Medicare Hospital Pharmaceuticals: Survey Shows Price Variation and Highlights Data Collection Lessons and Outpatient Rate-Setting Challenges for CMS
Published: 2006-04-28T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2003, the Medicare Modernization Act required the Centers for Medicare & Medicaid Services (CMS) to establish payment rates for a set of new pharmaceutical products--drugs and radiopharmaceuticals--provided to beneficiaries in a hospital outpatient setting. These products were classified for payment purposes as specified covered outpatient drugs (SCOD). The legislation directed CMS to set 2006 Medicare payment rates for SCODs equal to hospitals' average acquisition costs and included requirements for GAO. As directed, GAO surveyed hospitals and issued two reports, providing information to use in setting 2006 SCOD rates. To address other requirements in the law, this report analyzes SCOD price variation across hospitals, advises CMS on future surveys it might undertake, and examines both lessons from the GAO survey and future challenges facing CMS.
section_title: What GAO Found
paragraphs: Analyzing pharmaceutical price data collected from its 2004 survey of hospitals, GAO found that prices hospitals paid for SCOD products varied across hospitals. Certain factors--namely, whether the hospital had a major teaching program or not, was in an urban or rural area, and had a large or small hospital outpatient department--were associated with whether hospitals paid higher or lower prices for SCOD products. Major teaching hospitals paid prices that were an estimated 3.2 percent lower than those paid by nonteaching hospitals for drug SCODs; rural hospitals paid prices an estimated 4.4 percent higher than those paid by urban hospitals for radiopharmaceutical SCODs; and large hospitals paid prices an estimated 1.4 percent lower than those paid by small hospitals for drug SCODs and 3.1 percent lower for radiopharmaceutical SCODs. Combining these factors, GAO found that large, urban, major teaching hospitals--compared with other hospitals--generally paid lower prices, on average, for all SCOD products. From conducting its hospital survey, GAO learned a key lesson that CMS could use in the future: such a survey would not be practical for collecting the data needed to set and update SCOD rates routinely but would be useful for validating, on occasion, CMS's rate-setting data. GAO's survey produced accurate hospital drug price data, but it also created a considerable burden for hospitals as the data suppliers and considerable costs for GAO as the data collector. Nonetheless, the benefit of collecting actual prices paid by hospitals could make such surveys advantageous for occasionally validating CMS's proxy for SCODs' average acquisition costs--the average sales price (ASP) data that manufacturers report. CMS will face important challenges as it seeks to obtain accurate data on hospitals' acquisition costs for drug and radiopharmaceutical SCODs. Regarding drugs, CMS lacks the detail on manufacturers' ASP data needed to determine if rates developed from these data are appropriate for hospitals. Manufacturers report ASP as a single price paid by all purchasers, making it impossible to distinguish the price paid by hospitals alone. CMS instructs manufacturers to report ASP net of rebates but does not specify how to allocate individual product rebates when several products are purchased. Regarding radiopharmaceuticals, GAO found that the diversity of forms in which they can be purchased--ready-to-use unit doses, multidoses, or separately purchased radioactive and non-radioactive substances--complicates CMS's efforts to select a data source that can provide reasonably accurate price data efficiently. Efficiency as well as accuracy is a factor in selecting a data source because radiopharmaceuticals account for only 1.5 percent of Medicare hospital outpatient spending. GAO's experience suggests that the best option available to CMS, in terms of accuracy and efficiency, is to collect price data on radiopharmaceuticals purchased in ready-to-use unit doses, the form in which an estimated three-quarters of hospitals purchase these products.

section_title: Letter
paragraphs: In 2003, federal legislation required the establishment of Medicare  payment rates for a particular set of new pharmaceutical products that  were provided to beneficiaries in hospital outpatient settings but were  generally paid for differently than other services paid under Medicare’s  hospital outpatient prospective payment system (OPPS). These products  were newly introduced drugs, biologicals, and radiopharmaceuticals used  to treat and in some cases diagnose serious conditions such as cancer.  Specifically, the Medicare Prescription Drug, Improvement, and  Modernization Act of 2003 (MMA) required the Centers for Medicare &  Medicaid Services (CMS) in the Department of Health and Human Services  (HHS) to set rates for these pharmaceuticals. MMA classified them for  payment purposes as specified covered outpatient drugs (SCOD). In  addition, MMA defined a SCOD as a drug or radiopharmaceutical, used in  hospital outpatient departments, covered by Medicare, and paid for as an  individual product for which CMS established a separate payment  category rather than placing it in a category that included other services.
The MMA 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 the cost of rebates. In several related  requirements, the MMA directed us to provide information on SCOD costs  and CMS’s proposed rates. First, we were required to conduct a survey of  a large sample of hospitals to obtain data on their acquisition costs of  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 provided information from this survey in two  reports—one on drugs and another on radiopharmaceuticals. These  reports presented systematic information on hospitals’ purchase prices of  SCODs and limited information on rebates. Second, we were required to  evaluate CMS’s proposed rates for SCODs and comment on their  appropriateness in light of the survey of SCOD prices we conducted. We  provided our comments in a report issued in October 2005.
Two other MMA requirements had a role for us—to report on any variation  found in our survey results in acquisition costs among hospitals and to  advise on future data collection efforts by CMS based on our survey  experience. This report addresses these requirements and examines   (1) the extent to which SCOD prices identified in our survey differed  among hospitals with different characteristics, (2) lessons the MMA- mandated survey experience provided for the methodology and frequency  of future collection of SCOD price data, and (3) the challenges CMS faces  in collecting data to set SCOD payment rates accurately after 2006.
