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. 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. 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.) 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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 $4.4 million in Medicare spending from January 1, 2004, through September 30, 2004, which was 0.2 percent of total Medicare spending on SCODs for that time period. On April 1, 2005, CMS replaced J1564, Injection, Immune Globulin, Intravenous, 10 mg, with two new codes: Q9942 and Q9944. Because J1564 was replaced by two codes, we could not estimate the total number of hospitals in the population for these new codes individually. For this SCOD, our sample data cannot be extrapolated to compute a confidence interval for the median. Table 6 appears as table 1 in our report Medicare: Radiopharmaceutical Purchase Prices for CMS Consideration in Hospital Outpatient Rate- Setting, GAO-05-733R (Washington, D.C.: July 14, 2005). The label of the second column—HCPCS code—refers to the Healthcare Common Procedure Coding System, which CMS uses to define SCODs. Technetium Tc 99m Tetrofosmin, per dose Fluorodeoxyglucose (FDG) F18, per dose (4-40 mCi/ml) CMS payment rate for 2005($) 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. Phyllis Thorburn, Assistant Director; Hannah Fein; Dae Park; Jonathan Ratner; and Thomas Walke made key contributions to this report.

Summary: 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. 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.