classifications may exceed the total

approved facilities.

SOURCE: US DHHS, HCFA, 1989 (156).

-75-
76- Recombinant erythropoietin: Payment Options for Medicare

In general, a patient’s dialysis facility furnishes a

package of services, equipment, and supplies,

including laboratory tests and certain drugs, for each

dialysis treatment. Items and services in the package

include bicarbonate dialysate, catheter changes,

shunt declotting, cardiac monitoring, suture removal,

surgical dressing changes, oxygen and its administration, and staff time involved in the administration

of blood and certain parenteral1 items (151).

Medicare pays for this package of dialysis services

by a composite rate. The composite rate per dialysis

treatment, which currently averages $129 for the

hospital-based facilities and $125 for independent

dialysis facilities, (151) must be accepted as payment

in full by the facilities for all covered items and services. 2 The rate is based on a formula that takes into

.

account the mix of patients that receive dialysis at a

facility or at home and the relative cost of providing

such services in these settings (Public Law 101-239).

Patients that receive dialysis at home may choose

one of two payment methods. Under Method I, the

dialysis facility is paid and must accept the composite

rate as payment in full for providing all services,

equipment, and supplies needed for home dialysis.

Approximately 64 percent of all home dialysis

patients chose Method I in 1988 (124). Under

Method II, the patient may deal directly with a supplier to obtain home dialysis equipment and supplies.

In 1988, 36 percent of all home dialysis patients

chose Method II (124). Under a provision of the

Omnibus Budget Reconciliation Act of 1989 (Public

Law 101-239) that took effect Feb. 1, 1990, providers

of supplies and equipment to home dialysis patients

must also accept the composite rate as payment in

full. Previously, reimbursement to suppliers under

Method II was calculated on a reasonable charge

basis, and suppliers could charge home dialysis

patients more than the composite rate. This

situation could result in higher cost-sharing for those

home dialysis patients who chose Method 11. 3 I n

addition, all home dialysis patients must now be

affiliated with a dialysis facility, whether they receive

their home dialysis equipment and supplies from a

facility or a supplier (Public Law 101-239). Medicare

pays dialysis facilities and suppliers for services not

covered under the composite rate according to a fee

schedule (126).

Medicare pays for all dialysis-related physician

services through a monthly per-patient payment, currently an average $173 (126). The physician, known

as the patient’s “capitated physician,” receives the

same amount whether the patient the physician

supervises receives dialysis in a facility or at home.

ESRD patients cannot become members o f

health maintenance organizations (HMOs) or other

competitive medical plans (CMPs) that have a risksharing contract to serve Medicare beneficiaries. 4

Beneficiaries may retain CMP membership if they

develop ESRD subsequent to enrollment. Fo r

ESRD patients who are CMP members, Medicare

pays a monthly prospective per-capita amount that

covers both ESRD and non-ESRD services.

Payment is based on the estimated amount (the

average adjusted per capita cost)s that would be paid

for Medicare-covered services if beneficiaries were

not enrolled in HMOs and received care from local

fee-for-service providers. The rates are adjusted for

factors such as age, sex, disability, and, if available

and appropriate, welfare and institutional factors

(145).

ESRD networks, which function like peer review

organizations (PROS) review the quality of care provided to dialysis patients. Under contract to the

1 Parenteral refers to some means, other than through the

alimentary canal, to introduce a substance into the body. In this

case, it refers to intravenous administration of certain drugs.

2 Each facility has its own composite rate, composed of a labor

and non-labor portion. To determine a facility’s actual payment

rate, the labor portion of the appropriate base rate is first

adjusted by an area wage index and then added to a nonlabor

portion (154).

sAn exception is that for home patients on Continuous Cycling

Peritoneal Dialysis (CCPD), Medicare may pay up to 130 percent

of the median composite rate for hospital-based facilities (Public

hiW 101-239).

Q In a risk-sharing arrangement, a fiscal intermediary, such as an

HMO or other CMP, assumes the financial risk of arranging for

or providing care to Medicare enrollees (145).

5 See app. D for a definition of average adjusted per capita cost.
Chapter 4--Medicare’s Current Payment Policies- 77

Health Care Financing Administration (HCFA),

these 17 networks are generally organizations of

nephrologists. During each year, the networks select

approximately 12 percent of all dialysis patients to

review quality-of-care problems. Each network

develops its own criteria to assess the quality of care.

The networks, which have some limited ability to

impose sanctions on providers if problems are

detected, do not have the ability to deny payment for

claims. In March 1990, some of the networks

initiated their own review of various aspects of

recombinant erythropoietin use. HCFA has no

immediate future plans to require the networks to

review whether recombinant erythropoietin is being

used appropriately in dialysis patients (99).

Payment for dialysis service claims is made by

Medicare contractors. These contractors include

intermediaries, which usually process claims for Part

A providers, such as hospitals and dialysis facilities;

and carriers, which process claims for Part B providers, such as physicians (20). These contractors,

typically Blue Cross plans or commercial insurance

firms, determine reasonable costs or charges for

covered services, make payments, and guard against

unnecessary use of Medicare-covered services.

MEDICARE’S PAYMENT POLICIES

FOR PHARMACEUTICALS

General Payment Policies

HCFA first decides if a pharmaceutical (a drug or

biological) should be covered by the Medicare

program and then determines how payment should

be made. Coverage and payment rules differ for

each Medicare program, depending on whether the

pharmaceutical is provided to an inpatient or outpatient.

HCFA’s policy is that a pharmaceutical is covered

for FDA-approved indications, unless HCFA

determines that it is not safe and effective for a particular use or unless it is subject to a specific

exclusion, such as self-administered pharmaceuticals,

as discussed below. A HCFA contractor may cover

and pay for an FDA-approved pharmaceutical for an

indication for which there is no FDA approval, if it is

documented in the medical literature that the

pharmaceutical is commonly used in medical practice

to treat that particular condition. These are commonly referred to as off-label uses. HCFA does not

pay for the use of investigational pharmaceuticals,

except in the case of some cancer agents. When

HCFA views a coverage or payment issue to be significant, or contractors’ interpretations of FDA

actions differ, HCFA may issue specific national

guidelines on the coverage status of a particular

pharmaceutical (35).

In conjunction with its decision about coverage,

HCFA also determines the amount that the program

will pay for a particular pharmaceutical. Th e

payment method is based on the setting in which the

product is administered.

