Medicare: Information Needed to Assess Adequacy of Rate-Setting
Methodology for Payments for Hospital Outpatient Services
(17-SEP-04, GAO-04-772).
Under the Medicare hospital outpatient prospective payment system
(OPPS), hospitals receive a temporary additional payment for
certain new drugs and devices while data on their costs are
collected. In 2003, these payments expired for the first time for
many drugs and devices. To incorporate these items into OPPS, the
Centers for Medicare & Medicaid Services (CMS) used its
rate-setting methodology that calculates costs from charges
reported on claims by hospitals. At that time, some drug and
device industry representatives noted that payment rates for many
of these items decreased and were concerned that hospitals may
limit beneficiary access to these items if they could not recover
their costs. GAO was asked to examine whether the OPPS
rate-setting methodology results in payment rates that uniformly
reflect hospitals' costs for providing drugs and devices, and
other outpatient services, and if it does not, to identify
specific factors of the methodology that are problematic.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-04-772
ACCNO: A12410
TITLE: Medicare: Information Needed to Assess Adequacy of
Rate-Setting Methodology for Payments for Hospital Outpatient
Services
DATE: 09/17/2004
SUBJECT: Cost analysis
Drugs
Health care costs
Health care programs
Health insurance
Hospitals
Insurance claims
Medical services rates
Payments
Statistical methods
Outpatient care services
Medicare Hospital Outpatient Prospective
Payment System
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GAO-04-772
United States Government Accountability Office
GAO Report to the Chairman, Subcommittee on Health, Committee on Ways and Means,
House of Representatives
September 2004
MEDICARE
Information Needed to Assess Adequacy of Rate-Setting Methodology for Payments
for Hospital Outpatient Services
a
GAO-04-772
Highlights of GAO-04-772, a report to the Chairman, Subcommittee on
Health, Committee on Ways and Means, House of Representatives.
Under the Medicare hospital outpatient prospective payment system (OPPS),
hospitals receive a temporary additional payment for certain new drugs and
devices while data on their costs are collected. In 2003, these payments
expired for the first time for many drugs and devices. To incorporate
these items into OPPS, the Centers for Medicare & Medicaid Services (CMS)
used its rate-setting methodology that calculates costs from charges
reported on claims by hospitals. At that time, some drug and device
industry representatives noted that payment rates for many of these items
decreased and were concerned that hospitals may limit beneficiary access
to these items if they could not recover their costs. GAO was asked to
examine whether the OPPS rate-setting methodology results in payment rates
that uniformly reflect hospitals' costs for providing drugs and devices,
and other outpatient services, and if it does not, to identify specific
factors of the methodology that are problematic.
September 2004
MEDICARE
Information Needed to Assess Adequacy of Rate-Setting Methodology for Payments
for Hospital Outpatient Services
The rate-setting methodology used by CMS may result in OPPS payment rates
for drugs, devices, and other services that do not uniformly reflect
hospitals' costs of providing those services. Two areas of the methodology
are particularly problematic. The hospital claims for outpatient services
that CMS uses to calculate hospitals' costs and set payment rates may not
be a representative sample of all hospital outpatient claims. For Medicare
payment purposes, an outpatient service consists of a primary service and
the additional services or items associated with the primary service,
referred to as packaged services. CMS has excluded over 40 percent of
multiple-service claims, claims that include more than one primary service
along with packaged services, when calculating the cost of all OPPS
services, including those with drugs and devices. It excludes these
multiple-service claims because, when more than one primary service is
reported on a claim, CMS cannot associate each packaged service with a
specific primary service. Therefore, the agency cannot calculate a total
cost for each primary service on that claim, which it would use to set
payment rates. The data CMS has available do not allow for a determination
of whether excluding many multiple-service claims has an effect on OPPS
payment rates. However, if the types or costs of services on excluded
claims differ from those on included claims, the payment rates of some or
all services may not uniformly reflect hospitals' actual costs of
providing those services. In addition, in calculating hospitals' costs,
CMS assumes that, in setting charges within a specific department, a
hospital marks up the cost of each service by the same percentage.
However, based on information from 113 hospitals, GAO found that not all
hospitals use this methodology: charge-setting methodologies for drugs,
devices, and other outpatient services vary greatly across hospitals and
across departments within a hospital. CMS's methodology does not recognize
hospitals' variability in setting charges, and therefore, the costs of
services used to set payment rates may be under- or overestimated.
