Medicare: Payment for Blood Clotting Factor Exceeds Providers'	 
Acquisition Cost (10-JAN-03, GAO-03-184).			 
                                                                 
In 2001, Medicare's outpatient expenditures for blood clotting	 
factor used to treat the estimated 1,100 beneficiaries with	 
hemophilia totaled about $105 million, or more than 2 percent of 
total Medicare spending on outpatient drugs. Earlier work by GAO 
indicated that Medicare's payment for certain outpatient drugs is
substantially higher than providers' acquisition costs. Concerns 
have been raised about Medicare's payment for blood clotting	 
factor. GAO was asked to compare provider costs of purchasing	 
clotting factor with Medicare's payment for it and to identify	 
costs to providers associated with delivering clotting factor.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-184 					        
    ACCNO:   A05837						        
  TITLE:     Medicare: Payment for Blood Clotting Factor Exceeds      
Providers' Acquisition Cost					 
     DATE:   01/10/2003 
  SUBJECT:   Diseases						 
	     Drugs						 
	     Medical fees					 
	     Cost analysis					 
	     Health care costs					 
	     Medicare Program					 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-03-184

Report to the Ranking Minority Member, Subcommittee on Health, Committee
on Ways and Means, House of Representatives

United States General Accounting Office

GAO

January 2003 MEDICARE Payment for Blood Clotting Factor Exceeds Providers*
Acquisition Cost

GAO- 03- 184

Medicare*s payment for clotting factor, like other outpatient drugs, is 95
percent of the average wholesale price (AWP), a price established for each
drug by its manufacturer. Medicare*s payment is substantially more than
the actual acquisition costs of hemophilia treatment centers (HTC) and
homecare companies, which provide a majority of Medicare beneficiaries
with clotting factor. Most HTCs obtain prices from manufacturers that are
35 to 48 percent below AWP by participating in a federal program that

guarantees them low prices. Homecare companies obtain prices that range
from 22 to 40 percent below AWP. Providers incur additional costs
associated with delivering clotting factor

that are not separately reimbursed by Medicare. GAO estimates that these
additional costs in 2000 and 2001 ranged from $0. 03 to $0. 08 per unit
sold by HTCs. (Hemophilia patients use an average of 78,000 units of
clotting factor annually.) GAO did not receive enough data from homecare
companies to estimate their costs. Delivery costs are generated in
inventory management, specialized refrigerated storage, shipping, and the
provision of ancillary supplies such as needles, syringes, and tourniquets
to patients.

MEDICARE

Payment for Blood Clotting Factor Exceeds Providers* Acquisition Cost

www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 184. To view the full report,
including the scope and methodology, click on the link above. For more
information, contact Laura A. Dummit at (202) 512- 7119. Highlights of
GAO- 03- 184, a report to

Ranking Minority Member, Subcommittee on Health, Committee on Ways and
Means, House of Representatives

January 2003

In 2001, Medicare*s outpatient expenditures for blood clotting factor used
to treat the estimated 1, 100 beneficiaries with hemophilia totaled about
$105 million, or more

than 2 percent of total Medicare spending on outpatient drugs. Earlier
work by GAO indicated that Medicare*s payment for certain outpatient drugs
is substantially higher than providers* acquisition costs. Concerns have
been raised about Medicare*s payment for

blood clotting factor. GAO was asked to compare provider costs of
purchasing clotting factor with Medicare*s payment for it and to identify
costs to providers associated with delivering clotting factor. GAO
recommends that the

Administrator of the Centers for Medicare & Medicaid Services (CMS)
establish Medicare payment levels for clotting factor that are more
closely related to providers* acquisition costs and then establish a
separate payment for the cost of delivering clotting factor to Medicare
beneficiaries. The

Department of Health and Human Services (HHS) agreed with our
recommendations.

Page i GAO- 03- 184 Medicare Payment for Clotting Factor Letter 1 Results
in Brief 3 Background 4 Small Number of Providers Buy Clotting Factor
Directly from

Manufacturers 7 Providers Obtain Clotting Factor Products for
Substantially Less than Medicare*s Payment 10 Providers Incur Costs
Associated with Delivering Clotting Factor to Medicare Beneficiaries That
Are Not Separately Reimbursed 11 Conclusions 13 Recommendations for
Executive Action 14 Agency Comments 14 Appendix I Scope and Methodology 16

Appendix II Comments from the Department of Health and Human Services 18

Table

Table 1: Disease Type and Disease Severity for the Total Hemophilia
Population and the Medicare Subpopulation 7 Figure

Figure 1: Participants in the Clotting Factor Market 9 Contents

Page ii GAO- 03- 184 Medicare Payment for Clotting Factor Abbreviations

AMP average manufacturer price AWP average wholesale price CDC Centers for
Disease Control and Prevention CMS Centers for Medicare & Medicaid
Services HHS Department of Health and Human Services HIV human
immunodeficiency virus HRSA Health Resources and Services Administration
HTC hemophilia treatment center OIG Office of Inspector General

