Department of Health and Human Services 

OFFICE OF 

NSPECTOR GENERAL 

ACQUISITION COSTS OF PROSTHETIC 

INTRAOCULAR LENSES 

MARCH 1994 
OFFICE OF INSPECTOR GENERAL 

The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, as 

amended, is to protect the integrity of the Department of Health and Human Setices’ (HHS) 

programs as well as the health and welfare of beneficiaries served by those programs. This 

statutory mission is carried out through a nationwide network of audits, investigations, and 

inspections conducted by three OXG operating components: the Office of Audit Services, the 

Office of Investigations, and the Office of Evaluation and Inspections. The OIG also informs 

the Secretary of HHS of program and management problems and recommends courses to 

,- correct them. 

OFFICE OF AUDIT SERVICES 

The OIGS Office of Audit Services (OAS) provides all auditing sefic= for .HH$ either by 

conducting audits with its own audit resources or by overseeing audit work ‘done by others. 

Audits examine the performance of HHS programs and/or its grantees and contractors in 

carrying out their respective responsibilities and are intended to provide independent 

assessments of HHS programs and operations in order to reduce waste, abuse, and 

mismanagement and to promote economy and efficiency throughout the Department. 

OFFICE OF INVESTIGATIONS 

The OIGS Office of Investigations (01) conducts criminal, civil, and administrative 

investigations of allegations of wrongdoing in HHS programs or to HHS beneficiaries and of 

unjust enrichment by providers. The investigative efforts of 01 lead to criminal convictions, 

administrative sanctions, or civil money penalties. The 01 also oversees State Medicaid fraud 

control units which investigate and prosecute fraud and patient abuse in the Medicaid program. 

OFFICE OF EVALUATION AND INSPECTIONS 

The OIGS Office of Evaluation and Inspections (OEI) conducts short-term management and 

program evaluations (called inspections) that focus on issues of concern to the Department, 

the Congress, and the ,public. The findings and recommendations contained in these inspection 

reports generate rapid, accurate, and up-to-date information on the efficiency, vulnerability, 

,’ and effectiveness of departmental programs. This report was prepared in the Chicago regional . . office under the direction of WNiam C. Moran, Regional Inspector General and Natalie A. 

Can, Deputy Regional Inspector General. Project staf~ 

CHICAGO


John M. Traczytq Project Leader


Suzanne G. Johnson


Thomas Komaniecki


BOS’R3N 

TheodoreT. Watt 

SANFRANCISCO


Paul Gottlober


Don Loeb


Brian PattiSon


lzEADQuARTERs


Barbara R. Tedesco


W. Mark Krushat


Wayne A Powell


DALLAS


Frank Atmendarez


ATLANTA


Jacqueline .4mtrews


Chrk Koehler


PHILADELPHIA


Joy Quill


Robert A. Vko


Nancy J. Motyneaux


Linda M.Ragone


RobertA Baiocco


Robert A Katz


NEwYORK


Joseph Corm


Atari Meyer


Lucille Cop


Joseph Benkoski

I 

Department of Health and Human Services 

OFFICE OF 

INSPECTOR GENEML 

ACQUISITION COSTS OF PROSTHETIC 

INTRAOCULAR LENSES 

MARCH 1994 OEI4I5-92-O1O3O 
FINDINGS 

Intraocukw lenwx can be pumhased for km than $2(M. 

On average, ASCS paid $126 per IOL in 1991 and are paying $112 for the same lenses 

today. The OPDS paid $230 per IOL in 1991, over $100 more than ASCS. Today’s IOL 

acquisition costs for OPDS have decreased to an average of $198 per lens, but this price 

is nearly $86 more per IOL than that paid by ASCS. 

The ability of pumhasem to secure a lowpice for IOLS h not dkymdent on the number of 

IOJQ purchased annually. 

Contrary to expectations, our data show that the ability of purchasers to secure a low 

price for IOLS did not depend on the number of IOLS purchased annually, had no 

relationship to the type of lens technology purchased and did not depend on facility 

location or size. 

iUedicareh ability to obtain a fair price for IOih undkr todayb payment mechanisms is 

probkvnatic, particukhrly in OPD settings. 

In an effort to gain a competitive edge, many IOL vendors offer volume discounts, 

rebates, loans, customized packages of related cataract surgical supplies and other 

business arrangements. These incentives were equally distributed between the ASCS and 

OPDS in our sample. Since Medicare pays ASCS a fixed fee for IOLS, the prices ASCS 

pay and the business arrangements they have with IOL vendors have no immediate effect 

on Medicare expenditures. Medicare pays OPDS for the costs they incur. Therefore, 

Medicare is financially vulnerable to undisclosed business arrangements OPDS enter into 

with IOL vendors. 

Benejkiwy out-of-pocket apensm for catamct surgery with IOL implant are 2.5 to 3 times 

greater in OPDS than in AS(X 

Patient coinsurance for cataract extraction with IOL insertion averages $195 in ASCS 

versus $586 in OPDS. Patients pay coinsurance on the total charges they incur for 

services provided by an OPD. The amount of coinsurance an ASC can collect is limited 

to 20 percent of Medicare’s allowed payment rate. 

RECOMMENDATIONS 

On June 18, 1993, the Principal Deputy Inspector General for the Office of Inspector 

General testified before the Senate Appropriations Committee, Subcommittee on Labor, 

Health and Human Services, Education and Related Agencies. At that hearing the 

Subcommittee was notified that this study was nearing completion and that the data 

collected for the study indicated that ASCS were paying about $126 for IOLS while 

ii 
Medicare waspaying ASCs$200 per lens. That testimony andtheinformation in this 

report subsequently resulted in legislation reducing Medicare’s $200 fixed IOL payment 

to $150. 

At a $150 fixed IOL payment rate, we project that reduced payments to ASCS would 

save the Medicare program over $18 million annually, and more than $90 million over 5 

years. The change will also reduce beneficiary coinsurance payments to ASCS by $10 per 

procedure or $3.6 million annually. 