To examine price variation among a sample consisting of 1,157 hospitals  purchasing SCOD products, we conducted a multivariate statistical  analysis and grouped hospitals by certain key characteristics, including  teaching status, location, and size. We defined a hospital’s teaching status  as major, other teaching, or nonteaching, based on the hospital’s  intern/resident-to-bed ratio; location as urban or rural based on  metropolitan statistical areas (MSA); and size as a hospital’s total  Medicare outpatient charges, classifying a hospital as large if its Medicare  charges were at or above the 80th percentile of all hospital outpatient  charges. The prices we examined were drawn from our survey of  hospitals’ purchase prices for 62 SCODs for the period July 1, 2003,  through June 30, 2004. We determined that our survey data were reliable  for estimating SCOD prices. For details on our methodology, see   appendix I.
To identify lessons learned from our hospital survey experience as well as  challenges for CMS’s future data collection, we reviewed the findings  from our issued reports on SCOD drug prices, SCOD  radiopharmaceutical prices, and CMS’s proposed SCOD rates; consulted  on methodological issues with an advisory panel of experts in  pharmaceutical economics, pharmacy, medicine, survey sampling, and  Medicare payment; interviewed officials from CMS and several dozen  hospitals; and reviewed CMS’s final rule on Medicare’s 2006 payment rates  for SCODs. In particular, we reviewed CMS’s published method for  collecting the average sales prices (ASP) of drug SCODs: manufacturers  report their ASPs quarterly to CMS, which uses them as a proxy for  average acquisition costs in setting drug SCOD payment rates. We  performed our work according to generally accepted government auditing  standards from September 2005 through April 2006.
subsections: section_title: Background
paragraphs: In the period following the enactment of legislation establishing  Medicare’s OPPS and leading up to the MMA in 2003, concerns were  expressed about the adequacy of payments for innovative pharmaceutical  products. The MMA addressed these concerns by establishing a payment  policy for SCODs. As mandated by the MMA, we conducted a hospital  survey and provided HHS with information about prices hospitals paid for  SCOD products. Details follow on the background of SCODs, our survey,  CMS’s new rates for drug SCODs, and the nature of radiopharmaceutical  products.
subsections: section_title: MMA Established SCOD Payment Categories for Certain Pharmaceutical Products to Ensure Beneficiary Access to New Products
paragraphs: CMS uses OPPS to pay hospitals for services that Medicare beneficiaries  receive as part of their treatment in hospital outpatient departments.  Under OPPS, Medicare pays hospitals predetermined rates for most  services. When OPPS was first developed as required by the Balanced  Budget Act of 1997, the rates for hospital outpatient services, drugs, and  radiopharmaceuticals were based on hospitals’ 1996 median costs.  However, these rates prompted concerns that payments to hospitals would  not reflect the costs of newly introduced pharmaceutical products used to  treat, for example, cancer, rare blood disorders, and other serious  conditions. In turn, congressional concerns were raised that beneficiaries  might lose access to some of these products if hospitals avoided providing  them because of a perceived shortfall in payments. In response to these  concerns, the Medicare, Medicaid, and SCHIP Balanced Budget  Refinement Act of 1999 authorized pass-through payments, which were a  way to temporarily augment the OPPS payments for newly introduced  pharmaceutical products first used after 1996. The MMA modified this  payment method for some of these pharmaceutical products. As part of  the modification, the MMA defined the new SCOD payment category,  which includes many of these newly introduced pharmaceutical products.  The MMA requires that SCODs be placed in separate payment categories— that is, not packaged with related services.
section_title: MMA Required Us to Survey Hospitals to Determine Their Acquisition Costs for SCOD Products
paragraphs: As directed by the MMA, we conducted a survey of a large sample of  hospitals to determine their acquisition costs for SCOD products. We  surveyed 1,400 hospitals and received usable data from 83 percent of the  hospitals for drug SCODs and from 61 percent of the 1,322 hospitals that  had submitted Medicare claims for radiopharmaceutical SCODs in the first  6 months of 2003. We found that we could not obtain data that would  permit calculation of hospitals’ acquisition costs, because, in general,  hospitals were unable to report accurately or comprehensively on  rebates. Consequently, we reported average purchase prices for drug and  radiopharmaceutical SCODs, which are prices net of discounts but not  rebates. Of the 251 SCODs that we identified, we reported average  purchase prices for the 62 SCODs that accounted for 95 percent of  Medicare spending on all SCODs in the first 9 months of 2004. (These  prices and related information are included as app. II and app. III.)
section_title: MMA Defined ASP, Which Is Reported by Manufacturers and Used to Set Rates for Drug SCODs
paragraphs: ASP is a price measure established in the MMA to provide a basis for  payment rates for physician-administered drugs and now used by CMS in  setting rates for drug SCODs. CMS instructs pharmaceutical  manufacturers to report ASP data to CMS within 30 days after the end of  each quarter. 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; free  goods contingent on a purchase requirement; and charge-backs and  rebates. Under CMS’s final rule governing 2006 payment rates for hospital  outpatient services, including SCOD products, CMS uses manufacturers’  ASPs in setting drug SCOD rates. For radiopharmaceuticals, CMS has set  2006 rates based on an estimate of hospitals’ costs derived from charges,  but the agency has not decided how to pay for radiopharmaceutical  SCODs after 2006.
section_title: Radiopharmaceuticals Can Be Purchased in Different Forms
paragraphs: Hospitals can purchase radiopharmaceuticals, which consist of a  radioisotope and a medicine or pharmaceutical agent, in different forms.  They can purchase vials of the product in ready-to-use unit doses or in  multidoses, or they can purchase a product’s radioactive and  nonradioactive components separately and compound them in-house. In a  survey conducted by the Society of Nuclear Medicine and the Society of  Nuclear Medicine Technologist Section, 76 percent of hospitals reported  that they purchased their radiopharmaceuticals in unit doses.