Under Part A, Medicare pays for the operating

expenses associated with inpatient care for a particular diagnosis for the entire length of stay through

freed rates set in advance, known as diagnosis-related

groups (DRGs). DRGs classify patients according to

primary diagnosis, the principal surgical procedure,

and the type of discharge. Variations in the DRG

rates paid to hospitals are a function of location

(urban versus rural), area wage rates, a hospital’s

teaching affiliation, and the proportion of lowincome patients served. Hospitals are paid these

rates regardless of the costs that they actually incur

(35). The facilities earn a profit when their costs fall

below the payment and absorb the loss when the

costs are higher than the payment. Payment for

pharmaceuticals used during an inpatient stay are

included in the predetermined DRG rate.

In accordance with the Social Security Act,

Medicare Part B covers pharmaceuticals, if they

cannot be self-administered by the patient, such as

injectable; are reasonable and necessary for the

diagnosis or treatment of an illness by a physician; or

are provided incidental to a physician’s service

(Social Security Act 1861 (s)(2)(A)), or administered

to outpatients (even if they are self-administered) for

diagnostic purposes (42 CFR 410.28). Therapeutic

injectable that are routinely self-administered, such

as insulin, are therefore excluded from Medicare
78- Recombinant erythropoietin: Payment Options for Medicare

coverage. Whether a drug is self-administrable

depends on the usual method of administration of

the drug or biologic furnished by the physician. For

example, oral dosage forms administered by a

physician are not covered (35).

In addition, through legislation, Congress has

covered specific pharmaceuticals under Part B,

including certain prescription drugs provided

incidental to a dialysis treatment, certain immunosuppressive drugs used in transplant therapy for one

year following a Medicare-covered organ transplant,

pneumococcal vaccine, and hepatitis B vaccine for

certain high-risk groups.

Under Part B, pharmaceuticals furnished by

physicians, community pharmacies, and independent

dialysis facilities are paid on a reasonable charge

basis, while those furnished by outpatient hospital

facilities are paid on a reasonable cost basis.

Medicare pays 80 percent of the reasonable cost of

pharmaceuticals provided to patients of an outpatient

hospital facility. The reasonable cost of any service is

the cost actually incurred by the facility to acquire

the product or provide the service, excluding any

costs unnecessary for the efficient delivery of needed

health services (42 USC 1395v).

Medicare pays 80 percent of the reasonable or

approved charge for pharmaceuticals, after a patient

has met an annual deductible, currently $75. The

patient pays the remaining 20 percent, plus any difference between the actual charge and Medicare’s

approved charge. HCFA regulations define the reasonable or approved charge as the portion of the

charge that is approved for payment by Medicare.

The amount is determined by the Medicare contractor according to guidelines developed by HCFA.

The approved charge is defined as the lowest of 1)

the physician’s or supplier’s customary charge for

that service, 2) the prevailing charge for similar services in that locality, 3) the actual charge made by the

physician or the supplier, or 4) the contractor’s

private business charge for comparable service (35).

The method of deriving payment rates for the

approved charge is termed the customary, prevailing,

and reasonable (CPR) method. For injections,

determination of the approved charge is often based

on prices in the Redbook, Bluebook, or Medispan,

which are compendia of pharmaceutical price

information (155). The approved charge for

injectable, such as recombinant erythropoietin, is

based on the cost of the injectable and any supplies

used to administer it plus a maximum of $2 for the

accompanying staff time (155).

Patients who purchase covered Part B pharmaceuticals from non-Medicare providers, such as community pharmacies, must submit a Medicare claim to

the Medicare carrier. Patients are reimbursed at 80

percent of the approved charge for the product (126).

Prescription Drug Coverage

Under the ESRD Program

Through the composite rate, Medicare pays for

certain routine prescription drugs commonly provided as part of a dialysis treatment. Examples of

these drugs include insulin, heparin, protamine, mannitol, saline, xylocaine, antiarrythmic drugs, and

antihypertensive medications (151).

Dialysis facilities may bill Medicare separately for

other non-routine drugs that may be needed during a

dialysis treatment, but are not included in the composite rate. Examples of these drugs include compazine, gentamycin, demerol, morphine, vancomycin,

and defer examine. Payment is made for th e

pharmaceutical and any supplies used for its administration; no additional payment is made for staff time

used to administer a pharmaceutical (151).

Hepatitis B Vaccine

The enactment of the Deficit Reduction Act of

1984 (Public Law 98-369) established Medicare

coverage for hepatitis B vaccine furnished to a

Medicare beneficiary at high or intermediate risk of

contracting hepatitis B (150). Hepatitis B is a bloodborne infection that can result in severe morbidity

and even death (27). Dialysis patients were included

in the high-risk group because they frequently

receive blood transfusions. Medicare also pays the

facilities for staff time, supplies, and syringes

involved in administration of the vaccine (150).

At the time of Medicare coverage of the vaccine,

there was only one supplier in the market. In its

reimbursement guidelines, HCFA cautioned its con-
Chapter 4--Medicare's Current Payment Policies- 79

tractors that, when they determined the approved

charge, lack of competition in the marketplace

should not result in overpayments to facilities. The

contractor was to consider trade or quantity discounts on purchases of the vaccine that were

available to medical providers. In addition, Medicare

pays only for the quantity of vaccine that is actually

administered to the patient (150). For example, if a

facility purchased a vial of hepatitis vaccine for $100

and administered two-thirds of the vial, the reimbursement based on the approved charge method would

be approximately $67.

Immunosuppressive Drugs

The enactment of the Omnibus Budget Reconciliation Act of 1986 (Public Law 99-509) established

Medicare coverage for certain immunosuppressive

drugs for one year after a Medicare beneficiary’s discharge from an inpatient hospital stay during which a

Medicare-covered organ transplant was performed.

The change in the law was precipitated by FDAapproval in 1983 of the immunosuppressive drug

cyclosporine, whose annual treatment costs were

estimated to be about $5,000 per patient (126). In

addition to cyclosporine, the act extended coverage

to azathioprine, antithymocyte/globulin, an d

muromonab-CD3 (153). In December 1987 ,

Medicare coverage was expanded to those drugs that

are not used exclusively as immunosuppressive drugs,

but that are commonly used as part of immunosuppressive therapy, such as the steroid prednisone.

MEDICARE’S CURRENT COVERAGE

AND PAYMENT POLICIES FOR

RECOMBINANT erythropoietin

In developing payment rates for recombinant

erythropoietin, HCFA had to consider the various

facilities in which it would be used, including hospitals, dialysis facilities, physicians’ offices, HMOs,

and other CMPs.

Payment rates for recombinant erythropoietin

were not established for inpatient facilities or CMPs.

Medicare pays for recombinant erythropoietin

administered to inpatients through the DRG rate.