Number and Percentage of Hospitals that Reported Methods to Mark Up Drug
and Device GAO recommends that the Charges, 2003
Administrator of CMS collect data Drugs Devices
on excluded claims and analyze Number Percentage Number Percentagea
variation in hospital charge setting Same percentage for all items 40 43
39 46 to determine if the OPPS payment Graduated percentage, higher for
rates uniformly reflect hospitals' low-cost items 33 36 39 46
costs of providing outpatient Graduated percentage, lower for low
services, and, if they do not, to cost items 6 7 4 5
make appropriate changes to the Other 1314 3 4
methodology. CMS stated that it Source: GAO.
will consider GAO's
recommendations. aPercentage of total hospitals does not total 100 percent
due to rounding.
www.gao.gov/cgi-bin/getrpt?GAO-04-772.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact A. Bruce Steinwald at (202)
512-7119.
Contents
Letter
Results in Brief
Background
Payment Rates Were Generally Lower for Separately Paid Drugs, but
Cannot Be Evaluated for Packaged Drugs and Devices No Type of Hospital
Provided a Disproportionate Number of
Services Associated with Certain Drugs and Devices Payment Rates May Not
Uniformly Reflect Hospitals' Costs Conclusions Recommendations for
Executive Action Agency and External Reviewer Comments and Our Evaluation
1 5 7
11
14 15 18 19 19
Appendixes
Appendix I: Appendix II: Appendix III:
Appendix IV:
Scope and Methodology
Summary of Hospital Charge-Setting Methodologies
Comments from the Centers for Medicare & Medicaid Services
GAO Contact and Staff Acknowledgments
GAO Contact Acknowledgments
23 26
28
33 33 33
Tables Table 1: Payment Rates for Drug Administration APCs,
2002-2003 13
Table 2: Percentage of Medicare Outpatient Services by Type for
All
Hospitals and for Hospitals with Various
Characteristics 15
Table 3: Number and Percentage of Hospitals that Reported
Methods for Setting Base Charges for Clinic Visit Services,
2003 26
Table 4: Number and Percentage of Hospitals that Reported
Methods to Mark Up Drug and Device Charges, 2003 27
Figures Figure 1: Example of a Single-Service Claim with Packaged Services
9 Figure 2: Example of a Multiple-Service Claim with Packaged Services 9
Contents
Abbreviations
AAMC Association of American Medical Colleges
ACCC Association of Community Cancer Centers
AdvaMed Advanced Medical Technology Association
AHA American Hospital Association
APC ambulatory payment classification
AWP average wholesale price
BIO Biotechnology Industry Organization
CMS Centers for Medicare & Medicaid Services
FAH Federation of American Hospitals
HCPCS Healthcare Common Procedure Coding System
PhRMA Pharmaceutical Research and Manufacturers of America
PPS prospective payment system
OPPS outpatient prospective payment system
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A
United States Government Accountability Office Washington, D.C. 20548
September 17, 2004
The Honorable Nancy L. Johnson
Chairman
Subcommittee on Health
Committee on Ways and Means
House of Representatives
Dear Chairman Johnson:
Since 2000, hospitals have been paid fixed, predetermined amounts under a
prospective payment system (PPS) for outpatient services delivered to
Medicare beneficiaries. By paying hospitals under a PPS, Medicare seeks
to encourage them to operate efficiently, as they retain the difference if
their payments exceed their costs of providing necessary services.
However, unlike most other Medicare PPSs, where each payment amount is
designed to cover the combined costs of a large bundle of services, the
outpatient prospective payment system (OPPS) is more like a fee schedule
and pays a designated rate for each outpatient service provided to a
beneficiary.
By law, the initial 2000 OPPS rates were based on hospitals' 1996 median
costs.1 During the development of OPPS, the anticipated use of 1996 data
prompted concerns that the costs of new technology items, such as drugs,
biologicals,2 and devices, first used after 1996 would not be represented
in
the 2000 payment rates and that hospitals might not provide the newest
technology because of a perceived shortfall in payment. Accordingly,
Congressional concerns were raised that beneficiaries might lose access to
some of these items upon implementation of the payment system.
The Centers for Medicare & Medicaid Services (CMS),3 the agency that
administers Medicare, sets OPPS payment rates by using charges hospitals
report to CMS for the outpatient services they provide. The agency has
used this methodology since setting the 2000 rates. CMS converts each
hospital's charge to that hospital's cost for each service using a
specific
1 The Balanced Budget Act of 1997, Pub. L. No. 105-33, S: 4523, 111 Stat.
251, 445 (1997).
2 In this report, we use the term "drugs" to refer to both drugs and
biologicals.
3 In July 2001, the agency's name was changed from the Health Care
Financing Administration to CMS.
adjustment for each of the hospital's departments. Under OPPS, an
outpatient service consists of a primary service and its packaged
services, the additional services or items associated with the primary
service. For example, the surgical insertion of a pacemaker, a primary
service, includes packaged services such as operating and recovery room
services, anesthesia, and surgical and medical supplies, including the
pacemaker. CMS combines the costs of the primary service and packaged
services to calculate a total cost for that primary service. It assigns
primary services to ambulatory payment classification (APC) groups and
calculates a payment rate from the costs of the services in that group. An
APC may consist of one primary service, but more often consists of two or
more primary services with clinical and cost similarity. All primary
services assigned to one APC are paid the same rate.