Page 1 GAO- 03- 184 Medicare Payment for Clotting Factor

January 10, 2003 The Honorable Pete Stark Ranking Minority Member
Subcommittee on Health Committee on Ways and Means

House of Representatives Dear Mr. Stark: In 2001, Medicare*s outpatient
expenditures for blood clotting factor totaled about $105 million, or more
than 2 percent of total Medicare spending on all covered outpatient drugs
and biologicals. 1 Blood clotting factor is a biological used by persons
with hemophilia to prevent uncontrolled internal bleeding that could
result in disability or death. 2 The Centers for Disease Control and
Prevention (CDC) estimate that approximately 18,000 Americans, nearly all
male, have hemophilia and about 1,100 of these individuals are Medicare
beneficiaries.

Medicare*s payment for clotting factor, like other outpatient drugs and
biologicals, is 95 percent of the average wholesale price (AWP). Often
described as a *sticker price* or *list price,* AWP is established for
each drug by its manufacturer. Medicare*s AWP- based payment has recently
come under scrutiny. In 2001, we reported that providers were able to
purchase certain drugs at prices significantly less than the payment they

received from Medicare. 3 Although providers contended that this
overpayment was necessary to compensate for underpayment for other

1 Under Medicare part B, outpatient prescription drugs and biologicals are
covered if they are not usually self- administered and are provided
incident to a physician*s services or if they are used in conjunction with
durable medical equipment. Certain self- administered drugs and
biologicals, such as oral drugs used in association with cancer treatment
and blood clotting factor (and the items related to the administration of
such factor), are also covered. 2 Hemophilia is a deficiency in one of the
proteins that causes blood to clot, referred to as a

blood clotting factor. Hereafter, we refer to blood clotting factor as
*clotting factor* and use the term to generally refer to both the
deficient proteins and the biological substance infused for hemophilia
treatment. 3 U. S. General Accounting Office, Medicare: Payments for
Covered Outpatient Drugs

Exceed Providers* Cost, GAO- 01- 1118 (Washington, D. C.: Sept. 21, 2001).

United States General Accounting Office Washington, DC 20548

Page 2 GAO- 03- 184 Medicare Payment for Clotting Factor

services, we concluded that Medicare should not rely on potential
overpayments for some services to offset potential inadequate payments for
other services.

The method of delivery of clotting factor has implications for Medicare
payment. Most outpatient drugs covered by Medicare are administered in a
physician*s office. When a beneficiary visits a physician in order to
receive a drug, the physician receives one payment from Medicare for the
drug

and another payment through the physician fee schedule for administering
the drug. Clotting factor, however, is generally not administered in a
physician*s office. Medicare pays clotting factor providers, mainly
hemophilia treatment centers (HTC) 4 and homecare companies, 5 solely for
the drug. These providers generally purchase clotting factor products
directly from the manufacturers, rather than from drug wholesalers, and
deliver them directly to the very small hemophilia population. 6 Because
clotting factor products were not included in our 2001 report, you

asked us to evaluate whether Medicare*s payment for clotting factor is
higher than its acquisition cost and to identify and describe any aspects
of the production and delivery of clotting factor that may relate to how

Medicare payment should be determined. In this report, we (1) describe
characteristics of the clotting factor delivery system, (2) compare
provider costs of purchasing clotting factor with Medicare*s payment for
it, and

(3) identify any costs to providers associated with delivering clotting
factor and furnishing related services to Medicare beneficiaries with
hemophilia.

To conduct this study, we obtained data on the hemophilia population from
CDC. We analyzed the most recent data available from the Health Resources
and Services Administration (HRSA) on HTC clotting factor acquisition
prices obtained through a federal discount program. We also analyzed data
on clotting factor acquisition prices from two large, national 4 HTCs are
federally funded facilities that provide medical care to persons with
hemophilia.

Created in 1975 [see Pub. L. No. 94- 63, S: 606, 89 Stat. 304, 350
(1975)], HTCs are currently funded by the Health Resources and Services
Administration*s Maternal and Child Health Bureau and CDC.

5 Homecare companies are also known as *specialty pharmacies.* 6 There are
13 unique clotting factor products used to treat the two most common types
of hemophilia. These products vary by manufacturer, protein composition,
and manufacturing process.

Page 3 GAO- 03- 184 Medicare Payment for Clotting Factor

homecare companies. In addition, we analyzed acquisition price data
provided to us by an HTC association for seven HTCs that had purchased
clotting factor outside the federal discount program. We also analyzed

related data on clotting factor prices from the Centers for Medicare &
Medicaid Services (CMS), the agency that administers Medicare. We analyzed
data on provider delivery costs for four HTCs, which we obtained from a
representative of an HTC association, and for two large, national homecare
companies, which we contacted directly. We interviewed officials at the
Department of Health and Human Services (HHS) Office of Inspector General
(OIG), two patient advocacy organizations, four of the six clotting factor
manufacturers, two wholesalers, and several additional HTCs and homecare
companies. Our work was performed from February

through December 2002 in accordance with generally accepted government
auditing standards. See appendix I for more detailed discussion of our
scope and methodology.