section_title: Hospitals’ Teaching Status, Location, and Size Affected Prices for SCOD Products by Different Magnitudes
paragraphs: Using our hospital survey of prices hospitals paid for SCOD drugs and  radiopharmaceuticals, we examined the extent to which prices varied  among the approximately 1,200 hospitals that submitted survey data. To  do this, we looked at several hospital characteristics, or factors—including  teaching status, location, and size of the outpatient department—while  controlling for differences in the costliness of the mix of SCODs that  hospitals purchased. We analyzed both (1) the separate effect of each  factor, controlling for other factors; and (2) the effect of the three factors  combined. We found that teaching status had the largest separate effect on  drug SCOD prices, whereas location had the largest effect on  radiopharmaceutical SCOD prices. Combining the three factors, we found,  for example, that large, urban, hospitals with major teaching programs  paid lower prices, on average, for drug SCODs—compared with small  urban hospitals with other teaching programs.
subsections: section_title: Teaching Status, Location, and Size Were Each Significant Factors Affecting Price Variation among Hospitals
paragraphs: The importance of the three factors in accounting for variation in SCOD  prices among hospitals differed by type of product purchased—that is,  drug or radiopharmaceutical. A hospital’s teaching status, for example,  affected prices paid for drug SCODs but did not matter for the  radiopharmaceutical SCOD prices pertaining to unit dose purchases in our  survey. In contrast, a hospital’s location was an important factor linked to  price differences for radiopharmaceuticals but did not matter with respect  to prices for drugs. In addition, hospital size was important in affecting  price differences for both drugs and radiopharmaceuticals. (See table 1.)
In assessing the magnitude of each factor’s separate effect on prices, we  found the following results:    Teaching status: Compared with nonteaching hospitals, major teaching  hospitals paid prices that were, on average, an estimated 3.2 percent lower  for drug SCODs. Teaching status had no independent effect on the prices  of radiopharmaceutical SCODs purchased in ready-to-use unit doses.
Location: Compared with hospitals located in urban areas, the prices paid  by hospitals located in rural areas for radiopharmaceutical SCODs were,  on average, an estimated 4.4 percent higher.
Size: Compared with smaller hospitals, hospitals with large outpatient  departments paid prices, on average, that were an estimated 1.4 percent  lower for drugs and 3.1 percent lower for radiopharmaceuticals.
Certain circumstances may help explain why each factor had an effect on  price. Regarding the effect of teaching status on drug prices, for example,  manufacturers may want to influence prescribing patterns of physicians in  training and may therefore offer drugs at lower prices to hospitals with  teaching programs. As for location’s effect on radiopharmaceutical SCOD  prices, industry experts suggested that the short half-life of certain  radioactive products could make transporting them to hospitals in rural  areas more costly. As for hospital size, hospitals with large outpatient  departments may have benefited from volume discounts.
section_title: Hospitals with Combination of Major Teaching Status, Urban Location, and Large Size Obtained Lowest SCOD Prices
paragraphs: To examine the combined effect of the three key factors on prices paid by  hospitals, we compared hospitals grouped by one combination—major  teaching program, urban location, and large outpatient department—with  hospitals grouped by other combinations. Our analysis indicates that large,  urban, major teaching hospitals generally paid lower prices, on average,  for all SCOD products than did hospitals grouped by other combinations  of factors. For example, compared with small urban hospitals with other  teaching programs, large major teaching hospitals in urban areas paid  prices, on average, that were an estimated 4 percent lower for drugs and 3  percent lower for radiopharmaceuticals. In contrast, compared with small  urban hospitals with other teaching programs, small rural hospitals with  no teaching programs paid prices, on average, that were about the same  for drugs and 4 percent higher for radiopharmaceuticals.
section_title: Our Survey of Hospitals Suggests that the Burden of Large-Scale Annual Surveys Could Outweigh Gains in Data Accuracy
paragraphs: Our MMA-mandated survey of hospitals produced accurate hospital price  data. However, for CMS to use such a survey to routinely collect data in  the future for SCOD rate-setting, the burden could outweigh the benefit.  Instead, similar surveys of hospitals could be a useful tool to validate price  data obtained from manufacturers, if conducted on an occasional basis.
subsections: section_title: Using Hospitals as Data Source for SCOD Prices Had A Major Advantage and Serious Drawbacks
paragraphs: Based on our survey experience, we noted that hospitals as a SCOD data  source had one important advantage as well as substantial drawbacks. We  found that, as a data source for estimating hospitals’ SCOD acquisition  costs, hospitals offered a key advantage: our average purchase prices  obtained from hospitals, by definition, represent actual prices paid by  hospitals. In this respect, our data differ from other data sources  available to CMS—such as suggested list prices, ASPs, and hospitals’  Medicare claims. As a result, none of these alternatives provide, as our  survey data do, nationwide data on the actual purchase prices paid by  hospitals for drugs and radiopharmaceutical SCODs.
However, based on our experience, we found that there would be  drawbacks in using hospitals as an annual data source on SCOD prices,  owing primarily to the considerable burden created for hospitals as  suppliers of data and the considerable costs we incurred as data  collectors, signaling the difficulties that CMS would face in implementing  similar surveys in the future. Hospitals 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. The burden was more  taxing for some hospitals than for others. Most hospitals had the  advantage of relying on price data downloaded from their drug  wholesalers’ information systems. A number of hospitals, however, either  collected the data manually, provided us with copies of paper invoices, or  had automated information systems that were not designed to retrieve the  detailed price data needed and required additional data processing effort.  Hospitals’ data collection difficulties were particularly pronounced  regarding information on manufacturers’ rebates, which affect a drug’s net  acquisition cost. Typically, hospitals did not systematically track all  manufacturers’ rebates on drug purchases, although nearly 60 percent of  hospitals reported receiving one or more rebates.