Any additional cost to the facility of using recombinant erythropoietin, however, will not be reflected

in a DRG until the rates are recalculated in the

future. Similarly, Medicare pays CMPs for use of

recombinant erythropoietin through the monthly

cavitation payment (126).

Dialysis Facilities

Initial Payment Policy

In July 1989, HCFA issued special coverage and

payment instructions to its intermediaries for administration of recombinant erythropoietin to patients in

hospital-based and independent dialysis facilities.

Coverage was retroactive to June 1, 1989, the day

FDA approved recombinant erythropoietin for

anemia associated with chronic renal failure. (154).

HCFA determined that it would pay bot h

hospital-based and independent dialysis facilities $40

for any recombinant erythropoietin dose of 10,000

units or fewer, and an additional $30 for any dose

over that amount, 6 (154). Payment was to be made

in addition to the composite rate and restricted to

administration in a dialysis facility. No additional

payment would be made for the staff time or supplies

involved in administering recombinant erythropoietin. HCFA assumed that the composite rate

adequately covered these expenses, and no increase

was made in the composite rate. A review of HCFA

payment policy for recombinant erythropoietin

administered in dialysis facilities commenced in

December 1989 (126).

If a dialysis patient received 10,000 units of

recombinant erythropoietin or fewer at each of 3

weekly dialysis sessions, for a total of 156 sessions

per year, the annual per patient cost would total

approximately $6,240. Medicare would pay 80

percent of the costs ($32 per administration), or

$4,992, and the patient would pay the remaining 20

percent ($8 per administration), or $1,248 per year in

cost-sharing, if one assumes that the patient had previously met the $75 annual Part B deductible.

6 For doses over 10,000 units, HCFA requires that additional

information be reported to the intermedia~ or carrier, including

incidence of iron deficiency, Vitamin B12 or folic acid deficiency,

hemolysis, or unrecognized blood loss (1S4).
80- Recombinant erythropoietin: Payment Options for Medicare

Self-Administration of Recombinant

erythropoietin

Since the Social Security Act prohibits Medicare

from paying for self-administration of pharmaceuticals (42 CFR 410.29a), Medicare may not pay

for dialysis or other patients to self-administer

recombinant erythropoietin. This prohibition affects

the approximately 18,000 patients that perform

dialysis at home (156). Under current regulations,

dialysis patients may self-administer certain drugs in

the home setting that are considered dialysis supplies, such as heparin; local anesthetics, such as

xylocaine; and antibiotics for peritoneal dialysis

patients, when used to treat infections of the catheter

site (151).

Method Used To Establish Initial

Payment Rates

HCFA established an initial recombinan t

erythropoietin outpatient payment rate shortly after

the agent was approved (see app. E). Approximately

1 year prior to the anticipated approval of recombinant erythropoietin, Amgen and HCFA entered

into discussions about payment rates (25). HCFA

recognized that recombinant erythropoietin would

represent a significant expense for the Medicare

ESRD program and for dialysis patients and that

HCFA should have an appropriate payment policy

ready for its intermediaries. Amgen recognized that

the Federal Government, through the Medicare

ESRD program, would be the primary payer for

recombinant erythropoietin for the foreseeable

future and that the payment rate set by HCFA would

have a significant impact on the revenues of the

company, at least for the near term.

HCFA’s initial payment rate of $40 for a dose of

recombinant erythropoietin at or under 10,000 units

was based, in part, on an analysis of Amgen’s cost of

producing the amount of recombinant erythropoietin

projected to be used by the dialysis population in the

first year after FDA approval. HCFA was assisted in

analyzing these costs by the Department of Health

and Human (DHHS) Services’ Office of the Inspector General (OIG) (see app. E). HCFA used this

cost analysis along with other factors in setting

Medicare’s initial payment rate for dialysis facilities.

Several critical decisions had to be made by

HCFA and the OIG in analyzing Epogen’s costs of

production, including estimating the market penetration of Epogen, selecting an appropriate rate of

return on Amgen’s investment, and identifying the

percent of costs from each category that would be

allocated to Epogen vs. Amgen’s other products.

Based on data supplied by Amgen, HCFA

estimated that 20,000-25,000 patients, or about onefourth of the U.S. dialysis population, would receive

recombinant erythropoietin in the first year after

FDA approval. After estimating the total costs of

production for Epogen, the OIG used this level of

initial market penetration to estimate an annual per

patient cost of treatment. It then divided this by the

number of annual dialysis sessions to estimate a peradministration cost for Epogen.

The OIG used 20 percent as an appropriate

return on investment on the grounds that the

pharmaceutical industry averaged this profit rate

before taxes. In addition, for each cost category, the

OIG included only the portion that pertained to

Epogen, not to Amgen’s other products. For

example, in the current research and development

and the sales, general, and administrative categories,

only that part of costs that the OIG estimated

pertained to Epogen was included in the estimate

(129).

According to a November 1989-March 1990

survey of dialysis facilities by the OIG, the selling

price from wholesalers averaged $41 for the 4,000

unit vial (85). In March 1990, Amgen reported that

its list price to wholesalers was $10 for 1,000 units

(117). Prices of recombinant erythropoietin in the

United States as of December 1989 are compared

with prices in other European countries in table 4-3.

As the table indicates, the prices of the product are

higher in some countries and lower in others compared with the United States.

Physicians’ Offices

In November 1989, HCFA extended coverage to

and issued reimbursement instructions for recombinant erythropoietin administration for dialysis

patients in physicians’ offices. The instructions also
Chapter 4--Medicare’s Current Payment Policies- 81

Table 4-3-Prices of a 4,000-Unit Vial to Providers of Recombinant

Erythropoietin, by Country, December 1989

Price in country’s Purchasing power paritiesa Price in U.S.

Country currency dollars

Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Belgium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Denmark . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Greece . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Luxembourg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Netherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Norway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Portugal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Switzerland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

694.45

2,022.83

3%.00

224.39

330.00

98.00

13,000.00

73,777.00

2,023.00

114.00

383.00

9508.00

7,200.00

360.00

88.00

41.00b

36.00

16.80

44.50

10.20

6.21

7.43

2.47

100.00

1,399.00

41.00

2.40

8.64

84.10

106.00

8.69

2.43 —

0.58

41.34

45.46

38.82

36.13

44.41

39.67

130.00

52.75

49.34

47.50

44.33

113.06

67.92

41.43

36.21

41.00

62.00

a Represents the purchasing power parities (PPP) for the individual countries, a conversion factor that is based on

the purchasing power of foreign currencies relative to U.S. dollars as measured for a given market basket of goods.