The clotting factor market is characterized by a small number of
manufacturers and providers. The six clotting factor manufacturers sell
their products directly to providers, predominantly HTCs and homecare
companies. About half of the 137 HTCs can provide clotting factor and
related ancillary supplies, such as syringes and bandages, to their
patients. Individuals may also obtain clotting factor from homecare
companies, which ship drugs and biologicals and related ancillary supplies
directly to persons with chronic conditions. Shortages of particular
clotting factor products periodically occur. When HTCs and homecare
companies need to obtain a clotting factor product outside their typical
supply arrangements, such as during a shortage, they may purchase it from
certain specialty wholesalers, known as distributors.

Provider costs for acquiring clotting factor are significantly below
Medicare*s payment, which is 95 percent of AWP. Through a federal drug
discount program, HTCs obtain prices from manufacturers that are
approximately 35 to 48 percent below AWP. Homecare companies are able to
obtain clotting factor at prices 22 to 40 percent below AWP. HTCs and
homecare companies do not generally face higher acquisition prices from
manufacturers during product shortages.

Medicare does not make a separate payment to providers for the costs of
delivering clotting factor, which include dispensing costs and furnishing
Results in Brief

Page 4 GAO- 03- 184 Medicare Payment for Clotting Factor

related ancillary supplies. We estimate that dispensing and ancillary
supply costs in 2000 and 2001 ranged from approximately $0.03 to $0.08 for
each unit of clotting factor provided by HTCs. 7 We did not receive enough
data from homecare companies to estimate their costs. Clotting factor*s
biological properties and complex dosing protocols contribute to
dispensing costs in the form of inventory management, storage, and
shipping. In addition, the cost of ancillary supplies that are necessary
for infusing clotting factor, such as needles, syringes, and tourniquets,
is not reimbursed by Medicare. While providers may also furnish other
services for which they are not separately reimbursed, such as patient
education and community outreach, these services are not Medicare- covered

benefits, and they are generally targeted to younger patients who are not
Medicare beneficiaries.

While Medicare*s payment for clotting factor is high enough to more than
reimburse both acquisition and delivery costs, we believe that Medicare*s
overpayment for acquisition costs should not be used to compensate for the
lack of payment for delivery costs. Therefore, we recommend that the
Administrator of CMS establish Medicare payment amounts for clotting

factor delivered on an outpatient basis that are more closely related to
providers* acquisition costs. When payments are reduced to reflect costs
more accurately, the Administrator should establish a separate payment for
the costs of delivering clotting factor to Medicare beneficiaries. In
commenting on a draft of this report, HHS agreed with our recommendations.

The two most common types of hemophilia are a deficiency in clotting
factor VIII, hemophilia A, and a deficiency in clotting factor IX,
hemophilia B. Hemophilia can be mild, moderate, or severe depending on the
amount of the clotting factor present in the blood. People with severe
hemophilia, for example, have less than 1 percent of the normal level of
clotting factor VIII or IX. The level of clotting factor deficiency
contributes to the risk

that a particular bleeding episode poses to an individual. In individuals
with severe hemophilia, bleeding into the joints and adjoining tissues can
occur spontaneously, without an actual injury. Persons with mild

7 Clotting factor dosage is measured in international units; one
international unit is the amount of clotting factor contained in one
milliliter of normal plasma. The average annual use of clotting factor by
patients with the most common form of hemophilia, based on CDC

statistics for 1998, is 78,000 units. Background

Page 5 GAO- 03- 184 Medicare Payment for Clotting Factor

hemophilia usually experience prolonged bleeding only after surgery or a
major trauma, such as a head wound.

Historically, people with hemophilia relied on high- volume transfusions
of whole blood or plasma for treatment. These treatments, however, did not
provide enough clotting factor to stop serious bleeding and could be
performed only in a medical facility. With the introduction in the 1960s
of concentrated clotting factor products that could be infused at home,
hemophilia began to be more effectively and conveniently treated.

Early clotting factor products were produced from human plasma.
Recombinant clotting factor products, which are genetically engineered or
cloned, were introduced in the 1990s to reduce the risk of blood- borne
infections. New manufacturing processes and safety protocols have also
reduced the risk of infections to individuals using plasma clotting factor
products. Because recombinant products are not derived from human plasma,
they are generally considered the current treatment of choice, although
many older individuals continue to use plasma products. There is not
enough recombinant clotting factor manufactured to treat all

individuals with hemophilia. Both plasma and recombinant clotting factor
are biological substances that differ in many respects from conventional,
chemically synthesized drugs. For example, biologicals such as clotting
factor are derived from living sources, so the concentration and potency
of the original source

material can vary. Furthermore, biologicals cannot be manipulated during
the manufacturing process in a way that produces a consistent and precise
yield of product. As a biological product, clotting factor is susceptible
to microbial contamination and sensitive to environmental conditions, such

as temperature. Individuals with hemophilia generally self- infuse
clotting factor. 8 Clotting factor can be infused on demand, when a
bleeding episode occurs, or for prevention, known as prophylactic use. By
self- infusing, individuals can avoid waiting for care at a medical
facility. Timely infusion relieves shortterm pain and swelling and helps
prevent chronic joint disease, which results from recurrent bleeding into
the joints. Prophylactic infusions can