We project $9.7 million in OPD savings annually from this legislative change. We have 

reservations about whether these OPD savings would actually materialize. Complexities 

of the OPD cost reporting system coupled with opportunities for OPDS to shift costs or 

increase charges, may totally erode any potential savings. Unlike beneficiaries who have 

their cataract surgery with IOL implant performed in an ASC, patients of OPDS are 

unlikely to see any change in their out-of-pocket expenses. 

COMMENTS TO THE DRAFT REPORT 

This report has been modified and program savings adjusted to reflect the Health Care 

Financing Administration’s (HCFA’S) comments. The full text can be found in 

Appendix B. 

The most significant change to the report involved the deletion of our recommendation 

that HCFA seek legislation that would enable them to establish a fixed payment level for 

cataract surgery performed in OPDS that would bring OPD payments more in line with 

ASC payments. 

While we believe paying OPDS a fixed rate similar to ASCS to be the best interim 

solution, HCFA felt that this report in itself did not present enough evidence or make a 

convincing argument for such change. At this time, HCFA is continuing to pursue their 

ongoing work to determine the best method of calculation and reimbursement for an 

outpatient prospective payment system encompassing all outpatient procedures. 

Should HCFA consider implementing an outpatient prospective payment system in 

stages, we would encourage them to include cataract surgery with IOL insertion in the 

first stage. Cataract surgery encompasses unique characteristics that distinguish it from 

other outpatient procedures. It is the number one outpatient procedure paid by 

Medicare. It is a procedure that is scheduled days or weeks in advance. It is essentially 

an elective procedure. The beneficiary has control over whether to have the procedure 

done and at what stage in the cataract development to have surgery, Access to facilities, 

ophthalmic surgeons and follow up care is widely available. 

... 

111 
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TABLE OF CONTENTS


PAGE 

EXE~ SuMMARY . . . . . . .."" """"""""""""""""""""""""""""""""1 

1 

llTI’IIODU~ON . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

3 

FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

Intraocular lenses can be purchased for less than $200 . . . . . . . . . . . . . . . . . . . 3


The ability of purchasers to secure a low price for IOLS


is not dependent on the number of IOb purchased annually . . . . . . . . . . . . . . 4


Medicare’sabfitY to obtain afahptice for IOh under


today’s payment mechanisms is problematic, particularly .4


in OPD settings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


Medicare beneficia~ copayments for cataract extraction


with IOLinsefiion are almost 2.5 to 3timesgreater inOPDs 6


than in Arcs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .


RECOMMEN_DAmONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 

APPENDICES: 

A &pndedMetitioloPYmdStititidMomation


B: Health tie FkmtigA-tiation Ccmnenti


8 
INTRODUCTION


PURPOSE 

This study evaluates whether Medicare’s current payment policy for prosthetic intraocular 

lenses (IOLS) is prudent. 

BACKGROUND 

Cataract extraction with IOL insertion is the most frequently performed procedure paid 

by Medicare and accounts for approximately 6 to 8 percent of the Medicare outpatient 

budget. The number of IOLS implanted in Medicare beneficiaries has increased steadily 

over the last decade. In 1991, the Medicare program paid for an estimated 1.14 million 

IOLS. Hospital outpatient departments (OPDS) account for two out of three of the IOLS 

implanted in Medicare beneficiaries. Ambulatory surgical centers (ASCS) account for 

most of the remaining IOL implants and about 2 percent of the implants were performed 

in hospital inpatient or physician office settings. 

In March 1986, the Office of Inspector General (OIG) issued a report which concluded 

that Medicare payment policies encouraged inflated IOL prices. Discounts negotiated by 

purchasers were not passed on to the Medicare program resulting in Medicare paying 

double or triple the actual IOL purchase price. 

In June 1990, the OIG conducted a follow-up study on Medicare’s reimbursement for 

IOLS and, like the previous report, found that IOLS were widely available well below 

Medicare payment level. Both reports concluded that a national cap for IOL payment 

was needed to bring Medicare payment more in line with actual procurement costs. 

The Consolidated Omnibus Budget Reconciliation Act of 1985 and the Omnibus Budget 

Reconciliation Act of 1986 sought to correct the inequities fostered by Medicare payment 

policies. These Acts reduced cataract surgery fees, limited IOL payment and attempted 

to address Medicare payment inequities to ASCS and OPDS. 

In an effort to control expenditures for IOL acquisition costs, Medicare’s current policy 

limits IOL payment in ASCS. After beneficiaries meet their annual deductible, Medicare 

pays 80 percent of the $200 fixed fee, established by the Health Care Financing 

Administration (HCFA), to cover ASC IOL acquisition costs. Payment for the IOL is 

included in Medicare’s ASC facility payment and is not an itemized charge on ASC 

claims. 

Hospital OPDS are paid on a cost basis. Payment for cataract surgery includes the IOL 

and is based on the lower OR (1) charges, (2) cost, or (3) the blended rate. The blended 

rate is equivalent to 58 percent of the ASC cataract surgery rate less deductible and 

1 
coinsurance, plus 42 percent of the costs the OPD incurred less deductible and 

coinsurance. Medicare pays for OPD services using interim payments and then 

reconciles these interim payments with actual costs at the end of the cost reporting 

period. 

Payment for IOLS implanted during hospital inpatient cataract surgery is included in the 

hospital’s DRG payment. Physicians who perform cataract surgery in their office are 

paid for IOLS based on reasonable charge. The reasonable charge may not exceed the 

actual acquisition cost for the IOL plus up to a 5 percent handling fee. 

SCOPE and METHODOLOGY 

A random sample of 361 Medicare patients was drawn from a 1 percent sample of the 

1991 Medicare Part B Common Working File. A total of 326 IOL purchasers responded 

to our survey. 