In response to concerns that the 1996 data that would be used to set the
2000 OPPS payment rates did not include cost data for new drugs and
devices first used after 1996, in 1999, the Congress required that a
payment be made for a temporary period, in addition to the OPPS amount,
for certain drugs and devices used in the delivery of outpatient
services.4 New drugs and devices are eligible to receive these temporary
additional payments, known as pass-through payments, for 2 to 3 years
depending on when their eligibility first began and when cost data become
available to incorporate these items into OPPS as either a primary or
packaged service. These temporary payments for pass-through drugs
generally are equal to 95 percent of the average wholesale price (AWP),5
and the temporary payments for pass-through devices are equal to CMS's
calculation of the hospital's cost for the device.
In 2003, the first year for which pass-through eligibility expired for any
drugs or devices, 236 drugs and 95 categories of devices6 were
incorporated
4 The Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of
1999, Pub. L. No. 106-113, App. F, S: 201(b), 113 Stat. 1501A-321,
1501A-337 (1999).
5 Often described as a "sticker price" or "list price," AWP is the average
price that a manufacturer suggests wholesalers charge pharmacies.
6 Devices were initially eligible for pass-through payments based on the
individual device. Effective April 1, 2001, devices are eligible for
pass-through payments based on device categories, with an individual
device eligible if it meets a category description.
into OPPS.7 Of these drugs and devices, CMS designated 115 of the drugs
primary services and the remaining 121 drugs and all devices packaged
services. While those drugs that became primary services have assigned
payment rates, the packaged drugs and devices do not. At the time CMS made
the designations, some drug and device and hospital industry
representatives noted that in basing the payment for these items on
hospitals' costs, Medicare payments for many had declined significantly.
The drug and device industry representatives were concerned that if
hospitals could not recover their costs through OPPS payments, hospitals
would not purchase these items-in essence, limiting beneficiary access to
the products. Some hospital association representatives were concerned
that certain types of hospitals may provide a higher number of services
associated with drugs and devices, such as cancer center hospitals
providing chemotherapy services or teaching hospitals performing cardiac
procedures involving devices, and therefore may be disproportionately
affected by payment rate decreases for these items. Furthermore, the
decrease in payment rates for drugs and devices led to broader concerns
about how CMS ensures that OPPS payment rates for all services reflect
hospitals' costs.
You asked us to examine these issues. Specifically, we (1) describe how
payment rates changed for those drugs and devices whose pass-through
eligibility expired in 2003 and 2004, (2) determine whether a particular
type or types of hospitals provide a disproportionate number of Medicare
outpatient services associated with drugs and devices, and (3) examine
whether the OPPS rate-setting methodology results in payment rates that
uniformly reflect hospitals' costs for providing drugs and devices, as
well as all other outpatient services, to beneficiaries, and if it does
not, to identify specific factors of the methodology that are problematic.
7 Since this group included all drugs and devices eligible over a 4-year
period (from January 1, 1997 through January 1, 2001), many more items
expired in 2003 than are expected to expire in any subsequent year.
To address these objectives, we analyzed 2003 and 20048 OPPS payment rates
and the 2003 and 2004 AWPs for former pass-through drugs that are primary
services, which we refer to as separately paid drugs. The remaining drugs
and all devices were packaged. Therefore, no identifiable 2003 or 2004
payment rate for these items exists and we could not analyze any payment
rate change. We also analyzed the Medicare hospital claims, the bills
hospitals submit to CMS for payment, that were used to set the 2003 OPPS
rates.9 These claims were the latest data available at the time of our
analysis, and we determined they were reliable for our purposes. From the
claims data, we identified the outpatient services most often associated
with drugs or devices.10 We determined whether any hospital type provided
a disproportionate number of these outpatient services, such as hospitals
with and without an outpatient cancer center or major teaching status,
with major teaching hospitals defined as those having an
intern/resident-to-bed ratio of 0.25 or more. We also analyzed hospitals
by their urban/rural location and by their volume of outpatient services.
We analyzed information from 113 hospitals on how they set their charges
for drugs, devices, and other outpatient services. Of these hospitals, we
interviewed officials from 5, received information from another 50 through
association and industry representatives who gathered the information on
our behalf, and received information from another 58 who were contacted by
7 state hospital associations in geographically diverse areas on our
behalf. Because these 113 hospitals are not statistically representative
of all hospitals, we cannot generalize our results to other hospitals.
