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.