An effort was made to contact each of the ophthalmic surgeons who operated on the 361 

beneficiaries in the sample. The surgeons were asked to identi~ the IOL manufacturer 

and model number. When the surgeon did not purchase the 10~ we contacted the 

OPD, ASC or other purchaser for IOL cost and procurement information. 

All respondents were asked to provide information about their business transactions with 

IOL vendors. In addition to specific information about the IOL implanted in our 

sampled Medicare beneficiary, IOL purchasers were asked to provide cost information 

about all of the IOL models they purchased in 1991 and 1992. They were also asked to 

provide information about the cost of IOLS they purchased and intended to purchase in 

1993. 

Respondents were contacted in person, through mail sumeys or over the telephone. In 

some cases, the ophthalmologist had died or the facility or practice had been sold and 

the medical records pertaining to the beneficiary in our sample could not be located. 

Some surgeons and facilities chose not to participate in our study others were not 

contacted because they were under investigation for fraud or abuse. A total of 35 

potential IOL purchasers were dropped from the study for one or more of the above 

reasons. 

Survey responses and information collected from surgeons and facilities on the 

beneficiary sample and for IOL purchases in 1991 and 1992 were entered into a data 

base. This information was subsequently prepared for analysis by merging it with 

information obtained from the Food and Drug Administration (FDA) on IOL 

manufacturers suppliers and distributors, model numbers, and FDA approval dates. 

A more complete discussion of the methodology used for this study can be found in 

Appendix A. Appendix A also contains more detailed information on how the data and 

projections presented in this report were determined. 

2 
.,..,,.,,,.,.,,,,,.,, ,.,.,,,.,., ,.:.x.:.:.:...,

..:xm.,.,.~..

FINDINGS


Findikg #I: Ihtmocular knses can be pun%sed for kw than $200. 

The surgeons and facilities purchasing IOLS reported


$450 to secure the lenses implanted in our sampled


price paid was $198.


Considerable difference exists in the


price paid by ASCS and OPDS. The


ASCS in our sample paid, on


average, $126 to secure the IOL


implanted in our sampled beneficiary. oPm


The OPDS paid considerably more,


averaging $230 per IOL.
 . ::?:::::* 

that they spent between $30 and 

beneficiaries. In 1991, the average 

IOL COSTS 

1991 DATA 

Lqend 

� $150.00ORLESS 

(14%) � $150.01-$300.00 

� ~~~ ~.oo 

.::.:,:.:.i.

,%.,.,:,:.:.. According to survey responses, nearly ‘.:{:...(17%) ASCS 

e 9 out of 10 respondents still purchase ~w%) 

the same IOL model they implanted 

in 1991 in 1993. The same IOLS that (=) 

cost on average $198 in 1991 are 

being purchased in 1993 for an v 1%) 

average price of $172. As the table 

below illustrates, OPDS are paying 

less in 1993 than in 1991, but, on 

average, OPDS pay nearly $86 more per IOL than ASCS. 
Finding #2: l%e ability of pumhasem to secure a low prke for IOLJ k not dependent on 

the number of IOLS pumhased aruuudly. 

Contrary to expectations, our data show that the ability of purchasers to secure a low


price for IOLS did not depend on the number of IOLS purchased annually. When we


analyzed the data on all of the lenses our respondents purchased in 1991 and 1992, we


found that less than 3 percent of the variance in IOL prices can be explained by the


volume of lenses purchased.


When we analyzed our data on lens purchases, we found that OPDS affiliated with


hospitals having 100 beds or less had no problem securing IOLS at competitive prices.


As with our analysis of volume versus price, we found little correlation between bed size


and IOL prices.


Analysis of data and information provided by respondents show that the price negotiated


between purchaser and vendor was usually valid for all similar, if not all, IOL models in


the vendor’s product line. For example, a single price would be negotiated for all


poly(methyl methacrylate) or PMMA IOLS, all posterior chamber IOLS or all IOLS


except specific models.


The same data and information indicate that surgeons tended to use the same posterior


chamber IOL model for all of their patients. Surgeons deviated from their IOL of choice


only when an anterior chamber IOL was needed, when experimenting with trial lenses or


when the surgeon’s preferred IOL was contraindicated. Some surgeons changed their


IOL preference when the lens they used was no longer offered by the vendor.


We also expected that newer lenses would be more costly than older model IOLS. When


we examined the acquisition costs of foldable ultraviolet absorbing silicone lenses we


found that they were available in prices ranging from $75 to $475. Our data also showed


that this 10~ which many consider to be the newest technology available, was being


purchased by ASCS for $125 or less.


Examination of the data on all IOLS purchased in 1991 and 1992 shows that vendors


charged purchasers whatever the market would bear for a particular model. For


example, one vendor sold a particular model for $100 to one purchaser and for $410 to


another purchaser. Of the seven purchasers of this IOL model, five paid more than $100


but less than $410. All of the purchasers bought at least 500 units of this particular


model in 1991 and 1992. The price paid for this IOL had no apparent correlation to the


volume of other products purchased from the vendor.


Finding #3: Mxlicareh abildy & obtain a fairpice for IOLJ undertodaykpayment 

mechankm k problematic, particuk@ in OPD settings. 

In an effort to gain a competitive edge, many IOL vendors offer volume discounts, 

rebates, loans, customized packages of related cataract surgical supplies and other 

4 
� 

� 

� 

� 

� 

� 

� 

� 

business arrangements. When we examined invoices,


contracts, agreements and other documents provided by 101+ PURCHASERS


our respondents, we found evidence to establish that 52 IU3CETVE


percent of the IOL purchasers had one or more of the ..... ......................


following included in their IOL purchase:


Free 

Customized package deals in which other cataract . ~Urg~al~u~~lie~


related supplies and pharmaceuticals are included at “viscoekistic


no cost or provided at greatly reduced cost. - pharmaceuticals


Discounted microscopes and other surgical - IOU


equipment and supplies.