Finally, we spoke with officials at CMS, individual hospitals, hospital
associations, drug and device manufacturers, and trade associations
representing manufacturers of drugs and devices. We also spoke with
consultants who advise hospitals on setting charges for their services.
Our methodology is detailed in appendix I. We conducted our work from
March 2003 through
8 In our analysis, we used the 2004 OPPS payment rates set by CMS in the
November 7, 2003 final rule, which were based on hospital costs and
hospital outpatient claims. 68 Fed. Reg. 63,398 (2003). These rates do not
reflect provisions that limited the amount of fluctuation between the 2003
and 2004 rates that were implemented on January 1, 2004 as a result of the
Medicare Prescription Drug, Improvement, and Modernization Act of 2003. We
did not analyze the updated rates because they were not based on hospital
costs or hospital outpatient claims. Pub. L. No. 108-173, S: 621, 117
Stat. 2066, 2307 (2003).
9 These claims are for services performed from April 1, 2001 through March
31, 2002.
10 We analyzed all outpatient drugs that were individually identified in
the outpatient claims data, not only the drugs classified as pass through.
We could analyze only pass-through devices because these devices were
individually identified in the outpatient claims, while other devices were
not.
August 2004 in accordance with generally accepted government auditing
standards.
Results in Brief The OPPS payment rates of former pass-through, separately
paid, drugs were generally lower than the pass-through payment rate, but
the payment rates of former pass-through drugs and devices that were
packaged cannot be evaluated, as these items are not assigned a distinct
payment rate. The payment rates for the 115 of 236 former pass-through
drugs that expired from pass-through eligibility in 2003 and became
separately paid drugs almost universally decreased from the pass-through
payment rate of 95 percent of AWP. Because the remaining 121 pass-through
drugs and the devices in the 95 pass-through device categories were
packaged and are not assigned to an APC, we cannot evaluate any payment
rate changes for these items. In 2003, over 90 percent, and in 2004, 100
percent, of former pass-through drugs that CMS designated as separately
paid drugs had payment rates lower than 95 percent of AWP. In both years,
the payment rates were often considerably lower than AWP, but decreases
varied substantially. For example, although the 2003 median drug payment
rate was 55 percent of AWP, one drug had a 2003 payment rate about 7
percent of AWP, while another had a 2003 payment rate about 94 percent of
AWP.
No type of hospital provided a disproportionate number of Medicare
outpatient services associated with certain drugs and devices; in 2001,
these outpatient services as a percentage of total Medicare outpatient
services varied little among different hospital types. For example,
chemotherapy administrations-the outpatient services most frequently
associated with the use of drugs-accounted for an average of 1.8 percent
of all hospitals' total number of Medicare outpatient services.
Chemotherapy administration services accounted for an average of 2.0
percent of cancer center hospitals' and 1.8 percent of noncancer center
hospitals' total Medicare outpatient services. Cardiac procedures-the
outpatient services most frequently associated with the use of devices-
accounted for an average of 0.4 percent of all hospitals' total number of
Medicare outpatient services. Similarly, these cardiac procedures
accounted for an average of 0.4 percent of both major teaching and all
other hospitals' total Medicare outpatient services.
The OPPS rate-setting methodology used by CMS may result in APC payment
rates for drugs, devices, and other outpatient services that do not
uniformly reflect hospitals' costs of providing those services. Two areas
of the methodology are particularly problematic. First, the claims that
CMS
uses to calculate hospitals' costs and set payment rates may not be a
representative sample of hospital claims, as CMS has excluded over 40
percent of multiple-service claims, claims that include more than one
primary service as well as packaged services, when calculating the cost of
all OPPS services, including those with drugs and devices. It excludes
these multiple-service claims because outpatient claims list all the
services delivered during a visit and do not provide a link between
primary and packaged services. Because CMS cannot associate each packaged
service on the claim with one of the primary services listed on the claim,
the agency cannot calculate a total cost for each primary service on that
claim. The data CMS has available do not allow for the determination of
whether excluding a sizable percentage of the multiple-service claims has
an effect on OPPS payment rates. However, if the types or costs of
services on excluded claims differ from the types or costs of services on
included claims, the payment rates of some or all APCs will not uniformly
reflect hospitals' costs of providing those services. Second, in
calculating hospitals' costs, CMS assumes that, in setting charges within
a specific department, a hospital marks up the cost of each service by the
same percentage. However, many hospitals do not use this methodology;
chargesetting methodologies for drugs, devices, and other outpatient
services vary greatly both across hospitals and departments of a hospital.
CMS's methodology does not recognize hospitals' variability in setting
charges. This may lead to an under or overestimation of hospitals' costs
for certain services. As these costs are used to set payment rates,
payment rates may not uniformly reflect hospitals' costs.