The measures are 1987 estimates based on extrapolations from 1985 data. The source of the data is the Organization for Economic Cooperation and Development: Health Data File, 1989. Since the purchasing power of U.S.

dollars relative to other currencies may have changed over the past 5 years, these measures are subject to some

inaccuracy. Purchasing power parities, however, even if dated, are superior to current exchange rates, because the

latter are more reflective of the relative demands for the limited goods traded among countries rather than the

b

relative purchasing powers of the respective currencies.

Based on a November 1989-March 1990 survey by the HHS Office of the Inspector General, $41 is the average

price of the product to dialysis facility providers, including any markup added by the wholesaler (185).

SOURCES: Schieber and Poullier, 1989 (125); Zahn, 1989 (174).

extended coverage of and payment for recombinant

erythropoietin to patients with chronic renal failure

who do not yet require dialysis (predialysis patients)

(155). Coverage in physicians’ offices is possible

because Medicare covers pharmaceuticals that are

furnished incidental to a physician’s professional

service (Social Security Act 1861(s)(2)(A)). With the

implementation of this coverage, home dialysis

patients could receive recombinant erythropoietin

from a local physician.

Unlike the case for dialysis facilities, for which

the payment rate is $40 for up to 10,000 units of

recombinant erythropoietin, Medicare pays the

physician an approved charge on a fee-for-service

basis; Medicare payment increases with the number

of units administered to the patient and the

physician’s billed charge.

Medicare makes no additional payment for

physician’s staff time involved in administering

injectable to dialysis patients. HCFA assumes that

the monthly cavitation rate for physician services

adequately covers this time (42 CFR 405.542).

Therefore, physicians may not bill Medicare separately for time involved in administering recombinant

erythropoietin to dialysis patients in their offices.

The capitated physician may bill Medicare for any

additional supplies, such as needles and syringes,

used to administer the product (155). If a physician

other than the capitated one administers recombinant erythropoietin, the administering physician

may bill the capitated one for staff time. Medicare

pays the administering physician only for the amount

of product used and any supplies used for administration. For recombinant erythropoietin administered to non-dialysis patients, physicians may make
82- Recombinant erythropoietin: Payment Options for Medicare

an additional charge for staff time and supplies used

in administering recombinant erythropoietin.

MEDICAID COVERAGE OF

RECOMBINANT erythropoietin

Besides Medicare, other sources of dialysisrelated medical service payments are private

insurance, Medicaid, and other State programs.

Little information is available on the extent to which

these sources cover the costs of these services,

including recombinant erythropoietin and its administration.

Some information is available, however, on

Medicaid coverage. Medicaid is a federally-aided,

state-administered program that provides medical

assistance to certain low-income people (147).

Although over 90 percent of all ESRD patients’

medical services is paid for by Medicare, Medicaid

covers ESRD services for some individuals ineligible

for Medicare, those services not covered by

Medicare that a State may choose to provide under

Medicaid, and cost-sharing incurred by ESRD

patients who are dually eligible for both Medicare

and Medicaid. Dually eligible people consist of aged,

blind, or disabled Medicare beneficiaries whose

income and assets are low enough to meet either

Federal or State criteria for Medicaid. Approximately 3.5 million or 12 percent of the aged population fit into this category. Total State Medicaid

ESRD expenditures in 1988 were estimated to be $68

million dollars, approximately half of which were

paid by the Federal Government. The services

covered for ESRD patients vary by State. A recent

survey of Medicaid programs indicated that only 6 of

48 States cover prescription drugs as part of ESRD

services (75).

As of March 1990, however, 43 State Medicaid

programs paid the $8 per dose recombinant

erythropoietin Medicare patient cost-sharing for

eligible individuals (117). A decision had been made

by five States not to pay this cost-sharing, and four

States and the District of Columbia had not made a

decision. Many of the States had adopted the HCFA

payment policy of $40 for any recombinant

erythropoietin dose under 10,000 units with an additional $30 add-on for doses over that quantity. That

so many of the Medicaid programs adopted HCFA’s

payment rate for recombinant erythropoietin underscores the importance of HCFA’s payment rates.

ESRD patients may also be able to seek financial

relief for medical care costs from individual State

kidney programs, some of which were operating

before Medicare assumed most of the costs of ESRD

treatment in 1973. These programs are generally the

payer of the last resort, after all forms of public and

private insurance have been exhausted. A total of 19

States operate a kidney program to provide financial

assistance for ESRD patients who are not eligible for

Medicaid (75). As is the case with the State

Medicaid programs, the services covered by the

kidney programs differ by State. Sixteen of these

programs cover prescription drugs, but the extent to

which these programs help defray the cost of recombinant erythropoietin is currently unknown.
Appendix A

Method of the Study

The Office of Technology Assessment (OTA)

originally undertook this study of Medicare payment

for recombinant erythropoietin as part of a larger

assessment of Medicare payment for prescription

drugs. In connection with the Medicare Catastrophic

Coverage Act of 1988 (Public Law 100-360), the

House Committees on Energy and Commerce and

on Ways and Means and the Senate Committee on

Finance jointly requested OTA to examine

alternative payment policies for the prescription drug

benefit added by the Act. The Senate Special Committee on Aging also requested the study. In April

1989, OTA’s Technology Assessment Board (TAB)

approved an OTA study on prescription drug

payment to start in July 1989. In the context of the

larger study, in May 1989 the House Committee on

Ways and Means, Subcommittee on Health also

asked OTA to study payment strategies that

Medicare might apply to recombinant erythropoietin,

which was about to be approved by the Food and

Drug Administration.

The advisory panel for the parent assessment,

“Medicare’s Prescription Drug Benefit: Alternative

Payment Policies,” which consisted of 22 people from

pharmaceutical manufacture, distribution, and dispensing; medicine; consumer advocacy; economics;

law; and insurance, initially provided guidance for the

study on recombinant erythropoietin (see app. C).

At its meeting in September 1989, the advisory panel

reviewed background material prepared by OTA

staff on policy issues related to Medicare payment of

recombinant erythropoietin and suggested additional

sources of information and payment policies to consider.

During the fall and winter of 1989, OTA staff met

with representatives of companies manufacturing

recombinant erythropoietin; staff of Federal agencies

responsible for policies related to recombinant

erythropoietin, chiefly the Food and Drug Administration and the Health Care Financing Administration; and health services researchers with

expertise on Medicare’s End-Stage Renal Disease

Program. OTA staff also visited two dialysis centers,

one hospital-based and one free-standing, and discussed issues of recombinant erythropoietin with

their nephrologists. In addition, OTA staff reviewed

the published and unpublished literature on the

efficacy and safety of recombinant erythropoietin and

on economic topics pertaining to payment options.

