Medicare Part B Drugs: CMS Data Source for Setting Payments Is Practical but Concerns Remain
Published: 2006-07-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2005, the Centers for Medicare & Medicaid Services (CMS), as required by law, began paying for physician-administered Part B drugs using information on the drugs' average sales price (ASP). Subsequently, CMS selected ASP as the basis to pay for a subset of Part B drugs provided at hospital outpatient departments. To calculate ASP, CMS uses price data submitted quarterly by manufacturers. GAO was asked to discuss its work on Medicare payment rates for Part B drugs. This testimony is based on several GAO products: Medicare Hospital Pharmaceuticals: Survey Shows Price Variation and Highlights Data Collection Lessons and Outpatient Rate-Setting Challenges for CMS, GAO-06-372 , Apr. 28, 2006; Medicare: Comments on CMS Proposed 2006 Rates for Specified Covered Outpatient Drugs and Radiopharmaceuticals Used in Hospitals, GAO-06-17R , Oct. 31, 2005; and Medicare: Payments for Covered Outpatient Drugs Exceed Providers' Costs, GAO-01-1118 , Sept. 21, 2001. Specifically, GAO's statement discusses (1) ASP as a practical and timely data source for use in setting Medicare Part B drug payment rates and (2) components of ASP that are currently unknown and implications for Medicare rate-setting.
section_title: What GAO Found
paragraphs: In summary, using an ASP-based method to set payment rates for Part B drugs is a practical approach compared with methods based on alternative data sources, for several reasons. First, ASP is based on actual transactions and is a better proxy for providers' acquisition costs than average wholesale price or providers' charges included on claims for payment, neither of which is based on transaction data. Second, ASPs, which manufacturers update quarterly, offer information that is relatively timely for rate-setting purposes. In comparison, rates for other Medicare payment systems are based on data that may be at least 2 years old. Finally, using manufacturers as the data source for prices is preferable to collecting such data from health care providers, as the manufacturers have data systems in place to track prices, whereas health care providers generally do not have systems designed for that purpose. CMS lacks certain information about the composition of ASP that prompted GAO, in commenting on CMS's 2006 proposed payment rates for a subset of Part B drugs, to call ASP "a black box." Significantly, CMS lacks sufficient information on how manufacturers allocate rebates to individual drugs sold in combination with other drugs or other products; this is important, as CMS does not have the detail it needs to validate the reasonableness of the data underlying the reported prices. In addition, CMS does not instruct manufacturers to provide a breakdown of price and volume data by purchaser type--that is, by physicians, hospitals, other health providers, and wholesalers, which purchase drugs for resale to health care providers. As a result, CMS cannot determine how well average price data represent acquisition costs for different purchaser types. In particular, to the extent that some of the sales are to wholesalers that subsequently mark up the manufacturer's price in their sales to providers, the ASP's representation of providers' acquisition costs is weakened. Additionally, a sufficient empirical foundation does not exist for setting the payment rate for Medicare Part B drugs at 6 percent above ASP, further complicating efforts to determine the appropriateness of the rate. Given these information gaps, CMS is not well-positioned to validate the accuracy or appropriateness of its ASP-based payment rates.

section_title: Letter
paragraphs: I am pleased to be here as you discuss Medicare’s method of paying for  outpatient drugs covered under the program’s Part B, the part of Medicare  that covers a broad range of medical services, including physician,  laboratory, and hospital outpatient department (HOPD) services and  durable medical equipment (DME). Part B-covered drugs are typically  administered by a physician or other medical professional rather than by  patients themselves. In contrast, drugs covered under the new prescription  drug benefit, known as Part D, are generally self-administered by patients.  In 2005, Medicare paid more than $9 billion for Part B drugs furnished in  conjunction with physician services, HOPD services, dialysis services, and  services performed using DME, such as nebulizers.2, 3  Until 2005, Medicare’s method of paying physicians for Part B drugs was  based on the drug’s average wholesale price (AWP), which, despite its  name, was neither an average nor what wholesalers charged. It was a  price that manufacturers derived using their own criteria; there were no  requirements or conventions that AWP reflect the price of an actual sale of  drugs by a manufacturer. An analysis we conducted in 2001 on Part B  drug prices found that Medicare’s AWP-based payments often far  exceeded market prices that were widely available to health care  providers.
In this testimony, we will refer to physicians, hospital outpatient services, dialysis  services, and durable medical equipment suppliers collectively as providers.
A nebulizer is a device driven by a compressed air machine. It allows the patient to inhale  medicine in the form of a mist. is, an average, calculated from price and volume data reported by drug  manufacturers, of sales to all U.S. purchasers. The law directed that ASPs  be net of rebates and other price concessions and that 2005 payments to  physicians for these drugs be set at 106 percent of ASP.