We recommend that the Administrator of CMS gather the necessary data and
perform an analysis of the types and costs of services on excluded
multiple-service claims to determine if they are different from the types
and costs of services on the claims it includes in setting OPPS rates. The
Administrator should also analyze the effect that the variation in
hospital charge-setting practices has on the rate-setting methodology.
Finally, the Administrator should, in the context of the first two
recommendations, analyze whether the OPPS rate-setting methodology results
in payment rates that uniformly reflect hospitals' costs of the outpatient
services they provide to Medicare beneficiaries, and, if it does not, make
appropriate changes in that methodology. In commenting on a draft of this
report, CMS stated that it has continued to review and refine its OPPS
data collection and analysis. CMS stated that it is searching for ways to
use more data from multiple-service claims, and it has made efforts in
recent rate-setting analyses to include data from more of these claims. We
included a discussion of these changes in the draft report. In its
comments, CMS
stated that we should recognize that its rate-setting methodology that
converts hospital charges to costs using a cost-to-charge ratio does so at
the level of an individual hospital department. The draft report noted the
fact that cost-to-charge ratios were generally calculated on a
departmentspecific basis; however, we have revised the report to highlight
that information throughout. CMS stated that it will consider our
recommendations as it continues to assess and refine the rate-setting
methodology. Industry representatives who reviewed a copy of this draft
generally agreed with the findings, conclusions, and recommendations.
Background Medicare beneficiaries receive a wide range of services in
hospital outpatient departments, such as emergency room and clinic visits,
diagnostic services such as x-rays, and surgical procedures. To receive
Medicare payment, hospitals report the services they provided to a
beneficiary on a claim form they submit to CMS along with their charge for
each service. For Medicare payment purposes, an outpatient service
consists of a primary service and packaged services, the additional
services or items associated with that primary service. CMS assigns each
primary service to an APC, which may include other similar primary
services, and pays the hospital at the designated APC payment rate,
adjusted for variation in local wages. A hospital can receive multiple APC
payments for a single outpatient visit if more than one primary service is
delivered during that visit.
CMS Methodology for Determining APC Payment Rates
On outpatient claims, hospitals identify the primary services they
provided using a Healthcare Common Procedure Coding System (HCPCS)11 code,
while they identify packaged services by either specific HCPCS codes or
revenue codes that represent general hospital departments or centers, such
as "pharmacy," "observation room," or "medical social services." In
addition to claims, hospitals submit annual cost reports to CMS that state
their total charges and costs for the year and the individual hospital
department charges and costs.
As a first step in calculating the OPPS payment rate for each APC, CMS
obtains hospital charge data on each outpatient service from the latest
11 The HCPCS is a uniform system of codes used by providers and medical
suppliers to report professional services, procedures, and supplies.
available year of outpatient claims. It calculates each hospital's cost
for each service by multiplying the charge by a cost-to-charge ratio that
is computed from the hospital's most recent cost report, generally on an
outpatient department-specific basis. In those instances when a
cost-tocharge ratio does not exist for an outpatient department in a given
hospital, CMS uses one from a related outpatient department or the
hospital's overall cost-to-charge ratio for outpatient department
services. The cost of each primary service is then combined with the costs
of the related packaged services to calculate a total cost for that
primary service. On single-service claims, claims with one primary
service, CMS can associate packaged services with the primary service and
calculate a total cost for the service (see fig. 1). However, in the case
of multiple-service claims, claims with more than one primary service,
packaged services and their costs listed on the claim cannot be associated
with particular primary services, as the costs of a packaged service may
be associated with one or a combination of primary services (see fig. 2).
For this reason, CMS excluded all multiple-service claims from rate
setting prior to 2003. Beginning with the 2003 payment rates, CMS
identified several methods that allowed it to convert some
multiple-service claims into single-service claims, and therefore include
them in its rate-setting calculations.12
12 For multiple-service claims that have no packaged services, CMS
considers each primary service its own single-service claim. Similarly,
CMS treats each pathology service on a multiple-service claim as its own
single-service claim. If a multiple-service claim contains one primary
service together with certain other primary services that CMS states do
not typically have packaged services associated with them, such as a chest
X-ray or an electrocardiogram, CMS assigns all packaged services to that
one primary service and treats it as a single-service claim. In addition,
if the claim includes the date for each service and each primary service
has a different date, CMS uses the dates of service associated with
packaged services listed on the claims to match them to primary services
with the same dates of service, and makes each primary service its own
single-service claim.
Figure 1: Example of a Single-Service Claim with Packaged Services
Figure 2: Example of a Multiple-Service Claim with Packaged Services
After calculating the cost of each primary service assigned to an APC for
each hospital claim, CMS arrays the costs for all claims and determines
the median cost. To calculate the APC's weight relative to other APCs, CMS
compares the median cost of each APC to the median cost of APC 0601, a
mid-level clinic visit, which is assigned a relative weight of 1.00. For
example, if the median cost of APC 0601 is $100 and the median cost of
"APC A" is $50, CMS assigns APC A a relative weight of 0.50.