The Food and Drug Administration (FDA), the

Health Care Financing Administration, and the

Department of Veterans Affairs provided

information on their relevant regulations and

guidelines.

In February 1990, OTA convened a workshop to

discuss the draft report. Workshop participants

included people from the following fields:

manufacture of recombinant erythropoietin,

wholesale distribution of pharmaceuticals, provision

of dialysis services, nephrology, consumer advocacy,

economics, Medicare policy, FDA policy, consumer

advocacy, pharmacy administration, and law (See

app. B). In addition to the workshop participants,

the draft report was sent for review to members of

the advisory panel for the broader study of

Medicare’s prescription drug benefitl and to others

from a range of disciplines and interests. During

February and March 1990, OTA staff revised the

report on the basis of the discussion at the workshop

and on comments and additional material from

reviewers. The staff prepared a final draft, which

was submitted in late March 1990 to the Technology

Assessment Board for its approval.

IIn March 1990, in light of Congress’ previous repeal of the

Medicare Catastrophic Coverage Act of 1988, OTA’s Technology

Assessment Board rescinded approval for the study “Medicare’s

Prescription Drug Benefit: Alternative Payment Policies.”

-83-
Appendix B

Workshop Participants--

Recombinant erythropoietin: Payment Options for Medicare

On February 20, 1990, a workshop was held to discuss the draft report. OTA staff wish to thank the

participants for their review and advice.

Harold Cohen, Chair

Harold Cohen, Inc.

Baltimore, MD

Edward Berger

National Medical Care

Waltham, MA

Christopher Blagg

Northwest Kidney Center

Seattle, WA

Charles Booth

Health Care Financing Administration

Baltimore, MD

Paul Dawson

Amgen, Inc.

Thousand Oaks, CA

Louis Diamond

Georgetown University School

of Medicine

Washington, DC

Joseph Fratantoni

Food and Drug Administration

Center for Biologics Evaluation

and Research

Bethesda, MD

Dennis Longstreet

Ortho Pharmaceutical Corporation

Raritan, NJ

Patrick McKercher

The Upjohn Company

Kalamazoo, MI

Carlo Michelotti

California Department

of Health Services

Sacramento, CA

Michael Pollard

Michaels & Wishner

Washington, D.C.

Mark A. Pulido

Redline Medical Supply

Minneapolis, MN

Richard Rettig

Institute of Medicine

Washington, DC

Joseph Sobota

Chugai-Upjohn, Inc.

Rosemont, IL

Joseph Thomas

Purdue University

School of Pharmacy

West Lafayette, IN

Sidney Wolfe

Public Citizen Health

Research Group

Washington, DC

-84-
Appendix C

Acknowledgements

In addition to the workshop participants listed in appendix B, the following people provided valuable

guidance to the OTA staff.

Kathleen Buto

Health Care Financing

Administration

Bureau of Policy Development

Baltimore, MD

Regis A. de Silva

Harvard Medical School

Boston, MA

Paul Eggers

Health Care Financing

Administration

Office of Research and

Demonstrations

Baltimore, MD

Bruce Eisen

Genetics Institute, Inc.

Cambridge, MA

Joseph Eschbach

University of Washington

School of Medicine

Seattle, WA

Roger Evans

Batelle Research Center

Seattle, WA

Frank Gotch

Davies Medical Center

San Francisco, CA

Marlene Haffner

Food and Drug Administration

Office of Orphan

Products Development

Rockville, MD

Richard Husk

Health Care Financing

Administration

Office of Peer Review

Baltimore, MD

Paul Jeffrey

University of Maryland Hospital

Department of Pharmacy

Baltimore, MD

David Knapp

University of Maryland

School of Pharmacy

Baltimore, MD

Gary Kramer

Department of Health and

Human Services

Office of the Inspector General

Baltimore, MD

Steven Lawton

Reed, Smith, Shaw, and McClay

Washington, DC

Andreas Leupacis

University Hospital

Department of General Internal

Medicine

London, Ontario, Canada

Nathan Levin

Beth Israel Medical Center

New York, NY

Jeffrey McCombs

University of Southern California

School of Pharmacy

Los Angeles, CA

Paul Mendelson

Health Care Financing

Administration

ESRD Network Administration

Branch

Baltimore, MD

Alan Nissenson

University of California

at Los Angeles Medical Center

Los Angeles, CA

John Ogden

U.S. Department of Veterans

Affairs

Department of Pharmacy Services

Washington, DC

Emil Paganini

Cleveland Clinic Foundation

Cleveland, OH

Joseph Polastri

McKesson Drug Company

San Francisco, CA

Neil Powe

The Johns Hopkins University

School of Medicine

Baltimore, MD

Lisa Raines

Industrial Biotechnology

Association

Washington, DC

Kathleen Retterson

Amgen, Inc.

Thousand Oaks, CA

-85-
86- Recombinant erythropoietin: Payment Options for Medicare

Dennis Revicki

BatelleResearch Center

Washington, DC

Elizabeth Rothberg

Health Insurance Association

of America

Washington, DC

John Sadler

Independent Dialysis Foundation

Baltimore, MD

Larry Simmons

Department of Health and

Human Services

Office of the Inspector General

Baltimore, MD

Dennis Styrsky

U.S. Department of Veterans

Affairs

Marketing Center

Hines, IL

Wayne M. Turner

Food and Drug Administration

Office of orphanProducts

Development

Rockville, MD

Anne Vickery

Hogan and Hartson

Washington, DC

Bernadette Schumaker

Health Care Financing Thomas Taylor

Administration The Upjohn Company

Office of ESRD Payment Policy Kalamazoo, MI

Baltimore, MD

ADVISORY PANEL ON MEDICARE’S PRESCRIPTION DRUG BENEFIT:

Harold Cohen, Panel Chair

Harold Cohen, Inc.

Baltimore, MD

Lowell Anderson

Watauga Corporation

St. Paul, MN

Patricia A. Bell

Marriott Corporation

Washington, DC

Orson Berry

Arkansas Health

Services Agency

Little Rock, AR

Leonard J. DeMino

National Association

of Chain Drug Stores

Alexandria, VA

Arnold M. Epstein

Harvard Medical School

and School of Public Health

Boston, MA

Mark C. Hornbrook

Kaiser Permanence

Portland, OR

ALTERNATIVE PAYMENT POLICIES

Ronald Jordan Marilyn Moon

Blue Cross/Blue Shield The Urban Institute

of Rhode Island Washington, DC

Providence, RI

Thomas Kellenberger

PCS, Inc.

Scottsdale, AZ

Kenneth Larsen

Zetachron, Inc.