As collectors of data on SCOD prices, we also experienced difficulties  obtaining the information needed from hospitals. Hospitals’ information  systems were diverse and produced data in many different formats,  causing substantial resource and timing difficulties in the data collection  process. Specifically, we had to reconfigure data submitted in multiple  formats to produce data comparable across hospitals and usable for SCOD  rate-setting. This reconfiguration required us to deploy substantial  resources and to allow additional time for processing before the data  could be made available to CMS. The difficulties we encountered would  likely be faced by any organization undertaking a survey using a similar  approach.
As we previously reported, using SCOD price and related data from drug  manufacturers—as CMS is doing in 2006—is a practical strategy for setting  Medicare payment rates to hospitals for SCODs. However, our  experience obtaining information on actual purchase prices and our  observation of the pace of change in the drug marketplace suggest that an  occasional survey of hospitals—possibly once or twice in a decade—may  be advantageous for validating the accuracy of manufacturers’ price  information as a proxy for hospital acquisition cost. Drawing on our  experience and using data about sampling variability from our 2004  hospital survey, CMS could design a similar but streamlined hospital  survey. Other options available to CMS for validating the accuracy of the  price data as a proxy for hospitals’ acquisition costs include audits of  manufacturers’ price submissions or an examination of proprietary data  the agency considers reliable for validation purposes.
section_title: Survey Indicates that Accounting for Dynamic Drug Market and Infrequently Purchased Drugs Has Implications for Accuracy and Efficiency
paragraphs: Our hospital survey experience not only identified data collection issues  associated with hospitals but also underscored accuracy and efficiency  concerns in collecting SCOD data from any source. Specifically, the  accuracy of the rates Medicare pays for drugs within a SCOD payment  category, based on the average price of drugs included in the SCOD, may  be compromised if the price of any drug—that is, any national drug code  (NDC)—is omitted from the average price of the SCOD category. In the  conduct of our 2004 survey, we began with a list, which CMS provided to  us, of drug categories that included SCODs as well as other drugs that  potentially could be considered SCODs in the future. To ensure the  accuracy of our calculation of a hospital’s average purchase price for  SCODs, we took additional steps using industry experts and data sources  to classify the NDCs and assign them to the appropriate SCOD categories.  Since the drug market is dynamic—new drugs enter the market and other  drugs drop out in the course of a year—CMS’s list of SCOD drugs and their  component NDCs could become out of date unless updated frequently to  ensure that all SCOD drugs purchased by hospitals are identified and  figured into the calculation of a SCOD’s average price.
With regard to efficiency in analyzing our survey results, we concentrated  our data processing and statistical resources on the roughly one-quarter of  SCODs that account for most of Medicare’s total SCOD spending. In  particular, the 62 SCODs for which we produced price estimates  accounted for 95 percent of Medicare spending on all 251 SCODs in the  first 9 months of 2004. We would not have been able to produce price  estimates for all SCODs in time for CMS to take account of our data in  setting the 2006 rates. Our experience—especially the amount of time and  resources necessary for each step in the data collection and analysis  process—could be used by CMS to determine in advance the number of  SCODs on which to collect data and estimate prices. There might be some  benefit in gathering data and producing price estimates for all SCODs; on  the other hand, if resources were limited, CMS might choose to focus on  fewer SCODs.
section_title: CMS Faces Challenges in Future Data Collection Efforts to Set SCOD Payment Rates Accurately
paragraphs: CMS will face important challenges in its efforts to collect accurate data  for setting SCOD payment rates. In our October 2005 report on CMS’s  proposed SCOD rates, we expressed reservations about the ASP data CMS  used to set 2006 payment rates for drug SCODs. We cautioned that  manufacturers’ reporting of ASPs in summary form—without any further  detail—does not provide the agency the information needed to ensure that  ASPs are a sufficiently accurate measure of hospitals’ acquisition costs.  Data collection and rate-setting for radiopharmaceutical SCODs present  unique challenges because of these products’ distinctive characteristics.
subsections: section_title: Validating ASP Would Pose Challenges for CMS Because of Lack of Detail in Data
paragraphs: Under CMS’s current policy, manufacturers are required to report only  summary ASP data, limiting CMS’s ability to validate the data’s accuracy.  Specifically, manufacturers report ASP as a single price, with no  breakdown of price and volume by type of purchaser. CMS instructs  manufacturers to average together prices for each drug paid by all U.S.  purchasers. However, different purchaser types—for example, hospitals,  physicians, and wholesalers—may receive prices that, by purchaser type,  are on average higher or lower than one another’s. Because CMS does not  receive price data at this level of detail, it cannot determine whether price  differences among purchaser types exist. To the extent that nonhospital  providers pay different prices than hospitals and account for a proportion  of the SCODs purchased, ASP will differ from the prices paid on average  by hospitals. CMS has not presented evidence, in its final rule or in  discussions with us, that physicians and hospitals pay the same prices.
An additional weakness in CMS’s instructions for computing ASPs  compounds the challenge of testing the accuracy of the ASPs that  manufacturers report. No instruction is provided to manufacturers on the  treatment of rebates that apply to several drug products in calculating  ASP. This is of particular concern to the extent that manufacturers differ  in their rules for calculating these rebates. When a rebate applies to a  group of a manufacturer’s products—which may include several SCODs,  other pharmaceuticals, and other products—netting out the rebate  attributable to a specific SCOD’s purchase is less than straightforward. In  the absence of clear and specific instructions, each manufacturer must  identify or develop a method for allocating rebates to each of its drug  SCOD products. To the extent that manufacturers’ methods differ, they are  likely to yield inconsistent results. Moreover, CMS’s final rule does not  provide for a follow-up process to check that rebate allocations have been  made or have been made appropriately.
section_title: Radiopharmaceuticals Pose Unique Challenges for Obtaining Accurate Cost Data Efficiently
paragraphs: The complex nature of radiopharmaceuticals as compared with drugs  poses special challenges for collecting and interpreting cost data. These  challenges include (1) obtaining consistent data for radiopharmaceutical  SCODs produced in very different forms and (2) the short half-life for  certain products. Moreover, since Medicare spends relatively little on  radiopharmaceuticals—less than 1.5 percent of Medicare spending on  hospital outpatient services—the challenge is to find a source of data for  setting rates that is low cost and reasonably accurate.