To obtain a payment rate for each APC, CMS multiplies the relative weight
by a factor that converts it to a dollar amount. In addition, CMS annually
reviews and revises the services assigned to a particular APC and uses the
new APC assignments and the charges from the latest available outpatient
hospital claims to recalibrate the relative weights, and therefore the
payment rates.
Expiration of Drug and Device Pass-Through Eligibility
New drugs and devices are eligible to receive temporary pass-through
payments for 2 to 3 years, depending on when each drug and device's
eligibility began. January 1, 2003 was the first time that pass-through
eligibility expired for any drugs or devices. Once pass-through
eligibility for these items expires, CMS determines whether they will be
considered a primary service and assigned to a separate APC or a packaged
service and included with the primary services with which they are
associated on a claim.
On January 1, 2003, 236 drugs and on January 1, 2004, 7 drugs expired from
pass-through eligibility. For those drugs expiring in 2003, CMS designated
any drug with a median cost exceeding $150 (115 drugs) as a primary
service, and each was assigned to its own, separately paid APC. The
remaining drugs (121 drugs), those with a median cost less than $150, were
designated as packaged services, that is, their costs were included with
the costs of the primary service they were associated with on the claim.
CMS stated that many of these latter drugs were likely present on claims
with a primary service of drug administration and were therefore packaged
with the services assigned to the six drug administration APCs, that is,
the three chemotherapy administration and three drug injection and
infusion APCs.13 For these packaged drugs, although hospitals had
previously received two payments, one for the administration of the drug
or other primary service and an additional pass-through payment for the
drug itself, when eligibility expires, hospitals receive only one payment
for both the administration or other primary service and the packaged
drug. In 2004, all 7 drugs for which pass-through eligibility expired were
designated as primary services and assigned to their own, separately paid
APCs.
On January 1, 2003, the devices in 95 device categories, and on January 1,
2004, the devices in 2 device categories, expired from pass-through
eligibility; in both years, the devices in all device categories were
13 CMS expects that most drug charges would be present on claims that also
include the service for the administration of the drug; however, it is
possible that drug charges are present on claims with primary services
other than an administration and are included in the APCs to which those
primary services are assigned.
designated as packaged services and their costs were included with the
costs of the primary service they were associated with on the claim.
Although hospitals had previously received two payments, one for the
procedure associated with the device and an additional pass-through
payment for the device, hospitals then received only one payment for both
the procedure and its associated device.
Payment Rates Were Generally Lower for Separately Paid Drugs, but Cannot
Be Evaluated for Packaged Drugs and Devices
The OPPS payment rates of former pass-through, separately paid drugs were
generally lower than the pass-through payment rate, but the payment rates
of former pass-through drugs and devices that were packaged cannot be
evaluated, as these items are not assigned a distinct payment rate. In
2003, the payment rates for the 115 of 236 former pass-through drugs that
were designated as separately paid drugs almost universally decreased from
the pass-through payment rates. In 2004, for all 7 former pass-through
drugs were designated as separately paid drugs and the payment rates for
all 7 decreased. In 2003, for the remaining 121 pass-through drugs and the
devices in 95 pass-through device categories and, in 2004, the devices in
2 device categories, all of which were packaged, we cannot evaluate the
payment rate changes because individual payment rates were not assigned
for these items when they expired from pass-through eligibility.
Payment Rates Generally Decreased For Separately Paid, Former Pass-Through
Drugs
In 2003, about half of all drugs for which pass-through eligibility
expired (115 of 236) were assigned to their own APC and paid separately.
For these drugs, we determined that over 90 percent had payment rates
lower than 95 percent of AWP, the pass-through payment rate; the median
payment rate was 55 percent of AWP.14 Individual payment rates were often
considerably lower than AWP, but decreases varied substantially. For
example, 1 drug had a payment rate of about 7 percent of AWP, while
another had a payment rate of about 94 percent of AWP. However, 10 drugs
had a payment rate of more than 100 percent of AWP. In addition, payment
as a percentage of AWP varied by drug source. The majority of the 113
separately paid drugs that we analyzed were sole-source (70 percent),
followed by multi-source
14 This analysis excludes 2 drugs: 1 for which we were unable to determine
a reliable AWP, and 1 for which the payment rate was an extremely high
percentage of AWP.
(19 percent), and generic (10 percent).15 Generic drugs, which were paid
the highest percentage of AWP of the three categories, had a median
payment rate of 74 percent of AWP, multi-source drugs had a median of 56
percent of AWP, and sole-source drugs had a median of 53 percent of AWP.