St. College, PA

Sidney S. Lee

Harvard Medical School

Department of Social Medicine

Michael Pollard

Michaels & Wishner

Washington, DC

Mark A. Pulido

Redline Medical Supply

Minneapolis, MN

Alice Rivlin

The Brookings Institution

Washington, DC

Boston, MA Gary J. Sekulski

Helene Lipton Medco Containment

University of California Services, Inc.

Schools of Medicine and Pharmacy Fairlawn, NJ

San Francisco, CA

Patrick McKercher

The Upjohn Company

Kalamazoo, MI

Carlo Michelotti

California Department

of Health Services

Sacramento, CA

Joseph Thomas

Purdue University

School of Pharmacy

West Lafayette, IN

Sidney Wolfe

Public Citizen Health

Research Group

Washington, DC

Advisory Panel members provide valuable guidance during the preparation of OTA reports. The presence

of an individual on the Advisory Panel, however, does not mean that the individual agrees with or endorses the

conclusions of this particular Report.
Appendix D

Glossary of Terms and Acronyms

List of ACRONYMS

AAPCC --average adjusted per capita cost

AIDS --acquired immunodeficiency syndrome

ARC --AIDS-related complex

AWP --average wholesale price

AZT --zidovudine

CAPD --continuous ambulatory peritoneal dialysis

CBO --Congressional Budget Office, U.S. Congress

CCPD --continuous cycling peritoneal dialysis

CFR --code of federal regulations

CHO --Chinese hamster ovary

CMP --competitive medical plan

CPR --customary, prevailing, and reasonable

DHHS --Department of Health and Human Services

DNA --deoxyribonucleic acid

DRG --diagnosis-related group

ELA --establishment licensing application

ESRD --end-stage renal disease

FDA --Food and Drug Administration, U.S.

Department of Health and Human Services

FSS --Federal Supply Schedule

GMP --good manufacturing practices

HCFA --Health Care Financing Administration,

U.S. Department of Health and Human

Services

HIV --human immunodeficiency virus

HMO --health maintenance organization

ITC --U.S. International Trade Commission

IV --intravenous

kg --kilogram

NANBH --non-A non-B hepatitis

NDA --new drug application

NMC --National Medical Care, Inc.

OIG --Office of the Inspector General, U.S.

Department of Health and Human Services

OTA --Office of Technology Assessment, U.S.

Congress

PLA --product licensing application

PRO --peer review organization

RCT --randomized clinical trial

rHuEPO --recombinant (human) erythropoietin

RNA --ribonucleic acid

SC --subcutaneous

VA --Department of Veterans Affairs

Glossary of Terms

Access: Potential and actual entry of a population

into the health care delivery system.

AIDS (acquired immunodeficiency syndrome): A

disease caused by the retrovirus human immunodeficiency virus (HIV) and characterized by a

deficiency of the immune system. The primary

defect in AIDS is an acquired, persistent,

quantitative functional depression within the T4

subset of lymphocytes. This depression often

leads to infections caused by micro-organisms that

usually do not produce infections in individuals

with normal immunity or to the development of a

rare type of cancer (Kaposi’s sarcoma) usually

seen in elderly persons or in individuals who are

severely immunocompro-mised from other causes.

Amino acid: A group of 20 molecules that bind

together to form proteins. Each type of protein is

made up of a specific sequence of amino acids

coded for in the DNA.

Autologous donation: A blood donation that is

stored and reserved for return to the donor as

needed, usually in elective surgery.

Autologous transfusion: Transfusion of blood or

blood components drawn from a donor and

maintained for subsequent transfusion to that

same donor.

Average adjusted per capita cost (AAPCC): The

AAPCC is the estimated average per capita

amount that would be payable if covered services

for Medicare Competitive Medical Plan (CMP)

members were furnished in local fee-for-service

practices. The AAPCC formula consists of the

product of three major components: (1) the U.S.

per capita Medicare cost as projected to the

current year, (2) an adjustment based on the historical relationship between national Medicare

costs and Medicare per capita reimbursements in

the local area that a CMP serves, and (3) an

adjustment for the differences between persons

who choose to enroll in a CMP and the Medicare

population at large from which CMP enrollees

are drawn.

-87-
88- Recombinant erythropoietin: Payment Options for Medicare

Biologics: Medicinal preparations made from living

organisms and their products, including serums,

vaccines, antigens, antitoxins, etc.

Biotechnology: Techniques that use living organisms

or substances from organisms to make or modify

a product. “New” biotechnology refers to recombinant DNA techniques and other sophisticated

tools relying on the ability to harness and

manipulate genetic material.

Bone marrow: A highly vascular, modified connective tissue found in the long bones and certain

flat bones of vertebrates that is the origin of

blood cells.

Clinical trial: A scientific research activity undertaken to define prospectively the effect and value

of prophylactic, diagnostic, or therapeutic agents,

devices, regimens, procedures, etc., applied to

human subjects.

Coinsurance: That precentage of covered medical

expenses, after subtraction of any deductible, for

which an insured person is responsible. Under

Medicare Part B, after the annual deductible has

been met, Medicare will generally pay 80 percent

of approved charges for covered services and supplies; the remaining 20 percent is the coinsurance,

for which the beneficiary is liable.

Common Costs: Costs that are not traceable to any

one specific product.

Continuous ambulatory peritoneal dialysis (CAPD):

Peritoneal dialysis is a form of dialysis in which

sterile fluid is introduced into the abdominal

cavity and the peritoneum acts as the semipermeable membrane that allows the molecular

exchange. In CAPD, the peritoneal dialysis is

performed nearly constantly in ambulatory patients who exchange the fluid every 4 to 8 hours.

Continuous cycling peritoneal dialysis (CCPD): A

form of peritoneal dialysis in which a machine

cycles the dialysate in and out of the peritoneal

cavity automatically about every 4 hours overnight

as the patient sleeps.

Cost-sharing: That portion of the payment to a provider of health care services that is the initial

liability of the patient and that may include

deductibles, copayments, coinsurance, and, under

Medicare Part B, unassigned liability. Also, the

general set of financial arrangements under which

health care insurance is contingent on a purchaser’s acceptance of the obligation to pay some

portion of the reimbursements for those services.

Coverage (Medicare): In the Medicare program,

coverage refers to the benefits available to

eligible beneficiaries and can be distinguished

from payment, which refers to the amount and

methods of payment for covered services.

Customary, prevailing, and reasonable (CPR)

method (Medicare): The method used by carriers

to determine the approved charge for a particular

Part B service from a particular physician or supplier based on the actual charge for the service,

previous charges for the service by the physician

or supplier in question, and previous charges by

peer physicians or suppliers in the same locality.