8 Young children and individuals with severe disabilities, who may require
assistance from caregivers, are exceptions. Hemophilia Is Treated with

Clotting Factor

Page 6 GAO- 03- 184 Medicare Payment for Clotting Factor

be intermittent, such as before major surgery, or continuous, to prevent
uncontrolled bleeding over time. Continuous prophylactic infusion is
generally confined to younger individuals to prevent prolonged bleeding
episodes and long- term complications. Physicians prescribe a dosage of
clotting factor units that is based on the nature of treatment. 9
Generally, younger and smaller individuals are prescribed lower quantities
of clotting factor than older and larger individuals.

Because people infuse clotting factor in large doses, a substantial
quantity is used annually in the United States. Total clotting factor use
is about 1 billion units per year. Although the average annual use of
clotting factor VIII for a person with hemophilia A is 78,000 units,
individual use varies widely. In any given year, approximately 23 percent
of individuals with hemophilia use no clotting factor at all, while a very
small percentage of individuals may use more than 500,000 units.

According to CDC estimates, 6 percent of the hemophilia population, or
about 1,100 individuals, are Medicare beneficiaries. 10 The average age of
a Medicare beneficiary with hemophilia is 53, nearly three decades older
than the average age of the total hemophilia population, which is 24. 11
In addition, Medicare beneficiaries with hemophilia show higher rates of
chronic joint disease and two viral infections, hepatitis C and human
immunodeficiency virus (HIV), than the general hemophilia population.
Because clotting factor products were not available when most Medicare
beneficiaries were young, they typically experienced prolonged and
repeated bleeding episodes, a situation that in vulnerable joint areas
leads

to the destruction of joint tissues. As a result, 28 percent of Medicare 9
An individual*s prescription varies according to weight and whether the
individual is infusing on demand or for prophylactic purposes. Physicians
use their own discretion in calculating the exact quantity to prescribe in
any given situation. According to a physician at one HTC, a 150 lb.
individual with a moderate injury should be prescribed approximately 1,500
to 2,000 units of factor VIII. The same individual should be prescribed
3,000 to 3,500 units for a severe injury, such as a head injury. While
patients infuse once or twice in

response to a bleeding episode, those under preventive treatment infuse
three times per week to maintain their baseline amount of clotting factor.
According to the physician we consulted, a total of 5, 700 to 6,500 units
of factor VIII infused over the course of each week would be a suitable
preventive strategy for a 150 lb. individual.

10 CDC bases these estimates on data from the 1993- 1998 Hemophilia
Surveillance System Project, the most recent data available. 11 Certain
disabled individuals qualify for Medicare in addition to individuals age
65 and over. Characteristics of

Medicare Beneficiaries with Hemophilia

Page 7 GAO- 03- 184 Medicare Payment for Clotting Factor

beneficiaries with hemophilia have chronic joint disease, compared to 14
percent of the general hemophilia population. Also, because many Medicare
beneficiaries began using clotting factor products before the blood supply
was tested for hepatitis C and HIV and before recombinant products were
available, beneficiaries have high rates of infection with those viruses:
60 percent have hepatitis C and 45 percent have HIV. For the total
hemophilia population, the rates of hepatitis C and HIV infection are 39
and 24 percent, respectively. The Medicare beneficiary subpopulation and
overall hemophilia

population do not differ, however, in terms of the frequency of disease
type or severity of clotting factor deficiency (see table 1). Also, the
annual use of clotting factor among Medicare beneficiaries and the overall

population with hemophilia is similar.

Table 1: Disease Type and Disease Severity for the Total Hemophilia
Population and the Medicare Subpopulation

Percentage of total hemophilia population

Percentage of Medicare hemophilia subpopulation

Type of clotting factor deficiency  Factor VIII (hemophilia A) 79 80

 Factor IX (hemophilia B) 21 20

Total 100 100

Severity  Mild 32 32

 Moderate 24 23

 Severe 41 43

 Unknown 3 2

Total 100 100

Source: CDC analysis of data from the 1993- 1998 Hemophilia Surveillance
System Project.