Volume discounts based on minimum purchase D&cotuzted


- lllicroscopes commitments. - swgkal equipment
 Free IOLS or further price reductions after meeting - smgkal blades


certain volume level commitments.


Loans, some of which appear to have been forgiven Incentiws


in later years. - bans


Frequent buyer points good toward the purchase of - -h rebat~


the vendor’s other product lines. - ilequent buyerpoints


Free equipment and trial IOLS.


Cash rebates on total IOL purchases.


The actual number of purchasers with a quid pro quo business arrangement with their 

IOL vendor is probably closer to 75 or 80 percent. We believe the higher number to be 

correct after examining all of the invoices and other documents submitted. 

Some respondents did not provide conclusive evidence acknowledging their business 

arrangement with their IOL vendor; the information they did provide fit the pattern of 

business arrangements established horn files with more complete information. For 

example, some respondents did not acknowledge in our survey that they had made 

equipment purchases through their IOL vendor. No documentation to establish 

conclusively that an equipment purchase was included in the IOL purchase price was 

submitted. However, the IOL price reflected on invoices or other documents provided 

fits the pattern of business established by IOL vendors. When complete information was 

provided, this vendor’s pattern of business established that the purchaser’s IOL 

acquisition cost included payment for more than the IOL itself. 

While providers are required by law to disclose discounts and other incentives that affect 

the costs they clainy discounts and other incentives have not always been passed on to 

the Medicare program. We are concerned because the complexities of cost reporting still 

leave the Medicare program vulnerable to financial harm from undisclosed business 

arrangements OPDS enter into with IOL vendors. 

Perhaps the most abusive practice we found involved IOLS purchased by an OPD that 

were delivered to physicians who, in turn, resold them to the OPD at even higher prices. 

Another, involved wasteful and unnecessary next day freight charges that the OPD 

5 
insisted upon and routinely paid. Most cataract surgeries are scheduled days if not weeks


in advance. The IOLS used are taken horn stock on hand. There is no reason to pay


next day shipping charges for routine restocking. The most prevalent practices involved


inflated IOL prices in exchange for discounts on other vendor products and unbundling


of items included with the IOL purchase.


According to HCF& very few OPDS are subjected to full scale audits of the costs they


claim to have incurred to provide cataract extraction with IOL insertions. Fiscal


intermediaries complain of complex and often conflicting laws, regulations and rules that


make indepth audits time consuming and not cost effective. Providers voice the same


complaints. Cost reporting forms have not been changed to enable fiscal intermediaries


to effectively track the lesser of charges, costs or the blended rate for OPD cataract


surgery.


Vendor business arrangements with purchasers are customized to meet the buyer’s needs.


The arrangement may be purely financial such as a loan to purchase a piece of


equipment or to establish an operating suite. It may involve bundled cataract surgery


products from a single source or from multiple sources. The vendor’s stated value of any


item can vary considerably. The list price for equipment, supplies, IOLS and other items


is readily available but very few items offered by vendors are actually sold at list. The


cost to produce an IOL and the other items needed to perform cataract surgery is


unknown. Determining cost becomes more difficult as distributors and other third parties


add their profit margins to actual production costs. Eleven of our respondents reported


that the value of items they received with each IOL exceeded their IOL acquisition cost.


Arrangements may be one time events, short term (less than a year) or long term (one or


more years). They may be limited to IOL purchases or applied to other surgical or


facility supplies. They may be straight forward or backdoor arrangements such as rebates


paid to corporate offices or other third parties. Overall, they reflect business practices


common in the American economy. Attempts by Medicare to quantify the value of these


arrangements is extremely difficult, if not impossible.


Finding #4: M&am benejkiary copayment for catumct exlnrction with IOL insertz”onare 

25t03tirnesgreater inoPfithan iil AsCk 

After a beneficiary’s annual cash deductible has been satisfied, Medicare pays 80 percent 

of the ASC prospective payment rate established by HCFA for cataract extraction with 

IOL insertion. The beneficiary, or as is often the case the beneficiary’s secondary 

insurance, is responsible for paying the remaining 20 percent. The beneficiary copayment 

for services provided in ASCS is limited to the difference between the Medicare payment 

and the total ASC fixed rate calculated by the carrier paying the claim. The fixed rate 

calculation uses national payment rates established by HCFA to approximate the cost 

incurred by ASCS in providing covered services. Each carrier adjusts the national 

payment rate using the wage index value for the geographical area in which the ASC is 

located. Areas with high wage levels receive a higher payment than ASCS located in 

6 
areas with lower wage levels. Based on our sample, the average prospective rate 

established by HCFA for ASC cataract extraction with IOL insertion in 1991 was $975. 

On average, patients paid $195 in coinsurance to ASCS and the Medicare program paid 

the remaining $780. 

Hospital OPDS are not under the same billing constraints as ASCS. Patients pay 

coinsurance on the total charges they incur. Our sample establishes that the average 

charge for OPD cataract extraction with IOL insertion in 1991 was $2,928. On average, 

OPD patients paid $586 in coinsurance in 1991, which amounts to $390 more than ASC 

patients paid in the same year. 

Medicare payments to OPDS are affected by the amount of coinsurance OPDS collect. 

The greater the OPD charge to the patient the greater the patient coinsurance and the 

lower the Medicare payment. Our data established that the average OPD charge to 

patients for cataract surgery with IOL implant in 1991 was $2,928. The difference 

between an OPD’S charges to patients and the actual costs they incur in providing OPD 

services establishes the cost to charge ratio. Assuming the average cost to charge ratio 

for OPDS to be 50 percent, we calculated that the average cost of providing cataract 

surge~ in OPDS in 1991 was approximately $1,464. 

Our data shows that on average, patients paid OPDS $586 in coinsurance for OPD 

cataract surgery. This payment is deducted from the costs recognized by the program. 

After the $586 coinsurance has been deducted from the $1,464 cost, Medicare paid, on 

average, $878 per OPD procedure. 