Customary charge: In the absence of unusual

medical circumstances, the maximum amount

that a Medicare carrier will approve for payment

for a particular service provided by a particular

physician practice. The carrier computes the

customary charge on the basis of the actual

amount that a physician practice or supplier

generally charges for a specific service.

Prevailing charge: In the absence of unusual

medical circumstances, the maximum amount a

Medicare carrier will approve for payment for a

particular service provided by any physician

practice within a particular peer group and

locality. Generally, this amount is equal to the

lowest charge in an array of customary charges

that is high enough to include 75 percent of all

the relevant customary charges. Approved or

reasonable charge: An individual charge

determination made by a Medicare carrier on a

covered Part B medical service or supply. In the

absence of unusual medical circumstances, it is

the lowest of: (1) the physician’s or suppliers’s

customary charge for that service; (2) the

prevailing charge for similar services in the

locality; (3) the actual charge made by the

physician or supplier; and (4) the carrier’s private

business charge for a comparable service. Also

called allowed charge or reasonable charge.

Dialysate: The sterile fluid used in dialysis to

remove toxic substances from the blood. The

chemical composition of the dialysate varies

according to the types of substances being

removed. According to the basic principle of

osmosis, the dialysate generally contains low concentrations of the waste substances.
Appendix D--Glossary of Terms and Acronyms -89

Dialysis: The process of separating crystalloid and

colloids in solution by the differences in their

rates of diffusion through a semipermeable membrane.

Efficacy The probability of benefit to individuals in

a defined population from a medical technology

applied for a given medical problem under ideal

conditions of use.

Efficient resource allocation: The allocation of

resources among alternative uses so that

maximum social benefits are derived from the

resources.

End-stage renal disease (ESRD): Chronic renal

failure that occurs when an individual irreversibly

loses a sufficient amount of kidney function so

that life cannot be sustained without treatment.

Hemodialysis, kidney transplant surgery, and continuous ambulatory peritoneal dialysis are forms

of therapy.

Fee-for-service payment: A method of paying for

medical services in which each service performed

by an individual provider bears a related charge.

This charge is paid by the individual patient

receiving the service or by an insurer on behalf of

the patient.

Fee schedule: An exhaustive list of provider services

in which each entry is associated with a specific

monetary amount that represents the approved

payment level for a given insurance plan.

Glycoprotein: A protein with attached sugar groups.

Good manufacturing practices: Requirements

regarding the manufacturing, processing, packing,

storage, and other practices involving products

under the jurisdiction of the Food and Drug

Administration (foods and food additives, cosmetics, drugs, biologics, and medical devices).

Health maintenance organization (HMO): A health

care organization that, in return for prospective

per capita (cavitation) payments, acts as both

insurer and provider of comprehensive but

specified medical services. A defined set of

physicians provide services to a voluntarily

enrolled population. Prepaid group practices and

individual practice associations are types of

HMOs.

Hematocrit: The volume occupied by the cellular

elements of blood in relation to the total volume.

Hemodialysis: A process by which blood is pumped

from the patient’s body into a dialyzer and then

returned to the body in a continuous extracorporeal blood loop. While in the dialyzer the

blood flows next to but separate from another

fluid, a dialysate. The blood and the dialysate are

separated from each other by a semipermeable

membrane. By diffusion and osmosis, waste products and other molecules pass through the semipermeable membrane and the blood can again

take on its appropriate properties.

Hepatitis: Inflammation of the liver which may be

due any of several causes, including viruses.

Hormone: A chemical substance that is released into

the circulatory system by a gland that has a

specific regulatory effect on another organ; functions regulated include metabolism, growth, and

the development of secondary sex characteristics

(such as breasts, facial hair).

Medicare carriers: Fiscal agents (typically Blue

Shield plans or commercial insurance firms)

under contract to the Health Care Financing

Administration for administration of specific

Medicare tasks. These tasks include computing

reasonable charges under Medicare Part B,

making actual payments, determining whether

claims are for covered services, denying claims

for noncovered services, and denying claims for

unnecessary use of services.

Medicare intermediaries: Fiscal agents (typically

Blue Cross plans or commercial insurance firms)

under contract to the Health Care Financing

Administration for administration of specific

Medicare tasks. These tasks include determining

reasonable costs for covered items and services,

making payments, and guarding against unnecessary use of covered services for Medicare Part

A payments. Intermediaries also make payments

for home health and outpatient hospital services

covered under Part B.

Non-A, non-B hepatitis (NANBH): A term used to

describe hepatitis (inflammation of the liver) in

which both hepatitis A and hepatitis B have been

excluded. Hepatitis C has been identified as the

cause of a substantial portion of NANBH.

Orphan Drug Act: Public Law 97-414, which charges

the U.S. Government with identifying and

promoting orphan products, defined as drugs and

devices for rare diseases.

Out-of-pocket costs: Deductibles and copayments

incurred by beneficiaries when services are

rendered.

Peritoneal dialysis: A form of dialysis that occurs
90- Recombinant Erythropoietin: Payment Options for Medicare

within the patient’s body, rather than via an

extracorporeal blood loop as in hemodialysis. A

catheter is inserted into the abdomen and then dialysate is entered through the catheter into the

peritoneal cavity. The fluid is allowed to remain

for varying periods of time, during which dialysis

occurs across the semi-permeable peritoneal

membrane. Later, the dialysate is drained out

through the catheter and discarded.

Phase I, II, and 111 drug trials: The sequence of

studies in human beings required for new

pharmaceutical approval by the Food and Drug

Administration. Phase I includes studies in a

small number of relatively healthy patients or

normal volunteers to determine safety and pharmacologic effects. Phase 11 includes controlled

clinical trials to determine appropriate doses,

safety, and effectiveness in a total of about 200

patients. Phase III trials are usually randomized

clinical trials.

Protein: A molecule composed of hundreds of

linked amino acids in a specific sequence, which

is, in turn, determined by the sequence of nucleotides in DNA in the gene coding for the particular

protein. Proteins are required for the structure,

function, and regulation of the various cells,

tissues, and organs in the body.

Quality of care: The degree to which actions taken

or not taken increase the probability of beneficial

health outcomes and decrease risk and other

untoward outcomes, given the existing state of

medical science and art.

Randomized clinical trial (RCT): An experiment

designed to test the safety and efficacy of a

medical technology in which people are randomly

allocated to experimental or control groups, and

outcomes are compared.

Recombinant DNA (rDNA) technology Techniques

involving the incorporation of DNA fragments,

generated with the use of restriction enzymes,

into a suitable host organism’s DNA (a vector).