In 2004, all seven drugs for which pass-through eligibility expired were
assigned to separate APCs. The individual payment rate of each drug was
lower than the pass-through rate of 95 percent of AWP, with a median
payment rate of 69 percent of AWP. All drugs were sole-source.
Although the decreases in payments for these drugs were often substantial
and varied greatly across individual drugs, some level of decrease is
expected when pass-through eligibility expires and payments become based
on hospital costs instead of AWP, which often exceeds providers'
acquisition costs. In 2001, we reported that certain drugs purchased by
individual physicians were widely available at costs from 66 to 87 percent
of AWP.16
Packaged Drugs and Devices Do Not Have Distinct Payment Rates
In 2003, the costs of 121 former pass-through drugs and devices in 95
former pass-through device categories were packaged. Because CMS combines
the costs of these items with the costs of the primary services with which
they are associated on each claim, a specific payment rate for each of
these drugs and devices does not exist. However, to indirectly assess the
payment rates of packaged drugs and devices, we reviewed the payment rates
of the APCs with which CMS stated they were likely packaged. CMS stated
that, in 2003, former pass-through drug costs were most likely packaged
with the six drug administration APCs. The payment rates for five of the
six APCs decreased in 2003, when the costs of packaged former pass-through
drugs were included, compared to 2002, when the costs of these drugs were
not considered in the rate-setting calculations (see table 1). We are
unable to determine why the costs of these APCs decreased because
fluctuations in costs for any of the primary or packaged services in these
APCs, in addition to the costs of the
15 Generally, "sole-source" drugs are brand-name drugs produced by only
one manufacturer, "multi-source" drugs are drugs with generic equivalents
or drugs for which there are two or more competing
therapeutically-equivalent brand-name products, and "generic" drugs are
not patented and can be produced by many manufacturers.
16 GAO, Medicare: Payments for Covered Outpatient Drugs Exceed Providers'
Cost, GAO-01-1118 (Washington, D.C.: Sept. 21, 2001).
packaged drug, could have affected the payment rates. However, we would
have expected that combining the costs of up to $150 of packaged former
pass-through drugs with the costs of the primary services in these APCs
would have increased the 2003 payment rates for more of these APCs as more
than half of them are less than $150.
Table 1: Payment Rates for Drug Administration APCs, 2002-2003
Percent
APC Description 2002 2003 Difference change
0116 Chemotherapy administration by
other technique except infusion $46.32 $40.43 -$5.89 -13%
0117 Chemotherapy administration by
infusion only 205.14 187.98 -17.16
0118 Chemotherapy administration by
both infusion and other 214.81 286.02 71.21
technique
0120 Infusion therapy except
chemotherapy 157.80 113.70 -44.10
0352 Level I injections 20.87 11.62 -9.25
0359 Level II injections 91.63 59.12 -32.51
Source: GAO analysis of APC payment rates (67 Fed. Reg. 9,556, 9,569,
9,572 (2002); 67 Fed. Reg. 66,815, 66,818 (2002)).
To indirectly assess the payment rates of the devices in the 95 device
categories expiring from pass-through eligibility in 2003, we reviewed
APCs for which CMS determined that device costs made up at least 1 percent
of the APC's total cost.17 We found that the payment rates of these APCs
varied substantially between 2002 and 2003, when the former pass-through
device costs likely were included. For example, the payment rate of APC
0688 (Revision/Removal of Neurostimulator Pulse Generator Receiver)
decreased by 48 percent, while the payment rate of APC 0226 (Implantation
of Drug Infusion Reservoir) increased by 94 percent. However, we cannot
attribute these fluctuations solely to the packaging of pass-through
devices, because changes between 2002 and 2003 in the costs of the primary
services and other packaged services assigned to the APCs also could have
affected the payment rates.
In 2004, the devices in two device categories expired from pass-through
eligibility. The devices in one category were associated with services in
17 These APCs are identified in 67 Fed. Reg. 66,801-2 (2002).
one APC-APC 0674 (Prostate Cryoablation). The payment rate for this APC
almost doubled. We were unable to examine the change in payment for the
APC or APCs associated with the devices in the other expired passthrough
device category because CMS did not identify the APC or APCs into which
the costs of the devices in this device category were packaged.
No Type of Hospital Provided a Disproportionate Number of Services
Associated with Certain Drugs and Devices
No type of hospital provided a disproportionate number of Medicare
outpatient services associated with certain drugs and devices, as these
services, as a percentage of total Medicare outpatient services, varied
little among hospitals with differences in characteristics such as the
presence of an outpatient cancer center, teaching status, urban or rural
location, or outpatient service volume.18
In 2001, outpatient drugs were most often associated with APCs for
chemotherapy administration services, and devices in pass-through device
categories were most often associated with APCs for cardiac services.19 We
found that chemotherapy administration and cardiac services composed only
a small proportion of total Medicare outpatient services for all hospitals
(see table 2). In addition, these proportions varied little among
different types of hospitals.