In our hospital survey, we faced the challenge of uniformly pricing  products purchased in very different forms. We focused on prices for  radiopharmaceuticals purchased in unit doses. Most of the hospitals  purchased radiopharmaceuticals in this ready-to-use form, and only a  small fraction of hospitals purchased radiopharmaceuticals in separate  components (the radioisotope and the nonradioactive substance), which  need to be compounded. We were unable to make prices for separately  purchased components comparable to those obtained for unit doses, as  the labor costs for compounding the products are included in hospitals’  reported prices of ready-to-use products but not in their reported prices of  products they purchased as separate components.
The short half-life of certain radiopharmaceutical SCODs can also pose  challenges for collecting and interpreting price data. Because the  radioactive component decays over time, the amount of the product  purchased for a given patient may vary with the distance between where  the radiopharmaceutical is compounded and where it is administered. The  result is that for those short-lived radiopharmaceuticals paid on a per-dose  basis, the cost per dose is more for the doses prepared far from the point  of administration than for those prepared closer by, as more of a  radioactive product must be purchased to account for its decay in transit.  This applies most commonly to F-18 radiopharmaceuticals, the most  common of which, F-18 FDG, has a half-life of 1.8 hours. F-18  radiopharmaceuticals, including F-18 FDG, are used in the diagnosis of  various diseases, such as cancer, heart disease, and liver disease.
Finally, CMS faces the challenge of balancing accuracy and efficiency in  obtaining price data on radiopharmaceutical SCODs. Our approach in  estimating prices from our survey data was to use only information on unit  dose prices, the form purchased by most hospitals. CMS, as stated in the  2006 final rule governing payment rates for SCODs, has not found what it  considers a satisfactory method for obtaining data on acquisition costs of  radiopharmaceuticals and is continuing to explore both ASP and other  alternatives. Hospitals and manufacturers are the most direct source of  price data because both are parties to the transactions in which the  hospitals acquire the radiopharmaceuticals. In its notice of proposed  rulemaking for radiopharmaceutical SCODs, CMS proposed collecting  ASPs from manufacturers for use in setting 2007 payment rates. In light  of many comments regarding the difficulty of this undertaking, CMS  decided not to collect radiopharmaceutical ASPs for 2007 rates, but left  open the possibility of using ASP in the future.
CMS has also discussed the possibility of using charges from hospitals’  Medicare claims to approximate acquisition costs for radiopharmaceutical  SCODs, rather than obtaining price data from invoices provided by  hospitals or from manufacturers. Using claims data may be a more  efficient but less accurate means of obtaining price estimates than  obtaining price data directly from manufacturers or from hospitals’  invoices. In its final rule, CMS stated that it was basing 2006 payments on  hospitals’ charges (derived from outpatient claims) for  radiopharmaceuticals. CMS plans to adjust these charges to reflect costs  and noted that it did not plan to use this methodology permanently. For  rate-setting after 2006, CMS also noted the possibility of using invoice data  submitted to Medicare by physicians who administer  radiopharmaceuticals in their offices. In its final rule, CMS did not  present evidence that hospitals and physicians pay similar prices for these  radiopharmaceutical drugs nor, if these prices differ, whether using these  physician data would be appropriate for use in setting hospital outpatient  rates.
section_title: Conclusions
paragraphs: Basing Medicare’s payment rates for hospitals’ SCOD purchases on  current, accurate price data is important both to ensuring that Medicare  pays appropriately—neither too much nor too little—and to ensuring  beneficiary access to these innovative pharmaceutical products. As we  previously reported, we agree with CMS that ASP is a practical data source  for setting and updating rates for drug SCODs on a routine basis. However,  we remain concerned about whether CMS can determine that ASP  accurately represents purchases made by hospitals and believe that CMS  should implement our October 2005 recommendation to collect sufficient  information on ASP to make such a determination. We are also concerned  about the likelihood that ASPs are not calculated consistently across all  manufacturers, owing to CMS’s lack of detailed instructions. As for  validating the data CMS collects to set payment rates equal to hospitals’  acquisition costs, an examination of hospitals’ actual purchase prices, by  definition, is optimal for assessing accuracy. Recognizing the operational  difficulties of a hospital survey and using the knowledge gained from our  survey, CMS could conduct a similar but streamlined hospital survey,  possibly once or twice in a decade. Other options available to CMS for  validating price data could include audits of manufacturers’ price  submissions or an examination of proprietary data the agency considers  reliable for validation purposes.
In contrast, we found that the diversity of forms in which  radiopharmaceutical SCODs can be purchased—ready-to-use unit doses,  multidoses, or separately purchased radioactive and nonradioactive  components—complicates CMS’s efforts to select a data source that can  provide reasonably accurate price data efficiently. Our experience  suggests that the best option available to CMS, in terms of accuracy and  efficiency, is to collect price data on radiopharmaceuticals purchased in  ready-to-use unit doses, the form in which an estimated three-quarters of  hospitals purchase these products.
section_title: Recommendations for Executive Action
paragraphs: To ensure that Medicare payments for SCOD products are based on  sufficiently accurate data, we recommend that the Secretary of Health and  Human Services take the following two actions:    validate, on an occasional basis, manufacturers’ reported drug ASPs as a  measure of hospitals’ acquisition costs using a survey of hospitals or other  method that CMS determines to be similarly accurate and efficient; and    use unit-dose prices paid by hospitals when available as the data source  for setting and updating Medicare payment rates for radiopharmaceutical  SCODs.
section_title: Agency Comments and Our Evaluation
paragraphs: We received written comments on a draft of this report from HHS (see  app. IV), which noted that it had considered information from our survey  of hospitals in developing 2006 hospital outpatient payment policy and  expressed appreciation for our effort and analysis.