The host is then grown in culture to produce

clones with multiple copies of the incorporated

DNA fragment. The clones containing this particular DNA fragment can then be selected and

harvested.
Appendix E

Method Used by the Office of the Inspector General to Estimate the

Manufacturer’s Costs of Recombinant erythropoietin

The Health Care Financing Administration

(HCFA) was assisted in setting the initial rate that

Medicare paid for recombinant erythropoietin by the

Department of Health and Human Services’ (HHS)

Office of the Inspector General (OIG). 1 Based o n

data supplied by Amgen and other sources of

information, OIG staff estimated Amgen’s costs of

developing and producing the amount of recombinant erythropoietin expected to be used for the

dialysis population in the first year after approval by

the Food and Drug Administration (FDA). HCFA

used this cost estimate as one of the considerations

in setting the initial payment rate for recombinant

erythropoietin administered in a dialysis facility. The

OIG accepted some of the cost data supplied by

Amgen and modified other data.

The OIG’s initial cost estimates were predicated

on certain assumptions concerning use of recombinant erythropoietin in the first year after FDA

approval. These estimates assumed that an average

dose of 5,000 units of recombinant erythropoietin

would be administered to each dialysis patient 3

times a week, for a total of approximately 156 administrations per year, and that recombinant erythropoietin would be used in 20,000-25,000 dialysis

patients in the first year.2

The categories that the OIG used to estimate

Amgen’s costs were current operating expenses;

research and development costs; selling, general, and

administrative costs; income taxes; and payment of

an appropriate rate of return to investors.

IInformation in this appendix was based on personal communications with staff members from the HHS Office of the

Inspector General (129).

zIn December 1988, there were approximately 106,000 dialysis

patients in the U.S. (1S5), and some researchers have estimated

that approximately 75-80 percent are anemic (52). The OIG

estimated full market penetration would take some time (129).

Amgen’s current-year operating expense s

included cost of goods sold; current research and

development costs; sales, general and administrative

costs; and income taxes. The cost of goods sold

included the cost to produce the product, such as

labor and materials; royalty payments; and product

liability payments. Amgen provided the per-unit

budgeted cost of goods sold for recombinant erythropoietin for the first year. Since the OIG had no historical data with which to compare these estimates,

the OIG accepted Amgen’s figures on cost of goods

sold. The ratio of the costs of goods sold to total

projected revenue for Amgen was compared with

that of 19 other pharmaceutical companies and w a s

found to be lower.

The ratio from other pharmaceutical manufacturers, however, would consist of cost of goods sold

for all products made by that manufacturer including,

in some cases, non-pharmaceutical products. These

ratios might be equal to or lower than Amgen’s if the

costs of goods sold and revenues from the sales of

non-pharmaceutical products were removed from the

ratio calculations. For the purpose of comparing the

Amgen ratio with that of other pharmaceutical

manufacturers, the OIG used both the Business and

Investment Almanac of 1988 and Moody’s Industrial

Index.

Also included in cost of goods sold category was a

royalty payment of a certain percent of sales that

Amgen has to make to Stanford University for its

development of the recombinant gene-splicing technique used to produce erythropoietin. The estimated

cost of product liability insurance, based on a certain

percent of recombinant erythropoietin sales, was also

calculated.

Current research and development costs were

defined as the costs that would be incurred by the

manufacturer in 1989 to further research and develop

products under development, including recombinant

erythropoietin. Past research and development

-91-
92- Recombinant Erythropoietin: Payment Options for Medicare

(R&D) costs were not included in this category. To

determine the portion of total R&D on all Amgen’s

products to include in a cost estimate, the OIG first

estimated the portion of the manufacturer’s

projected 1989 research and development costs that

would be allocated to recombinant erythropoietin,

and then estimated the portion of these expenditures

that would be used for further research and

refinement of recombinant erythropoietin in dialysis

patients.

For sales, general and administrative costs,

Amgen estimated its costs of establishing a

marketing and distribution process for recombinant

erythropoietin. These estimates were accepted by

the OIG because there were no historical data with

which the OIG could make comparisons. As was the

case with current research and development costs,

however, the OIG estimated the percentage of these

costs that would be used for recombinant erythropoietin in dialysis patients.

Approximately 20 percent was added to the total

of the above cost categories for current profit and

return on historical investment. Amgen’s income tax

payments for the period were also estimated and

included.

The OIG estimated the amount of funds invested

in Amgen over the past 8 years (1981-1988), an

appropriate profit or rate of return on these funds

for individuals who had invested, and a period of

time over which the investment would be recovered.

Past incurred research and development expenses

were to be included in this category.

To determine the total amount of funds that had

been invested in the company prior to 1989, the OIG

used, as a proxy, the value of stockholders’ equity.

The value of stockholders’ equity was derived from

analysis of the Amgen’s Annual Reports and 1 0 K

reports filed with the U.S. Securities and Exchange

Commission . Amgen received initial start-up

funding from venture capitalists and joint ventures

with other pharmaceutical manufacturers, but later

obtained funds from three public stock offerings.

Investments made in Amgen by other manufacturers

for the purpose of licensing Amgen products or

securing the rights for certain recombinant

erythropoietin treatment indications were not

included in the estimate of stockholders’ equity.

The OIG then compounded a 20-percent rate of

return on the value of the stockholder’s equity for the

8-year period (1981-1988) over which these funds

were invested. To determine the percentage of this

amount that should be included in the cost calculations for recombinant erythropoietin, the OIG

estimated the percent of company revenue over the

period 1992-1995 that would be attributable to

recombinant erythropoietin sales in the dialysis

market. The OIG staff believed that products from

Amgen’s current research activities would reach

maximum sales penetration in the marketplace

during this period.3 This compounded amount was

then divided by 8 to determine the amount that

would be included in the annual cost calculations.

After totaling the costs in all the designated categories, the OIG then calculated the annual cost per

patient by dividing this total amount by the estimate

of patients (20,000-25,000) expected to use recombinant erythropoietin during the first year after FDA

approval. This resulted in the annual per-patient

cost. This amount was then divided by the estimated

number of patient dialysis sessions per year (approximately 156) to arrive at a per-treatment payment

rate. HCFA used this calculated amount as only one

of the considerations in setting its payment rate of

$40 for any dose under 10,000 units.

In the final analysis, the OIG’S estimate of the

per-unit cost of Amgen’s recombinant erythropoietin

consisted of approximately 27 percent for cost of

goods sold; 16 percent for current research and

development costs; 24 percent for sales, general and

administrative costs; 11 percent for income taxes;

and 22 percent for return on initial investment and

profit.

3 The OIG thought that Amgen would have two mature products

in the market in that period of time, recombinant erythropoietin

and granuloeyte colony stimulating factor.
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