The MMA took a different approach to setting rates for a subset of  Medicare Part B drugs delivered in the HOPD setting. Prior to the MMA,  Medicare paid HOPDs for Part B drugs based on hospitals’ 1996 median  costs for these drugs. In response to concerns that payments would not  reflect the cost of newly introduced pharmaceutical products—such as  those used to treat cancer or rare blood disorders—1999 legislation  authorized augmented payments for these drugs on a temporary basis.  Subsequently, the MMA defined a new payment category for these drugs  called specified covered outpatient drugs (SCOD). The MMA required the  Centers for Medicare & Medicaid Services (CMS) in the Department of  Health and Human Services (HHS) to set rates for this subset of Part B  drugs. Specifically, it directed CMS to set 2006 payment rates for SCOD  products equal to hospitals’ average acquisition costs—the cost to  hospitals of acquiring a product, net of rebates. Subsequently, CMS  selected ASP as the basis to pay for SCODs provided at HOPDs.
In several related requirements, the MMA directed us to provide  information on SCOD costs and CMS’s proposed rates. Among them was a  requirement to conduct a survey of a large sample of hospitals to obtain  data on their acquisition costs for SCODs and provide information based  on these data to the Secretary of Health and Human Services for his  consideration in setting 2006 Medicare payment rates. We were also  required to evaluate CMS’s proposed rates for SCODs, comment on their  appropriateness in light of the survey we conducted, and advise on future  data collection efforts by CMS based on our survey experience. We  issued reports in 2005 and 2006 in response to these requirements, and my  remarks about ASP are based on that work. Specifically, my remarks today  will focus on (1) ASP as a practical and timely data source for use in  setting Medicare Part B drug payment rates and (2) components of ASP  that are currently unknown and implications for Medicare rate-setting. Our  work was conducted in accordance with generally accepted government  auditing standards.
In summary, using an ASP-based method to set payment rates for Part B  drugs is a practical approach compared with methods based on alternative  data sources, for several reasons. First, ASP is based on actual  transactions and is a better proxy for health care providers’ acquisition  costs than AWP or health care providers’ charges included on claims for  payment, neither of which is based on transaction data. Second, ASPs,  which manufacturers update quarterly, offer information that is relatively  timely for rate-setting purposes. In comparison, rates for other Medicare  payment systems are based on data that may be at least 2 years old.  Finally, using manufacturers as the data source for prices is preferable to  collecting such data from health care providers, as the manufacturers have  data systems in place to track prices, whereas health care providers  generally do not have systems designed for that purpose.
Despite these advantages, CMS lacks certain information about the  composition of ASP that prompted us, in our report commenting on CMS’s  proposed 2006 SCOD rates, to call ASP “a black box.” Significantly, CMS  lacks sufficient information on how manufacturers allocate rebates to  individual drugs sold in combination with other drugs or other products;  this is important, as CMS does not have the detail it needs to validate the  reasonableness of the data underlying the reported prices. In addition,  CMS does not instruct manufacturers to provide a breakdown of price and  volume data by purchaser type—that is, by physicians, hospitals, other  health care providers, and wholesalers, which purchase drugs for resale to  health care providers. As a result, CMS cannot determine how well  average price data represent acquisition costs for different purchaser  types. In particular, to the extent that some of the sales are to wholesalers  that may subsequently mark up the manufacturer’s price in their sales to  health care providers, the ASP’s representation of providers’ acquisition  costs is weakened. Additionally, a sufficient empirical foundation does not  exist for setting the payment rate for Medicare Part B drugs at 6 percent  above ASP, further complicating efforts to determine the appropriateness  of the rate. Given these information gaps, CMS is not well-positioned to  validate the accuracy or appropriateness of its ASP-based payment rates.
subsections: section_title: Background
paragraphs: CMS calculates payment rates for each Part B drug with information on  price data that manufacturers report quarterly to the agency. In reporting  their price data to CMS, manufacturers are required to account for price  concessions, such as discounts and rebates, which can affect the amount  health care providers actually pay for a drug.
subsections: section_title: ASP Is a Price Measure Established in Law and Calculated with Manufacturers’ Data
paragraphs: The MMA defined ASP as the average sales price for all U.S. purchasers of  a drug, net of volume, prompt pay, and cash discounts; charge-backs and  rebates. Certain prices, including prices paid by federal purchasers, are  excluded, as are prices for drugs furnished under Medicare Part D. CMS  instructs pharmaceutical manufacturers to report data to CMS—within   30 days after the end of each quarter—on the average sale price for each  Part B drug sold by the manufacturer. For drugs sold at different strengths  and package sizes, manufacturers are required to report price and volume  data for each product, after accounting for price concessions. CMS then  aggregates the manufacturer-reported ASPs to calculate a national ASP for  each drug category.