Regarding the first recommendation—that HHS validate ASPs as a  measure of hospital acquisition costs through occasional hospital surveys  or other methods—HHS highlighted our finding that an annual hospital  survey could place considerable burdens on both the agency and hospital  staff. However, HHS agreed to consider this recommendation, saying that  it would continue to analyze the best approach for setting payment rates  for drugs and radiopharmaceutical SCODs in view of our  recommendation. It will also continue to analyze the adequacy of paying  for drugs at ASP+6 percent in the light of claims data, which persuaded  HHS that for 2006 ASP + 6 percent was the best available proxy for  hospital acquisition and handling costs.
Regarding the second recommendation—that HHS use unit-dose prices to  set and update payment rates for radiopharmaceuticals—HHS agreed with  us that the multiple forms in which radiopharmaceuticals can be  purchased makes setting their payment rates difficult. While agreeing to  consider our recommendation, HHS expressed several reservations. First,  it noted that we had not specified whether the survey to collect acquisition  cost data should be a survey of hospitals or manufacturers and asked that  we clarify this point. Second, it noted that we had emphasized the burden  of annual surveys of hospital drug prices and expressed the concern that  an annual survey of hospital radiopharmaceutical prices would be equally  burdensome. Finally, HHS noted that we had confined our report to 9 of  the approximately 55 radiopharmaceuticals that are paid separately, and  questioned whether unit-dose data would be available for all or most  radiopharmaceuticals.
Our recommendation that HHS validate ASPs through occasional surveys  or by using other methods is based in considerable part on our experience  of the difficulty of a hospital survey. The burden that annual surveys  would place on both hospitals and the agency is the reason that we  rejected annual surveys as a source of acquisition cost data and instead  proposed only occasional surveys to validate ASPs. Furthermore, as we  noted in the recommendation, HHS could use a method other than a  survey if that method were similarly accurate and efficient.
In our recommendation on radiopharmaceuticals, we did not comment on  whether the survey to collect acquisition cost data should be a survey of  hospitals or manufacturers, because we have not analyzed the feasibility  of obtaining these data from manufacturers. We recognize the potential  burden of hospital surveys; this burden would need to be taken into  account in weighing the merits of a hospital survey versus other  alternatives. Regarding our recommendation to collect unit-dose prices,  we have clarified it, saying that unit-dose prices should be used when  available. In our survey, we used unit-dose data when we reported  purchase prices for the 9 radiopharmaceuticals that accounted for 90  percent of Medicare’s costs for hospital outpatient drugs. For  radiopharmaceuticals that are prepared exclusively in-house HHS could, if  necessary, establish an alternative method for determining payment rates.
We are sending copies of this report to the Secretary of Health and Human  Services, the Administrator of the Centers for Medicare & Medicaid  Services, and other interested parties. We will also make copies available  to others upon request. In addition, the report will be available at no  charge on the GAO Web site at http://www.gao.gov.
If you or your staff members have any questions about this report, please  contact me at (202) 512-7119 or at steinwalda@gao.gov. Contact points for  our Office of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made major contributions to  this report are listed in appendix V.
section_title: Appendix I: Methodology for Analysis of SCOD Price Differences among Hospital Types
paragraphs: This appendix describes the data and methods we used to examine SCOD  price variation among hospitals purchasing SCOD products. In particular,  we describe (1) the SCOD price data we analyzed, (2) the factors  potentially affecting SCOD prices and the measurement of these factors,  and (3) the methods underlying the statistical analysis of prices we  conducted and the statistical results we obtained.
subsections: section_title: SCOD Price Data
paragraphs: Drawing on data from our survey of 1,157 hospitals, we examined  hospitals’ purchase prices for 53 drug SCODs and 9 radiopharmaceutical  SCODs for the period July 1, 2003, through June 30, 2004. Combined,  these 62 SCOD categories represented 95 percent of Medicare spending on  SCOD products during the first 9 months of 2004. We analyzed invoice  data that hospitals submitted to us; specifically, our analysis included one  SCOD price for each SCOD purchase listed on an invoice. As a result, for a  hospital that purchased SCODs and other drugs once a month, our  analysis included 1 price for each month’s purchase of a particular SCOD  or a total of up to 12 invoice prices for that SCOD during the 12-month  period. We were advised in our analysis by an expert panel consisting of  Joseph P. Newhouse, John D. MacArthur Professor of Health Policy and  Management, Harvard University; Robert A. Berenson, Senior Fellow,  Urban Institute; Ernst R. Berndt, Professor of Applied Economics, Sloan  School of Management, Massachusetts Institute of Technology; Andrea G.  Hershey, Clinical Coordinator and Pharmacy Residency Program Director,  Union Memorial Hospital (Baltimore, Md.); and Richard L. Valliant, Senior  Research Scientist, University of Michigan.
section_title: Factors Potentially Affecting SCOD Prices
paragraphs: To analyze SCOD price variation among hospitals purchasing SCODs, we  identified characteristics of hospitals that could plausibly explain why  prices vary: teaching status, location, and size. We also identified a fourth  factor: differences in the costliness of the mix of SCODs that hospitals  purchased. Table 2 lists these factors and describes operational measures  of these factors and the sources of data used to calculate these measures.
In addition to the measures listed in table 2, we considered alternative  measures for location and for size:    We examined two geographic classification systems as alternatives to an  MSA (metropolitan statistical area)/nonMSA classification: (1) urban  influence codes, which classify counties based on each county’s largest  city and its proximity to other areas with large, urban, populations; and   (2) rural-urban continuum codes, which classify metropolitan counties  (that is, those in an MSA) by the size of the urban area and classify  nonmetropolitan counties by the size of the urban population and  proximity to a metropolitan area.