A small number of providers and manufacturers are involved in the clotting
factor market. The two main types of providers, HTCs and homecare
companies, furnish clotting factor and related ancillary supplies to
individuals with hemophilia. These providers obtain clotting factor
directly from the six clotting factor manufacturers. Providers rarely
purchase from distributors. Small Number of

Providers Buy Clotting Factor Directly from Manufacturers

Page 8 GAO- 03- 184 Medicare Payment for Clotting Factor

HTCs and homecare companies are the two main providers of clotting factor.
HTCs provide annual checkups and ongoing medical care, physical therapy,
and social and other services to persons with hemophilia. HTCs are located
in 47 states, the District of Columbia, Puerto Rico, and Guam and treat an
average of about 90 hemophilia patients each. Approximately

half the HTCs, 67 out of 137, can furnish clotting factor and related
ancillary supplies to individuals they treat. 12 Homecare companies are
the main source of clotting factor for individuals who do not obtain their
clotting factor from HTCs. There are several large national homecare
companies, as well as smaller regional companies.

Homecare companies ship drugs and related ancillary supplies directly to
individuals with chronic conditions. While homecare companies do not
provide physician services to their patients, they may provide nursing
services, patient education, community outreach, and case management.
Homecare companies can ship clotting factor to individuals throughout the
United States through their licensed pharmacies.

There are six manufacturers of clotting factors VIII and IX that sell
directly to HTCs and homecare companies. In addition, distributors buy the
small amount of clotting factor, approximately 5 percent of all clotting
factor delivered in the United States, that manufacturers have not sold to
HTCs, homecare companies, or other medical entities such as hospitals.
These distributors sell to HTCs, homecare companies, and hospitals and
other medical entities to meet their emergency or short- term needs. (See
fig. 1 for a depiction of the clotting factor market.)

12 According to an HTC representative, one reason some HTCs may not
provide clotting factor is the high initial start- up costs of a factor
program; such costs arise from the structural modifications to facilities
that storing and dispensing clotting factor require, the initial supply of
clotting factor, and the salaries for a dedicated staff to run the
program. The HTC representative also stated that some HTCs affiliated with
larger organizations, typically medical schools or hospitals, may have had
difficulty receiving institutional

approval for such a program. HTCs and Homecare Companies Provide

Clotting Factor Small Number of Clotting Factor Manufacturers Contribute
to Periodic Product Shortages

Page 9 GAO- 03- 184 Medicare Payment for Clotting Factor

Figure 1: Participants in the Clotting Factor Market

Shortages of particular clotting factor products occur periodically.
Because the six manufacturers run at capacity, a decrease in production by
any one reduces availability of a particular product and strains the
general clotting factor supply. Increasing clotting factor production in
response to a shortage is difficult. Manufacturing clotting factor takes
an average of 6 months; opening an additional plant can take several
years. In 2001, there was a severe shortage of recombinant clotting factor
VIII when production problems at one manufacturer occurred concurrently
with a routine maintenance shutdown by another. Many individuals were
unable to obtain recombinant products at that time, causing them to rely
on plasma clotting factor, straining its supply as well. Because some HTCs
and homecare companies could not obtain the needed clotting factor
products from manufacturers, they turned to distributors to obtain
alternative products.

Distributors Six manufacturers of clotting factor

Patients Patients Hemophilia treatment

centers Homecare

companies Source: GAO.

Page 10 GAO- 03- 184 Medicare Payment for Clotting Factor

HTCs and homecare companies are able to purchase clotting factor at prices
considerably lower than Medicare*s payment for clotting factor. Almost all
HTCs that provide clotting factor participate in a federal program that
allows them to obtain prices from manufacturers that are 35 to 48 percent
below AWP. Homecare companies can obtain prices that

range from 22 to 40 percent below AWP. While clotting factor shortages can
affect providers* ability to procure specific products for their
customers, HTCs and homecare companies do not generally face higher
acquisition prices from manufacturers during periods of product

shortages. In an analysis of 2001 and first quarter 2002 data, we found
that HTCs purchase clotting factor from manufacturers at a 35 to 48
percent discount from AWP. The largest discounts are for plasma clotting
factor VIII products, and the smallest discounts are for recombinant
clotting factor VIII products, with the discounts for clotting factor IX
products falling in between. HTCs obtain these substantial discounts
through the Public Health Service 340B program, 13 which enables certain
federally funded entities to buy drugs directly from manufacturers at
discounted prices. 14 The 340B prices, which are updated quarterly, equal
a set discount from a

manufacturer*s price. 15 Our analysis of data from 2001 and 2002 shows
that homecare companies can also purchase clotting factor from
manufacturers at prices substantially below Medicare*s payment. 16 With
prices from 22 to 40 percent below AWP, the discounts that homecare
companies receive are somewhat less than those received by HTCs. Like
HTCs, homecare companies receive the largest discounts on plasma clotting
factor VIII

13 See Pub. L. No. 102- 585, Title VI, S: 602, 106 Stat. 4943, 4967 (1992)
(adding section 340B to the Public Health Service Act). 14 Of the 67 HTCs
that can operate clotting factor programs, 4 have chosen not to
participate in the 340B program. 15 Generally, the 340B price equals the
average manufacturer price (AMP) minus 15.1 percent. AMP represents the
average unit price paid to the manufacturer by wholesalers for drugs
distributed to retail pharmacies. Because wholesalers make up such a small
portion of the clotting factor market, AMP calculations for clotting
factor are based primarily on direct sales to providers. 16 See appendix I
for a detailed discussion of our analysis of homecare company acquisition

prices. Providers Obtain

Clotting Factor Products for Substantially Less than Medicare*s Payment

Providers Obtain Large Discounts from AWP

Page 11 GAO- 03- 184 Medicare Payment for Clotting Factor

products and the smallest on recombinant clotting factor VIII products,
with discounts for clotting factor IX products falling in between.