Currently, IOL costs are not paid separately from total cataract surgery costs. Nor is the 

beneficiary copayment for the IOL calculated separately. If IOLS were paid separately, 

the coinsurance on the IOL would be $40 in ASCS. In OPDS, the IOL coinsurance is 20 

percent of the OPD charge for the lens. In our sample, OPDS charged beneficiaries an 

average of $580 for an IOL. The beneficiary coinsurance on IOLS provided by OPDS in 

1991, averaged $116, nearly 3 times greater than ASCS. 

7

RECOMMENDATIONS


On June 18, 1993, the Pticipal Depu~Inspector General forthe Ofice of Inspector 

General testified before the Senate Appropriations Committee, Subcommittee on Labor, 

Health and Human Services, Education and Related Agencies. At that hearing the 

Subcommittee was notified that this study was nearing completion and that the data 

collected for the study indicated that ASCS were paying about $126 for IOLS while 

Medicare was paying ASCS $200 per lens. That testimony and the information in this 

report resulted in legislation to reduce Medicare’s $200 fixed IOL payment to $150. We 

encourage HCFA to broaden the scope of that legislation by seeking an amendment to 

the statute and regulations that would extend the $150 limit on IOLS to physicians who 

perform cataract surgery in their office. 

At a $150 fixed IOL payment rate, we project that reduced payments to ASCS would 

save the Medicare program over $18 million annually, and more than $90 million over 5 

years. The change will also reduce beneficiary coinsurance payments to ASCS by $10 per 

procedure or $3.6 million annually. 

We project $9.7 million in OPD savings annually from this legislative change. We have 

reservations about whether these savings would actually materialize. Complexities of the 

OPD cost reporting system coupled with opportunities for OPDS to shift costs or increase 

charges, may totally erode any potential savings. Unlike beneficiaries who have their 

cataract surgery with IOL implant performed in an ASC, patients of OPDS are unlikely 

to see any change in their out-of-pocket expenses. 

COMMENTS TO THE DRAFT REPORT 

The Health Care Financing Administration (HCFA) commented on our draft report. 

The report has been modified and program savings adjusted to reflect HCFA’S 

comments. The full text can be found in Appendix B. 

The most significant change to the report involved the deletion of our recommendation 

that HCFA seek legislation that would enable them to establish a fixed payment level for 

cataract surgery performed in OPDS that would bring OPD payments more in line with 

ASC payments. 

Until a comprehensive outpatient system can be developed we believe paying OPDS a 

fixed payment rate similar to the rate paid to ASCS to be the best interim solution. The 

HCFA felt that this report in itself did not present enough evidence or make a 

convincing argument for such change. At this time, HCFA is continuing to pursue their 

ongoing work to determine the best method of calculation and reimbursement for an 

outpatient prospective payment system encompassing all outpatient procedures. 

If HCFA should consider implementing a prospective payment system for outpatient 

8 
semices in stages, we would encourage them to include cataract surgery with IOL in the 

first stage. Cataract surgery encompasses unique characteristics that distinguish it from 

other outpatient procedures. It is the number one outpatient procedure paid by 

Medicare. It is a procedure that is scheduled days or weeks in advance. It is essentially 

an elective procedure. The beneficiary has control over whether to have the procedure 

done and at what stage in the cataract development to have surgery. Access to facilities, 

ophthalmic surgeons and follow up care is widely available. 

9

APPENDIX A 

Eqymded Methodology 

and 

Statistical Information 

A-1 
METHODOLOGY


A random sample of 361 Medicare beneficiaries who had cataract surgery with IOL 

insertion performed in 1991 was drawn from a 1 percent sample of the Medicare Part B 

Common Working File (CWF). Using CWF information, we identified the ophthalmic 

surgeon for each patient in the sample. 

An effort was made to contact each surgeon either in person, through the mail or over 

the telephone. 

We did not receive information from 8 ophthahnic surgeons: 

. Five surgeons did not respond to our requests, 

. Two were under investigation and were not contacted at the request of the Office 

of Investigations, and 

� One could not be located. 

A total of 353 ophthalmic surgeons (nearly 98 percent of the sample) responded to our 

request for information. 

Three beneficiaries were dropped from the sample for the following reasons reported by 

the ophthalmic surgeon: 

. The cataract procedure with IOL implant had actually been performed in 1990, 

� One patient died and surge~ was aborted before lens implant, and 

. One patient had a cataract removed but no lens was implanted. 

Overall, we were able to identify, from surgeon records: (1) the IOL purchaser, (2) the 

IOL manufacturer, (3) the IOL model number, and (4) the IOL serial number for 350 of 

the 361 patients in our sample. 

Using the information gained from surgeon records, we attempted to contact each IOL 

purchaser (ASC, OPD or physician) to ascertain the cost of the IOL implant. We were 

unable to secure a response to our request for information from 27 IOL purchasers: 

. Twenty-one purchasers did not respond to our request for information, 

. Three were under investigation and at the request of the OffIce of Investigations 

were not contacq 

. Three could not be identified (the ophthalmic surgeon did not respond and 

information on hand was insufficient to ident~ the purchaser). 

A-2

Information was received from 326 IOL purchasers, representing 90 percent of the


sample. The information presented in this study was derived from the information we


received from these 326 IOL purchasers.


Each purchaser was asked to disclose the cost they incurred to procure the IOL


implanted in our sampled patient. They were also asked to provide a copy of the invoice


showing: (1) the IOL manufacturer, (2) the IOL model number, and (3) the IOL serial


number. Accuracy of reported IOL acquisition costs were verified by comparing


reported acquisition costs with the purchase prices shown on the purchase invoices.


Discrepancies between survey responses and the invoice price were documented for


analysis.


Finding #1


The IOL cost incurred by the 326 purchasers responding to our request for information


was entered into a data base for analysis. Arraying the data established that the IOLS


implanted in our sampled beneficiaries ranged in price from $30 to $450. The average


price paid was $198.