Before selecting our preferred measure of hospital size (hospital  outpatient charges at the 80th percentile or higher, where hospitals were  ranked by their outpatient Medicare charges), we considered other  measures of hospital size: the number of hospital beds, the number of  unique SCODs purchased by a hospital, and the number of hospital  outpatient visits.
In assessing our regression results for each of the several measures of  location and size that we considered, we took into account statistical  criteria including the statistical significance of each measure and the  overall explanatory power of each model. We also considered qualitative  factors when selecting our preferred measures of location and size. For  example, we selected hospital outpatient charges as our measure of size,  instead of number of hospital beds, because both measures had similar  statistical properties and our analysis focuses on the hospital outpatient  setting.
In addition to conducting separate regression analyses of the price data for  drug SCODs and for radiopharmaceutical SCODs, we analyzed price  variation separately for each of four therapeutic categories of drug SCODs.  We also conducted separate regression analyses of SCOD price variation  for drugs without biologicals, for biologicals, and for  radiopharmaceuticals. We determined that any gains in statistical  properties did not outweigh the greater complexity of these analyses.
section_title: Methods and Results of Price Analysis
paragraphs: In analyzing SCOD price variation, our dependent variable was the natural  logarithm of SCOD price. SCOD prices are not distributed symmetrically  around the average. SCOD prices are skewed to the right and are not  distributed normally, reflecting some SCODs with particularly high prices.  Taking the natural logarithm of price is intended to take skewness into  account and make the resulting distribution consistent with the statistical  assumptions of a regression.
We weighted prices paid by hospitals for individual drugs and  radiopharmaceuticals by the purchase amount of each invoice. That is, we  weighted prices more heavily in the statistical analysis for invoices that  represented a larger proportion of total annual purchases of a particular  SCOD than for invoices that represented a smaller proportion of  purchases. In addition, our analysis took into account the fact that  multiple prices paid by a particular hospital were not necessarily  statistically independent of each other—a phenomenon known as  clustering. In estimating our statistical models, we corrected the potential  bias in our estimates due to clustering by using the robust and cluster  options in STATA, a statistical software package.
To gauge the effects of our explanatory factors on price variation among  hospitals, we estimated one regression model for drug SCODs and a  separate model for radiopharmaceutical SCODs. Table 3 shows estimates  of the first model, which indicate the effects of three hospital  characteristics on the natural logarithm of price of drug SCODs.
To examine the separate effect of each factor, holding constant the effects  of the remaining factors, we referred to the estimated coefficients for each  factor in the model. From the estimated coefficient, we calculated the  percentage difference in price attributable to each factor. For example,  major teaching hospitals paid lower prices for drugs compared to  nonteaching hospitals: major teaching hospitals paid 3.2 percent less than  nonteaching hospitals, holding constant location, size, and the mix of  SCODs purchased. In contrast, we found no statistically significant  difference in prices paid by hospitals with other teaching programs and  those paid by nonteaching hospitals, holding the other factors constant.
Although the R-squared statistic in table 3 indicates that the model  accounts for over 99 percent of the variation in the logarithm of the SCOD  price, this feature of the estimated model requires careful interpretation.  Most of the variation in the logarithm of the drug SCOD price was due to  the particular SCODs that were purchased—for some, hospitals paid on  average about $300 per unit while for others, hospitals paid about $3 per  unit. Consequently, after accounting for differences in the mix of SCODs  purchased by different hospitals, only a small amount of variation in price  remains to be explained by other factors. As a result, the R-squared for this  model should not be interpreted as an indicator of the three factors’  success in explaining SCOD price variation. Instead, the t-statistics  associated with teaching status, location, and size are more useful, since  they signal these factors’ statistical significance—that is, whether the  difference between the estimated effect of each factor and zero is  statistically significant.
Table 4 presents the results for the second model, which estimates the  effects of the three factors on the prices of radiopharmaceutical SCODs.
As table 4 shows, two factors—location and size—are statistically  significant in the model examining radiopharmaceutical SCOD prices.  Other things equal, a rural hospital paid prices for radiopharmaceutical  SCODs that were an estimated 4.4 percent higher than urban hospitals,  while large hospitals paid prices an estimated 3.1 percent lower than small  hospitals.
To examine the effect of the three factors combined, while controlling for  differences in the costliness of SCODs that hospitals purchased, we used  the estimates from two models—one for drug SCODs and one for  radiopharmaceutical SCODs—to simulate the prices that certain groups of  hospitals paid. In particular, we focused on comparing the prices paid by  hospitals with one combination of characteristics—major teaching, urban,  and large—with the prices paid by hospitals with a different combination  of characteristics—nonteaching, rural, and small.
section_title: Appendix II: Purchase Prices for Drug SCODs
paragraphs: Table 5 appears as table 1 in our report Medicare: Drug Purchase Prices  for CMS Consideration in Hospital Outpatient Rate-Setting, GAO-05- 581R (Washington, D.C.: June 30, 2005). The label of the second column— HCPCS code—refers to the Healthcare Common Procedure Coding  System, which CMS uses to define SCODs.