Because most HTCs obtain their prices through a federal discount program,
they are typically protected from price increases during periods of
product shortage. According to certain homecare companies and other
stakeholders we interviewed, shortages do not result in price fluctuations
for homecare companies over the course of the contracts they sign with

manufacturers. During shortages, sufficient supplies of particular
clotting factor products may not be available directly from manufacturers.
In such rare cases, providers may pay higher prices to other entities,
mainly distributors, to secure needed products. However, a distributor we
spoke with sold clotting factor products to providers at prices that were
still lower than Medicare*s payment.

Providers incur costs associated with delivering clotting factor that are
not separately reimbursed by Medicare. We estimate that total delivery
costs in 2000 and 2001 ranged from $0.03 to $0.08 per unit of clotting
factor sold by HTCs. 17 We did not receive enough data from homecare
companies to

estimate their costs. Delivery costs are generated in inventory
management, storage, shipping, and the provision of ancillary supplies
necessary for the infusion of clotting factor. Providers may also furnish
other services for which they are not separately reimbursed, such as
patient education and community outreach. These services are not Medicare-
covered benefits, and they are generally targeted to younger patients who
are not Medicare beneficiaries.

Medicare does not make a separate payment for the costs of delivering
clotting factor, including costs associated with inventory management,
storage and shipping, and the provision of ancillary supplies. Due to its
complex dosing protocols and biological properties, clotting factor
requires considerable inventory management. Because the number of units of
clotting factor prescribed is determined by an individual*s size and
treatment needs, each prescription is specific to the individual. However,

17 A delivery cost of $0.03 to $0.08 per unit of factor is equivalent to
about 4 to 17 percent of HTCs* acquisition costs, depending on the
specific product purchased, the individual provider, and the amount
provided to the patient. Providers Do Not

Generally Face Higher Prices during Shortages

Providers Incur Costs Associated with Delivering Clotting Factor to
Medicare Beneficiaries That Are Not Separately Reimbursed

Delivering Clotting Factor Generates Dispensing and Ancillary Supply Costs

Page 12 GAO- 03- 184 Medicare Payment for Clotting Factor

manufacturers sell vials of clotting factor in only three standard
concentrations: 250, 500, or 1,000 units per vial. Furthermore, the
unpredictability involved in manufacturing a biological substance like
clotting factor results in manufacturers* inability to predetermine the
precise concentration of clotting factor in a particular vial; they can
only predict its concentration within 10 percent of the standard
concentration. Therefore, a small- sized vial may be labeled anywhere from
225 to 275 units, and a large- sized vial may be labeled anywhere from 900
to 1,100 units. Managing clotting factor inventory requires more staff
time than managing the inventory of conventional drugs, in large part due
to the variations across individual prescriptions and the variable
concentrations in individual vials.

Inventory management is further complicated by product recalls as well as
shortages. If a specific product or concentration is not available as a
result of a product recall or shortage, the provider must allocate
additional staff time to consult with an individual*s physician to
determine an alternate

plan of clotting factor treatment until the preferred product is available
again. One provider we spoke with said that product recalls of clotting
factor occur more often than for other drugs because of sensitivity to the
possibility of blood- borne infection resulting from the use of clotting
factor. In 2001, there was one recall of a clotting factor VIII and one
recall of a clotting factor IX product.

Clotting factor providers also incur costs associated with storing and
shipping clotting factor. Providers order tens of thousands of units of
clotting factor a year for each patient. Because clotting factor must be
refrigerated to prevent spoilage, the high volume of clotting factor
stored by providers requires large temperature- controlled areas with
sources of backup power. The shipment of clotting factor also involves
special arrangements. Glass vials of clotting factor must be securely
wrapped to prevent breakage and then packed with coolants. Providers ship
the products using overnight delivery services that track and monitor the
product along the delivery route to ensure that it is delivered to the
individual*s door at a specific time. Many providers have staff available
24 hours a day to ship clotting factor to patients during emergencies.
Some providers insure their shipments, while others absorb the cost of any
product lost, damaged, or spoiled during shipment.

Providers incur costs for furnishing ancillary supplies necessary to
infuse clotting factor to individuals. These include needles, syringes,
alcohol wipes, bandages, medical tape, sterile gloves, tourniquets, and
needle disposal containers.