Analysis of IOL acquisition cost data by type of purchaser revealed that OPDS paid


significantly more for their IOLS than did the ASCS in our sample. On average, OPDS


paid $230 for each lens they implanted during 1991. The ASCS paid an average $126 per


lens during the same period.


Nine out of 10 (299 of 326) purchasers indicated that they were still purchasing the same


IOL model implanted in our sampled Medicare beneficiary. Information provided by


these purchasers established that the average price they paid for IOLS had decreased


between 1991 and 1993. The average cost of an IOL fell from $198 per lens in 1991 to


$172 per lens in 1993. The lowest price paid for an IOL in 1993 was $40 and the highest


price $450. The average price paid by ASCS declined from $126 to $112, while the


average price paid by OPDS declined from $230 to $198 per lens.


Finding #2 

In addition to information about the IOL implanted in our sampled Medicare beneficiary, 

all purchasers were asked to provide volume and cost data on all of the IOLS they 

acquired in calendar years 1991 and 1992. Invoices and contracts provided by our 

respondents were used to validate the awurq of the reported costs. The information 

provided was entered into a data base for analysis. Discrepancies between 

invoices/contacts and reported data were documented and analyzed. 

The 326 purchasers in our sample bought a total of 213,745 IOLS in 1991 and a total of 

233,036 lenses in 1992. We calculated the mean and median for all lenses purchased in 

1991 and 1992. The analysis of the 213,745 lenses purchased in calendar 1991 produced 

A-3 
a mean of $121 for ASCS compared to our sample mean of $126. The same data set 

produced a mean of $219 for OPDS compared to our sample mean of $230. Analysis of 

the 233,036 IOLS purchased in 1992 revealed that the average IOL acquisition cost had 

declined from 1991 levels for both ASCS and OPDS. This finding was consistent with the 

results of our initial sample which showed that the average price paid to acquire an IOL 

had fallen between 1991 and 1993 from $198 in 1991 to $173 in 1993. 

Neither ASC or OPD variance in IOL prices was explained by the volume of lenses 

purchased. We analyzed the data on all lenses purchased in 1991 and 1992 to determine 

if a correlation existed between the volume of lenses purchased and acquisition cost. 

Correlation analysis indicated that overall less than 3 percent (1991 R-square = 0.0289, 

1992 R-square = 0.0274) of the variance in IOL prices was explained by the volume of 

lenses purchased. 

Analysis of the OPD data for 1991 and 1992 produced R-squares slightly higher than the 

overall sample. R-squares for OPDS were 0.0566 for 1991 and 0.0483 for 1992 indicating 

again little of the variance in IOL prices paid by OPDS was explained by the volume of 

lenses they purchased. Additional analysis of the 1991 and 1992 OPD data revealed that 

no correlation existed between the price OPDS paid for IOLS and the size of the 

purchasing institution. 

The data on all lenses purchased in 1991 and 1992 was further analyzed by merging it 

with a data base containing Food and Drug Administration (FDA) approved IOLS. The 

FDA data base contained information on all IOL model numbers approved by the FDA 

for each manufacturer/distributor and the year in which the IOL model received FDA 

approval.1 Analysis of this data revealed the price paid for a particular lens model 

varied significantly and that neither the attributes of the lens (Pm hepatics etc.) nor 

the number of years the lens had been on the market affected the price of the lens. 

Finding #3 

Providers are required by law to disclose discounts and other incentives that might affect 

the costs they claim and the providers subsequent reimbursement from the Medicare 

program. Several prior studies have attempted to make adjustments to the IOL costs 

claimed by respondents by taking into account the value of free or discounted services 

and supplies provided by IOL manufacturers and distributors. We made no such 

adjustments to IOL acquisition costs reported by our respondents. 

4 

‘ As of August 8, 1989 manufacturers could make certain model additions without FDA approval. These new 

model numbers dld not require FDAapproval because they were essentialitythe same lens already approved by the FDA. 

Likewise,manufacturers and distributors were not required to report new model numbers assigned lenses already approved 

by the FDA. 

A-4 
We found evidence to establish that 169, or 52 percent, of our study respondents clearly 

had business arrangements with IOL manufacturers, distributors and others that arguably 

could have inflated the IOL acquisition price they reported to us. A number (76) of 

respondents did not provide complete copies of their financial agreements with their IOL 

vendors. The invoices and other information that these 76 respondents did provide 

indicated that they might have business arrangements with IOL vendors similar to the 

169 respondents who disclosed such arrangements. Overall, we concluded that 75 

percent our respondents had business arrangements with one or more of their IOL 

suppliers that might artificially inflate the cost they incurred in procuring IOLS. The 

number climbs to nearly 80 percent when arrangements involving third parties are taken 

into consideration. 

Finding # 4 

All of coinsurance amounts reported in this study were derived from the actual bills 

submitted to the Medicare program by the OPDS and ASCS in our sample. 

The ASC billing and payment information was readily obtained from the Part B history 

contained in the common working file (CWF) from which we drew our sample. The 

ASC patient deductibles and coinsurance were determined by subtracting program 

payments from the recognized ASC facility charge shown on the CWF. 

The ASC data in the CWF indicated that the average ASC allowed charge for the 

beneficiaries in our sample was $975. The data also established that beneficiaries paid, 

on average, $195 in coinsurance to ASCS. On average the Medicare program paid $780 

to ASCS for each cataract procedure performed in 1991. 

To determine what OPDS were charging patients for cataract surgery with IOL implant 

we used information that we obtained from the OPDS that responded to our sumey. All 

of the HOPDS in our sample were asked to provide a copy of the itemized bill they 

provided to the Medicare patient in our sample. They were also asked to provide a copy 

of the bill that they submitted to Medicare for payment. This information was entered 

into a data and when analyzed revealed that on average: 

1) OPDS charged $2,928 for cataract surgery with IOL implant in 1991, and 

2) Medicare beneficiaries paid, on average, $586 in coinsurance. 