Injection, Epoetin Alpha (for non-ESRD use),  per 1,000 units  Injection, Pegfilgrastim, 6 mg  Injection, Immune Globulin, Intravenous,  Lyophilized, 1 g  Injection, Immune Globulin, Intravenous, Non- Lyophilized, 1 g  Injection, Infliximab, 10 mg  Injection, Darbepoetin alfa, 1 mcg (non-ESRD  use)
Injection, Oxaliplatin, per 5 mg  Injection, Zoledronic Acid, 1 mg  Gemcitabine Hcl, 200 mg  Injection, Nesiritide, 0.25 mg  Leuprolide Acetate (for depot suspension),   7.5 mg  Injection, Alpha 1 - Proteinase Inhibitor -  Human, 10 mg  Injection, Bevacizumab, 10 mg  Injection, Filgrastim (G-CSF), 480 mcg  Injection, Leuprolide Acetate (for depot  suspension), per 3.75 mg  Doxorubicin Hydrochloride, all lipid  formulations, 10 mg  Injection, Octreotide, depot form for  intramuscular injection, 1 mg  Injection, Cetuximab, 10 mg  Injection, Bortezomib, 0.1 mg  Injection, Filgrastim (G-CSF), 300 mcg  956 sales price) ($) price ($)
95% confidence  interval of the  average purchase  price ($)
Median  purchase  price ($)
Medicare  spending on  SCOD, 2004($ in millions)
Injection, Imiglucerase, per unit  Injection, Verteporfin, 0.1 mg  Goserelin Acetate Implant, per 3.6 mg  Injection, Granisetron Hydrochloride, 100 mcg  Botulinim Toxin Type A, per unit  Injection, Amifostine, 500 mg  Injection, Pamidronate Disodium, per 30 mg  Vinorelbine Tartrate, per 10 mg  Injection, Reteplase, 18.1 mg  Injection, Mitoxantrone Hydrochloride,   per 5 mg  Fludarabine Phosphate, 50 mg  Apligraf®, per 44 square centimeters  Injection, Fulvestrant, 25 mg  Injection, Tenecteplase, 50 mg  Injection, Pemetrexed, 10 mg  Denileukin Diftitox, 300 mcg  Injection, Agalsidase Beta, 1 mg  Granisetron Hydrochloride, 1 mg, oralInjection, Palonosetron Hcl, 25 mcg  Injection, Immune Globulin, Intravenous,  Lyophilized, 10 mg  Injection, Immune Globulin, Intravenous, Non- Lyophilized, 10 mg  Factor VIII (Antihemophilic Factor, Human)  per I.U.
Injection, Abciximab, 10 mg  Injection, Cytomegalovirus Immune Globulin  Intravenous (Human), per vial  Injection, Eptifibatide, 5 mg  Interferon, Alfa-2B, Recombinant, 1 million  units  Dermagraft®, per 37.5 square centimeters  2 sales price) price ($)
95% confidence  interval of the  average purchase  price ($)
Median  purchase  price ($)
95% confidence  interval of the median  purchase price($)
545.10 This estimate of the total number of hospitals in the population is based on our sample.
This is the payment rate specified for each HCPCS for 2005. It incorporates CMS’s April 2005  update.
CMS publishes the ASP plus 6 percent for certain drugs used in physicians’ offices. These amounts  are based on data provided by manufacturers each quarter. We are reporting ASPs for the quarter  beginning in April 2005. ASPs reported here do not include the 6 percent added by CMS.
For HCPCS codes that contain only one National Drug Code (NDC), we do not include information on  the average or median purchase price because of the potential proprietary sensitivity of such  information.
On April 1, 2005, CMS replaced J1563, Injection, Immune Globulin, Intravenous, 1g, with two new  codes: Q9941 and Q9943. J1563 was ranked fourth in total Medicare spending on SCODs from  January 1, 2004, to September 30, 2004.
J1563, Injection, Immune Globulin, Intravenous, 1g, accounted for $127.1 million in Medicare  spending from January 1, 2004, through September 30, 2004, which was 6.4 percent of total  Medicare spending on SCODs for that time period.
On April 1, 2005, CMS replaced J1563, Injection, Immune Globulin, Intravenous, 1g, with two new  codes: Q9941 and Q9943. Because J1563 was replaced by two codes, we could not estimate the  total number of hospitals in the population for these new codes individually.
On January 1, 2005, CMS replaced C9214, C9215, C9207, C9213, C9208, and C9210 with J9035,  J9055, J9041, J9305, J0180, and J2469, respectively. The ranks for the new codes correspond to the  ranks in total Medicare spending on SCODs from January 1, 2004, to September 30, 2004, for the  former codes.
On April 1, 2005, CMS replaced J1564, Injection, Immune Globulin, Intravenous, 10 mg, with two  new codes: Q9942 and Q9944. J1564 was ranked 47th in total Medicare spending on SCODs from  January 1, 2004, to September 30, 2004.
J1564, Injection, Immune Globulin, Intravenous, 10 mg accounted for $4.4 million in Medicare  spending from January 1, 2004, through September 30, 2004, which was 0.2 percent of total  Medicare spending on SCODs for that time period.
On April 1, 2005, CMS replaced J1564, Injection, Immune Globulin, Intravenous, 10 mg, with two  new codes: Q9942 and Q9944. Because J1564 was replaced by two codes, we could not estimate  the total number of hospitals in the population for these new codes individually.
For this SCOD, our sample data cannot be extrapolated to compute a confidence interval for the  median.
section_title: Appendix III: Purchase Prices for Radiopharmaceuticals SCODs
paragraphs: Table 6 appears as table 1 in our report Medicare: Radiopharmaceutical  Purchase Prices for CMS Consideration in Hospital Outpatient Rate- Setting, GAO-05-733R (Washington, D.C.: July 14, 2005). The label of the  second column—HCPCS code—refers to the Healthcare Common  Procedure Coding System, which CMS uses to define SCODs.
Technetium Tc 99m  Tetrofosmin, per dose  Fluorodeoxyglucose (FDG)  F18, per dose (4-40 mCi/ml)
CMS payment rate  for 2005($) price($)
95% confidence  interval of the  average purchase  price($)
Median purchase  price($)
95% confidence  interval of the median  purchase price($)
This estimate of the total number of hospitals in the population is based on our sample.
section_title: Appendix IV: Comments from the Department of Health and Human Services
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: Phyllis Thorburn, Assistant Director; Hannah Fein; Dae Park; Jonathan  Ratner; and Thomas Walke made key contributions to this report.