section_title: Varying Payment Arrangements Affect the Price Purchasers Pay at the Time of Sale
paragraphs: Common drug purchasing arrangements can substantially affect the  amount health care providers actually pay for a drug. Physicians and  hospitals may belong to group purchasing organizations (GPO) that  negotiate prices with wholesalers or manufacturers on behalf of GPO  members. GPOs may negotiate different prices for different purchasers,  such as physicians, suppliers of DME, or hospitals. In addition, health care  providers can purchase covered outpatient drugs from general or specialty  pharmaceutical wholesalers or can have direct purchase agreements with  manufacturers. In these arrangements, providers may benefit from  discounts, rebates, and charge-backs that reduce the actual costs  providers incur. Discounts are applied at the time of purchase, while  rebates are paid by manufacturers some time after the purchase. Rebates  may be based on the number of several different products purchased over  an extended period of time. Under a charge-back arrangement, the  provider negotiates a price with the manufacturer that is lower than the  price the wholesaler normally charges for the product, and the provider  pays the wholesaler the negotiated price. The manufacturer then pays the  wholesaler the difference between the wholesale price and the price  negotiated between the manufacturer and the provider.
section_title: ASP Is a Practical Payment Approach, Given the Limitations of Other Data Sources Available for Rate- Setting
paragraphs: Using an ASP-based method to set prices for Medicare Part B drugs is a  practical approach compared with alternative data sources for several  reasons. First, unlike AWP, ASP is based on actual transactions, making it  a useful proxy for health care providers’ acquisition costs. Whereas AWPs  were list prices developed by manufacturers and not required to be related  to market prices that health care providers paid for products, ASPs are  based on actual sales to purchasers. For similar reasons, payments based  on ASPs are preferable to those based on providers’ charges, as charges  are made up of costs and mark-ups, and mark-ups vary widely across  providers, making estimates of the average costs of drugs across all  providers wide-ranging and insufficiently precise. In addition, basing  payments on charges does not offer any incentives for health care  providers to minimize their acquisition costs.
Second, ASPs offer relatively timely information for rate-setting purposes.  Manufacturers have 30 days following the completion of each quarter to  report new price data to CMS. Before the end of the quarter in which  manufacturers report prices, CMS posts the updated Part B drug payment  rates, to take effect the first day of the next quarter. Thus, the rates set are  based on data from manufacturers that are, on average, about 6 months  old. In comparison, rates for other Medicare payment systems are based  on data that may be at least 2 years old.
Third, acquiring price data from manufacturers is preferable to surveying  health care providers, as the manufacturers have data systems in place  that track prices, whereas the latter generally do not have systems  designed for that purpose. In our survey of 1,157 hospitals, we found that  providing data on drug acquisition costs made substantial demands on  hospitals’ information systems and staff. In some cases, hospitals had to  collect the data manually, provide us with copies of paper invoices, or  develop new data processing to retrieve the detailed price data needed  from their automated information systems. Hospital officials told us that,  to submit the required price data, they had to divert staff from their normal  duties, thereby incurring additional staff and contractor costs. Officials  told us their data collection difficulties were particularly pronounced  regarding information on manufacturers’ rebates, which affect a drug’s net  acquisition cost. In addition, we incurred considerable costs as data  collectors, signaling the difficulties that CMS would face should it  implement similar surveys of hospitals in the future.
section_title: CMS Lacks Information on ASP Necessary to Monitor Payment Rate Accuracy and Appropriateness
paragraphs: Despite its practicality as a data source, ASP remains a “black box.” That  is, CMS lacks detailed information about the components of  manufacturers’ reported price data—namely, methods manufacturers use  to allocate rebates to individual drugs and the sales prices paid by type of  purchaser. Furthermore, for all but SCODs provided in the HOPD setting,  no empirical support exists for setting rates at 6 percent above ASP, and  questions remain about setting SCOD payment rates at ASP+6 percent.  These information gaps make it difficult to ensure that manufacturers’  reported price data are accurate and that Medicare’s ASP rates developed  from this information are appropriate.
Significantly, CMS has little information about the method a manufacturer  uses to allocate rebates when calculating an ASP for a drug sold with other  products. Unlike discounts, which are deducted at the point of purchase,  rebates are price concessions given by manufacturers subsequent to the  purchaser’s receipt of the product. In our survey of hospitals’ purchase  prices for SCODs, we found that hospitals received rebate payments  following the receipt of some of their drug purchases but often could not  determine rebate amounts. Calculating a rebate amount is complicated by  the fact that, in some cases, rebates are based on a purchaser’s volume of  a set, or bundle, of products defined by the manufacturer. This bundle may  include more than one drug or a mixture of drugs and other products, such  as bandages and surgical gloves. Given the variation in manufacturers’  purchasing and rebate arrangements, the allocation of rebates for a  product is not likely to be the same across all manufacturers. CMS does  not specifically instruct manufacturers to provide information on their  rebate allocation methods when they report ASPs. As a result, CMS lacks  the detail it needs to validate the reasonableness of the data underlying the  reported prices.