Page 13 GAO- 03- 184 Medicare Payment for Clotting Factor

According to our analysis of data from four HTCs, the costs to HTCs for
dispensing clotting factor and providing ancillary supplies directly to
patients ranged from $0.03 to $0.08 per unit of clotting factor based on
data from 2000 and 2001. We did not receive enough data from homecare
companies to estimate their costs. Delivery costs reflect fixed charges,
such as rent and insurance, and costs that vary by the quantity of
clotting factor sold, such as shipping and ancillary supplies. Therefore,
providers*

per unit costs may depend on their overall product volume and the size of
the individual orders.

HTCs and homecare companies state that they provide services related to
hemophilia, such as nursing services, patient education, education on
hemophilia to schools and community organizations, and case management,
that are not separately reimbursed by Medicare and must be covered through
clotting factor payments. To the extent that Medicare beneficiaries
receive services incident to a physician visit, such as case management at
an HTC or physician*s office, these services are compensated through
Medicare*s payment for the physician visit. Other services are not covered
under the Medicare program and predominantly target families with young
children and the schools and other community institutions they attend.

Medicare*s payment for clotting factor delivered on an outpatient basis is
flawed in the same way that its payment is flawed for other outpatient
prescription drugs. In tying its payment to AWP, Medicare has been paying
substantially more than providers* actual acquisition costs. The provider

discounts that we report result in acquisition costs that are
substantially below Medicare*s payment. However, the lowest prices, those
from the 340B program, are not available to all Medicare providers of
clotting factor.

Providers also incur costs in delivering clotting factor related to
inventory management, specialized storage, shipping procedures, and in
providing ancillary supplies. These costs are not separately paid by
Medicare. While we can only estimate the amount of delivery costs,
overpayments on clotting factor are sufficiently high to more than cover
them. However, we believe that Medicare overpayments for some services
should not be used to compensate for the lack of payments for others.
Services Related to

Clotting Factor Are Not Targeted towards Medicare Beneficiaries

Conclusions

Page 14 GAO- 03- 184 Medicare Payment for Clotting Factor

We recommend that the Administrator of CMS establish a Medicare payment
for clotting factor delivered on an outpatient basis that is more closely
related to providers* acquisition costs. Medicare*s payment for clotting
factor should reflect actual market transaction prices. When Medicare*s
payment for clotting factor more closely reflects acquisition costs, we
recommend that the Administrator establish a separate payment for
providers based on the costs of delivering clotting factor to Medicare
beneficiaries.

In commenting on a draft of our report, HHS noted that our findings expand
upon those in earlier reports by us and the HHS OIG on Medicare payment
for outpatient drugs to specifically include information on payments for
clotting factor. HHS agreed that Medicare should appropriately pay for
clotting factor and services related to furnishing clotting factor. HHS*s
written comments are in appendix II. The agency also provided technical
comments, which we incorporated where appropriate. We also provided a copy
of the draft to representatives of two hemophilia

associations, the National Hemophilia Foundation and the Hemophilia
Federation of America, for oral comment. They agreed with our
recommendations and provided technical comments, which we incorporated
where appropriate.

As agreed with your office, unless you publicly announce the contents of
this report earlier, we plan no further distribution of it until 30 days
from the date of this report. We will then send copies of this report to
the Secretary of HHS and the Administrators of CMS and HRSA. The report is
available at no charge on GAO*s Web site at http:// www. gao. gov. We will

also make copies available to others on request. Recommendations for
Executive Action

Agency Comments

Page 15 GAO- 03- 184 Medicare Payment for Clotting Factor

If you or your staff have any questions, please call me at (202) 512- 7119
or Nancy A. Edwards at (202) 512- 3340. Other major contributors to this
report include George H. Bogart, Beth Cameron Feldpush, and Yorick F.
Uzes.

Sincerely yours, Laura A. Dummit Director, Health Care* Medicare Payment
Issues

Appendix I: Scope and Methodology Page 16 GAO- 03- 184 Medicare Payment
for Clotting Factor

In conducting this study, we analyzed data from the Centers for Medicare &
Medicaid Services (CMS), the Health Resources and Services Administration
(HRSA), and the Centers for Disease Control and Prevention (CDC). We also
analyzed data from 11 hemophilia treatment centers (HTC) and 2 homecare
companies. We interviewed officials at the Department of Health and Human
Services Office of Inspector General, 2 patient advocacy organizations, 4
clotting factor manufacturers, 2 of the 5 largest distributors, and
several HTCs and homecare companies.

To obtain demographic and treatment information on the hemophilia
population and Medicare subpopulation, we used data from the 1993- 1998
CDC Hemophilia Surveillance System Project, generally recognized as the
most complete and accurate data available. Through this project, CDC
collected medical records data on persons with hemophilia to estimate its
national prevalence. We used these data to determine characteristics of
Medicare beneficiaries with hemophilia and compare them to the overall
population with hemophilia.