SAVINGS PROJECTIONS 

Our sampling of the CWF indicated that approximately 1.14 million cataract procedures 

with IOL implant were performed in calendar year 1991. Of the 361 beneficiaries in our 

sample, 238 (66 percent) had cataract surgery performed in an OPD; 114 (32 percent) 

had surgery in an ASC. The remaining 9 beneficiaries (2 percent) were classified as 

A-5

“other or unknown” and includes beneficiaries who had surgery performed while hospital 

inpatients or in a physician’s office. 

JUediMre l+vgmm Savings Fmm Changes to ASC P~ 

The legislation enacted by Congress would not change the current method used by 

Medicare to pay ASCS for cataract extraction with IOL implant. The ASC payment 

method adds the maximum allowable amount for an IOL to the geographically adjusted 

standard overhead amount or payment group. In 1991, $200 (the maximum allowable for 

an IOL) was added to the payment group (adjusted standard overhead) determined for 

each ASC. The legislation enacted by Congress lowered this amount from $200 to $150. 

One out of every 3 (32 percent) cataract procedures with IOL implant was performed in 

an ASC. This equates to 360,000 of the 1.14 million procedures performed in 1991. The 

change enacted by Congress will lower the amount Medicare allows for IOL acquisition 

costs by $50 per procedure and produce savings of over $18 million per year (360,000 

procedures x $50). Over 5 years these savings will amount to more than $90M. 

Calculations may vary slightly due to rounding. 

-9’ Savings 

As previously mentioned, we used the CWF to determine the average coinsurance paid 

by Medicare beneficiaries to ASCS. The change in the amount recognized for an IOL 

will have a direct impact on the amount of coinsurance that will be paid by beneficiaries 

electing to have their cataract surgery with IOL implant performed in an ASC. 

Beneficiary coinsurance liability will decrease by $10 for each cataract procedure with 

IOL insertion performed at an ASC. Overall, the 360,000 beneficiaries who use ASCS 

each year will save a more than $3.6 million annually (360,000x $10). 

M’&are Rngmm Savihgs Rvm Changes to OPD Payments 

Using the billing information provided by the OPDS our sample, we determined 

approximately how much Medicare might have paid each of them for the claim they 

submitted on our sampled beneficiary. To do this we determined how much Medicare 

would have paid each OPD using cost reimbursement, the blended rate and actual 

charge. The lowest payment amount was then used in all calculations. 

Our first calculation established the likely Medicare payment if the OPD in our sample 

had been paid using cost reimbursement. To arrive at a Medicare payment amount 

based on cost, we used an average cost to charge ratio of 50 percent. The 50 percent 

figure was taken from a HCFA draft report concerning outpatient services. 

A-6

For each OPD in our sample we took 50 percent of the total charges indicated on the 

bill (UB820r other) submitted to Medicare for payment. From this amount (total billed 

charges x 0.50) we subtracted the actual amount of coinsurance the patient was required 

to pay (20 percent of the total charges shown on the bill). This gave us the approximate 

Medicare payment if the claim was paid using cost reimbursement. 

Our second calculation established Medicare’s payment to each OPD in the sample using 

the blended rate. To establish a potential Medicare payment amount using the blended 

rate it was necessary for us to determine the ASC and OPD portion of the blend. 

The ASC portion of the blend was determined using data from the CWF. The average 

ASC payment rate for 1991 ($975) was adjusted to reflect the average coinsurance ($195) 

paid by beneficiaries. This gave us the average net amount paid by Medicare to ASCS or 

$780 ($975 - 195). The net amount paid to ASCS was then adjusted by 58 percent to 

arrive at the ASC portion of the blend ($780x 0.58 or $452.40). 

The OPD portion of the blended rate was determined by taking 42 percent of the cost 

determined under the cost reimbursement method described above. 

A-7

The Medicare payment amount determined from each method (cost reimbursement and 

blended rate) described above was compared to actual amount billed. The lowest of the 

three numbers was established as Medicare’s likely payment amount for each OPD in our 

sample. 

Savings from the change in IOL reimbursement were derived by changing the blend 

calculation to reflect the lower ASC portion resulting from legislative change. This new 

blended rate was compared to the lowest rate established in the above calculations. If 

the new blended rate was lower than the previously established payment rate, savings 

would accrue to the Medicare program. 

We calculated that the ASC portion of the blend would decline from $452.40 to $429.20. 

Using the lower ASC portion of the blend we recalculated the blended rates for each 

OPD in the sample. The revised blended rates were compared to the lowest payment we 

calculated for the OPD bill submitted to Medicare in 1991. When the revised blended 

rate was lower than the amount paid in 1991 savings would accrue to the Medicare 

program. We added up these individual OPD savings and determined $12.90 to be the 

average savings per OPD procedure. 

Of the 1.14 million cataract procedures with IOL implant, approximately 66 percent, or 

752,000 procedures, were performed in OPDS. Savings of $12.90 per procedure are 

projected to yield savings of $9.7 million annually or $48.5 million over 5 years. 

A-8

APPENDIX B 

Comments 

of 

The Health Care Financing Administration 

B-1 
�

** ..

,,*, ,, Health Care ,, 4 

. DEPARTMENTOFHEALTH & HUMAN SERVICES Financing Admmls~ration : 

: 

: %‘., Jg

%v,m 7 Memorandum 

Date 

From 

Subject 

To 

#w?29@ 

Bmce C. VladO /. /.&( 

Administrator \ \ 

b 

Office of Inspector General (OIG) Draft Report “Intraocular Lens (IOL) Implant 

Acquisition Costs,” (OEI-05-92-01030) 

June Gibbs Brown 

Inspector General 

We reviewed the subject draft report which examines IOL acquisition costs. 