In addition, CMS does not require manufacturers to report details on price  data by purchaser type. Because a manufacturer’s ASP is a composite  figure representing prices paid by various purchasers, including both  health care providers and wholesalers, CMS cannot distinguish prices paid  by purchaser type—for example, hospitals compared with other  institutional providers, physicians, and wholesalers. In particular, to the  extent that some of the sales are to wholesalers that may subsequently  mark up the manufacturer’s price in their sales to health care providers,  the ASP’s representation of providers’ acquisition costs is weakened. Thus,  distinguishing prices by purchaser type is important, as a central tenet of  Medicare payment policy is to pay enough to ensure beneficiary access to  services while paying pay no more than the cost of providing a service  incurred by an efficient provider. In our 2005 report on Medicare’s  proposed 2006 SCOD payment rates, we recommended that CMS collect  information on price data by purchaser type to validate the reasonableness  of ASP as a measure of hospital acquisition costs.
Better information on manufacturers’ reported prices—for example, the  extent to which a provider type’s acquisition costs vary from the CMS- calculated ASP—would help CMS set rates as accurately as possible. For  most types of providers of Medicare Part B drugs—physicians, dialysis  facilities, and DME suppliers—no empirical support exists for setting rates  at 6 percent above ASP. In the case of HOPDs, a rationale exists based on  an independent data source—our survey of hospital prices—but the  process of developing rates for SCODs was not simple. In commenting on  CMS’s proposed 2006 rates to pay for SCODs, we raised questions about  CMS’s rationale for proposing rates that were set at 6 percent above ASP.  CMS stated in its notice of proposed rulemaking that purchase prices  reported in our survey for the top 53 hospital outpatient drugs, ranked by  expenditures, equaled ASP+3 percent on average, and these purchase  prices did not account for rebates that would have lowered the product’s  actual cost to the hospital. We noted that, logically, for payment rates to  equal acquisition costs, CMS would need to set rates lower than ASP+3  percent, taking our survey data into account. In effect, ASP+3 percent was  the upper bound of acquisition costs. Consistent with our reasoning, CMS  stated in its notice of proposed rulemaking that “Inclusion of … rebates  and price concessions in the GAO data would decrease the GAO prices  relative to the ASP prices, suggesting that ASP+6 percent may be an  overestimate of hospitals’ average acquisition costs.” In its final rule  establishing SCOD payment rates, CMS determined that our survey’s  purchase prices equaled ASP+4 percent, on average, based on an analysis  of data more recent than CMS had first used to determine the value of our  purchase prices. CMS set the rate in the final rule at ASP+6 percent,  stating that this rate covered both acquisition costs and handling costs.  We have not evaluated the reasonableness of the payment rate established  in the final rule.
Lacking detail on the components of ASP, CMS is not well-positioned to  confirm ASP’s accuracy. In addition, CMS has no procedures to validate  the data it obtains from manufacturers by an independent source. In our  2006 report on lessons learned from our hospital survey, we noted  several options available to CMS to confirm the appropriateness of its  rates as approximating health care providers’ drug acquisition costs.  Specifically, we noted that CMS could, on an occasional basis, conduct a  survey of providers, similar to ours but streamlined in design; audit  manufacturers’ price submissions; or examine proprietary data the agency  considers reliable for validation purposes. HHS agreed to consider our  recommendation, stating that it would continue to analyze the best  approach for setting payment rates for drugs.
section_title: Concluding Observations
paragraphs: Because ASP is based on actual transaction data, is relatively timely, and is  administratively efficient for CMS and health care providers, we affirm the  practicality of the ASP-based method for setting Part B drug payment  rates. However, we remain concerned that CMS does not have sufficient  information about ASP to ensure the accuracy and appropriateness of the  rates. To verify the accuracy of price data that manufacturers submit to  the agency, details are needed—such as how manufacturers account for  rebates and other price concessions and how they identify the purchase  prices of products acquired through wholesalers. Equally important is the  ability to evaluate the appropriateness of Medicare’s ASP-based rate for all  providers of Part B drugs over time. As we recommended in our April 2006  report, CMS should, on an occasional basis, validate ASP against an  independent source of price data to ensure the appropriateness of ASP- based rates.
Madam Chairman, this concludes my prepared statement. I will be happy  to answer any questions you or the other Subcommittee Members may  have.
section_title: Contact and Staff Acknowledgments
paragraphs: For further information regarding this testimony, please contact A. Bruce  Steinwald at (202) 512-7101 or steinwalda@gao.gov. Phyllis Thorburn,  Assistant Director; Hannah Fein; and Jenny Grover contributed to this  statement. Contact points for our Offices of Congressional Relations and  Public Affairs may be found on the last page of this statement.
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