To determine Medicare expenditures for clotting factor products, we used
2001 data from the Medicare Part B Extract and Summary System, which are
the most recent data available. We limited our analysis to four clotting
factor payment categories of recombinant clotting factor VIII, plasma
clotting factor VIII, recombinant clotting factor IX, and plasma clotting

factor IX. These categories constituted over 90 percent of Medicare
expenditures on clotting factor in 2001.

We determined clotting factor acquisition prices for the two major
providers of clotting factor, HTCs and homecare companies. For HTCs, we
obtained 2001 and first quarter 2002 340B acquisition prices directly from
HRSA. The 340B prices are the discounted prices that HTCs receive through
their participation in a federal program.

We obtained 2002 homecare acquisition prices from two homecare companies,
which we supplemented with two other sources. First, we used 2001 and
first quarter 2002 average manufacturer price (AMP) data obtained from
CMS. AMP reflects the average price paid to a manufacturer by a purchaser
for a drug, excluding 340B prices, other federal prices, and sales to
hospitals and health maintenance organizations. Because of the limited
number of provider types involved in the clotting factor market, the
exclusion of 340B prices from AMP calculations, and the small market share
of distributors, AMP is a satisfactory proxy for homecare acquisition

prices. Second, we used acquisition prices from 2001, which we received
from an HTC association, for seven HTCs that had purchased clotting
Appendix I: Scope and Methodology

Appendix I: Scope and Methodology Page 17 GAO- 03- 184 Medicare Payment
for Clotting Factor

factor outside of the 340B program. We combined these three data sources
into a list of acquisition prices for 2001 and 2002. To obtain the
estimated discounts from the average wholesale price

(AWP) for each provider type, we first averaged the acquisition prices
within product category and year for each of our four data sources: the
340B prices, the homecare company acquisition prices, the AMP prices, and
the HTC non- 340B acquisition prices. We obtained AWP data from the 2001
and 2002 Drug Topics Red Book. To obtain AWP discounts, we calculated the
difference between the corresponding AWP and the average acquisition
prices to find the average discount, by product category and year, for
each of the four data sources. We then determined the range of HTC
discounts by listing the highest and lowest average discounts among the
four product categories for 2001 and first quarter 2002 340B prices. We
determined the range of homecare company prices by listing the highest

and lowest average discounts among the four product categories for 2002
homecare prices, 2001 and first quarter 2002 AMP prices, and 2001 HTC non-
340B prices.

To identify the categories of additional costs that providers incur in
delivering clotting factor, we relied on structured interviews with
providers. From information obtained in our interviews, we developed cost
categories and asked providers to give us their operating costs for each
of these categories for 1 full year and the total number of clotting
factor units they purchased during that year. Some HTCs were unable to
provide this information because they were financially associated with
larger institutions, such as hospitals, and could not separate their costs
from those of the institutions. We did obtain costs from four HTCs and
used these data to determine the range of HTC additional costs. We did not
receive enough data from homecare companies to estimate their costs.

Appendix II: Comments from the Department of Health and Human Services

Page 18 GAO- 03- 184 Medicare Payment for Clotting Factor

Appendix II: Comments from the Department of Health and Human Services

Appendix II: Comments from the Department of Health and Human Services

Page 19 GAO- 03- 184 Medicare Payment for Clotting Factor (290167)

The General Accounting Office, the investigative arm of Congress, exists
to support Congress in meeting its constitutional responsibilities and to
help improve the performance and accountability of the federal government
for the American people. GAO examines the use of public funds; evaluates
federal programs and policies; and provides analyses, recommendations, and
other assistance to help Congress make informed oversight, policy, and
funding decisions. GAO*s commitment to good government is reflected in its
core values of accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost
is through the Internet. GAO*s Web site (www. gao. gov) contains abstracts
and fulltext files of current reports and testimony and an expanding
archive of older products. The Web site features a search engine to help
you locate documents using key words and phrases. You can print these
documents in their entirety, including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as *Today*s Reports,* on its
Web site daily. The list contains links to the full- text document files.
To have GAO e- mail

this list to you every afternoon, go to www. gao. gov and select
*Subscribe to daily E- mail alert for newly released products* under the
GAO Reports heading.

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to: U. S. General Accounting Office 441 G Street NW, Room LM
Washington, D. C. 20548 To order by Phone: Voice: (202) 512- 6000

TDD: (202) 512- 2537 Fax: (202) 512- 6061

Contact: Web site: www. gao. gov/ fraudnet/ fraudnet. htm E- mail:
fraudnet@ gao. gov Automated answering system: (800) 424- 5454 or (202)
512- 7470 Jeff Nelligan, managing director, NelliganJ@ gao. gov (202) 512-
4800

U. S. General Accounting Office, 441 G Street NW, Room 7149 Washington, D.
C. 20548 GAO*s Mission Obtaining Copies of

GAO Reports and Testimony

Order by Mail or Phone To Report Fraud, Waste, and Abuse in Federal
Programs Public Affairs
*** End of document. ***