HCFA concurs with Option 1 presented in the report. A provision included in the 

Omnibus Budget Reconciliation Act of 1993 reduces the IOL payment rate for 

ambulatory surgicai centers to $150. Our detailed comments are attached for your 

consideration. 

Thank you for the opportunity to review and comment on this report Please advise 

us if you would like to discuss our position on the report recommendation at your 

earliest convenience. 

Attachment 

B-2 
Comments of the Health Care Financine Administration (HCFA\ 

on the Ot’ficeof [nspector General (OIG’) Draft Report: 

“Intraocular Lens (IOLS) [mdant Acquisition Costs,” 

(OEI-O5-42-O1O3O) 

OIG Recommendation 

HCFA should establish a fixed payment level for cataract surgexy petiormed in hospital 

outpatient departments (OPDS) that would bring Medicare reimbursement to OPDS 

more in line with ambulatory surgical centers (ASCS) payments. 

[f this is not achievable, we suggest HCFA consider our options for addressing lens 

acquisition costs. 

Option 1- Reduce the S200 freed IOL payment, without changing cufie~t 

policies for determining payment. 

Oution 2- ~- Establish a fMed program payment for IOLS and a f~ed 

beneficia~ copayment for each IOL Payment for 10Ls at 

$ 1~, and beneficiary copayment at 1991 levels: $40 for 

&s and$116 for OPDS. 

~- Establish a fued program payment for IOLS and a fixed 

beneficiary copayment for [Ok Payment for IOLS at $ 1S0, 

and beneficiary copayment set at $92 for both ASCS and 

OPDS. 

~- Establish a fixed program payment for IOLS and a fixed 

beneficiary copayment for IOLS, with beneficiary copayment 

set at 20 percent of the payment rate for both ASCS and 

OPDS. 

HCFA Resrmnse


HCFA concurs with option 1 and has taken action. We have already received legislation


through the Omnibus Budget Reconciliation Act (OBRA) of 1993, signed on


August 10, 1993, to reduce the IOL payment rate for ASCS to $150 for the period


January 1, 1994, through December 31, 1998. We suggest that in the final report this


option include a more detailed description of what implementation would accomplish.


For example, in addition to the direct savings realized in ASCS, there will be some


indirect savings in OPDS as the payment level used in the blended payment amount


would also decrease. (The blended payment amount includes 58 percent of the ASC


rate. )


B-3

Page 3 

Each segment of option 2 represents a piecemeal approach to payment and coinsurance 

reform, and each contains inherent problems, both in the calculation of savings and in 

implementation. Options 2A and 2B would increase the beneficiary share of total 

payment for IOIA in ASCS from 20 percent to 27 percent and 61 Percenk respectively. 

ln addition, although option 2B decreases the coinsurance paid in OPDS for IOLS by 

$18 million, at the same time it increases actual beneficiary payments by the same 

amount in ASCS. 

--”-” 

The report shows option 2C as saving the program %2+miiKon”~ IOL rates were set at 

$150. We believe that this option would actual!y prove a cast to the program, as 

beneficiary coinsurance for the IOL would decrease more than would the total payment. 

A technical appendix to the report would be indispensable. This should describe the 

sampling methodology in greater detail than presented in the reporg clarifying ~uch 

questions as how sumey information was “merged with information obtained tiom the 

Food and Drug Administration” and the relationship between 10L costs and procedure 

costs. 

It is not clear how OIG derived their program savings in OPD payments. There are 

discrepancies between the OIG’S estimates and our own estimates which suggest a 

systematic difference in the way these figures are calculated. Based on information 

contained in the report, it appears to us that the program savings are greatly overstated. 

We suggest that all savings calculation be presented in detail, either at relevant places in 

the text or as part of a technical appendix. 

Refer to the attached markup of the draft report for other suggested changes. 

B-5

Page 2 

In addition to supporting the reduction in Medicare IOL allowance to the $150 level in 

ASCS, we also support an amendment to the statute and regulations that would apply 

that level to IOL payments made to physicians who perform cataract surgery in their 

office. Although these changes could possibly be made through ordinary notice and 

comment procedures, we believe that legis~ation would more expediently achieve these 

ends. 

Regarding the report’s prima~ recommendation, 0BIL4 of 1986 requires HCFA to 

develop a prospective payment approach for hospital outpatient senkes. Toward this 

en~ the Office of Research and Demonstrations is funding a study to assist in 

implementing such an approach. The study will produce a national data base of 

outpatient facility resource costs that can be used as input to formulate an outpatient 

prospective paynent system. The study wiil cover 400 procedures including the resource 

use and costs for cataract removal and IOL implants in both the hospital OpD-aBd the 

ASC setting. 

The study is not complete at this time. The final report is expected to be completed in 

early 1994. Upon completion, it is expected that data from over 70 OPDS and ASCS will 

have been analyzed, comprising an estimated 2S,000 cataract procedures. The 

prelimina~ data indicate that the average cost of the IOLa is below $200 (in the range 

of $175), although some were purchased at a cost of over $400. The method for 

calculating the cost for the IOLs will be expanded beyond the existing methodology, 

which determines an average cost across all sitq to also include a weighted analysis of 

the number and range of costs for IOU purchased at each site. 

General Comments 

Descriptions of OPD payment in the Background sections of the Executive Summary 

and Introduction are not completely accurate. Twenty percent of the ASC rate is netted 

out in the ASC portion of the blen& rather than actual coinsurance. 

We suggest that the term “blended payment amount” be used instead of “blended rate” 

as “rate” implies an amount determined in advance based on a blended payment 

methodology. 

The primaxy recommendation in the repo~ i.e., establish a fixed rate for OPDS 

approximating ASC payment levels does not flow from the findings in the report. 

The first option does not specifically address coinsurance; however, the report does 

indicate that beneficiaries would save $1.7 billion from this recommendation. What 

generates these savings? Who pays the $1.7 billion if not Medicare?