18 We defined "cancer center hospitals" as those hospitals that were
members of the Association of Community Cancer Centers as of February 28,
2003, the latest data available when we performed this analysis. We
defined teaching status by a hospital's intern/residentto-bed ratio. We
defined a major teaching hospital as a hospital with an
intern/resident-tobed ratio of 0.25 or more and a hospital without major
teaching hospital status having a ratio of less than 0.25.
19 We analyzed all outpatient drugs identified by a HCPCS code in the
outpatient claims data, not only the drugs that had pass-through
eligibility. We could analyze only pass-through devices because these
devices were specifically identified in the outpatient claims while other
devices were not.
Table 2: Percentage of Medicare Outpatient Services by Type for All
Hospitals and for Hospitals with Various Characteristics
Chemotherapy
administration Cardiac services
services as a percent as a percent of
Number of of total Medicare total Medicare
hospitals outpatient services outpatient services
All hospitals 4,034 1.8
Cancer center hospitals 555 2.0
Noncancer center
hospitals 3,479 1.8
Major teaching hospitals 288 2.4
Hospitals without major
teaching hospital status 3,746 1.7
Urban hospitals 2,493 1.7
Rural hospitals 1,541 2.3
Small volume hospitals 1,258 1.0
Medium volume hospitals 1,840 1.3
Large volume hospitals 936 2.2
Source: GAO analysis of CMS data.
Notes: We used hospital outpatient claims from April 1, 2001 through March
31, 2002, the claims CMS used to set the 2003 OPPS rates, applied to
hospital categories defined in 2003. We defined "cancer center hospitals"
as those hospitals that were members of the Association of Community
Cancer Centers as of February 28, 2003, the latest data available when we
performed this analysis. We defined a major teaching hospital as a
hospital with an intern/resident-to-bed ratio of 0.25 or more and a
hospital without major teaching hospital status as a ratio of less than
0.25. We defined the urban or rural location of a hospital using
Medicare's classification of that hospital under OPPS. We defined volume
based on the number of outpatient services a hospital provided. Small
volume hospitals were those with fewer than 11,000 services, medium volume
hospitals were those with at least 11,000 services but fewer than 43,000
services, and large volume hospitals were those with at least 43,000
services.
Payment Rates May Not Uniformly Reflect Hospitals' Costs
The OPPS rate-setting methodology used by CMS may result in APC payment
rates for drugs, devices, and other outpatient services that do not
uniformly reflect hospitals' costs. Two areas of CMS's methodology are
particularly problematic. First, the claims that CMS uses to calculate
hospitals' costs and set payment rates may not be a representative sample
of hospital claims, as CMS excluded many multiple-service claims when
calculating the cost of OPPS services, including those with drugs and
devices. The data CMS has available do not allow for the determination of
whether excluding many multiple-service claims has an effect on OPPS
payment rates. However, if the types or costs of services on excluded
claims differ from the types or costs of services on included claims, the
payment rates of some or all APCs may not uniformly reflect hospitals'
costs of providing those services. Second, when calculating hospitals'
costs, CMS assumes that, in setting charges within a specific department,
a hospital marks up the cost of each service by the same percentage.
However, not all hospitals use this methodology, and charge-setting
methodologies for drugs, devices, and other outpatient services vary
greatly across hospitals and across departments within a hospital. CMS's
methodology does not recognize hospitals' variability in setting charges,
and, therefore, the costs of services used to set payment rates may be
under or overestimated.
CMS May Not Be Using a Representative Sample of Claims to Set Payment
Rates
The claims CMS uses to calculate hospitals' costs and set payment rates
may not be a representative sample of hospital claims. When calculating
the cost of all OPPS services, including drugs and devices, to set payment
rates, CMS excluded over 40 percent of all multiple-service claims because
CMS could not associate particular packaged services with a specific
primary service on these claims.20 Drug and device industry
representatives we spoke with raised concerns that certain drugs and
devices are often billed on multiple-service claims that are largely
excluded from rate setting. For example, they stated that chemotherapy
administration and the drugs themselves are typically billed on a 30-day
cycle; therefore, one claim likely includes chemotherapy administration
and other primary and packaged services and is likely excluded from CMS's
rate-setting calculations.21 Device industry representatives we spoke with
also asserted that multiple-service claims represent more complex, and
therefore, potentially costlier, outpatient visits and excluding them from
the rate-setting calculations underestimates the actual cost of a service.
Because of the structure of the outpatient claim, the data CMS has
20 In 2003 and 2004, CMS used 53 percent of the approximately 20.4 million
and 58 percent of the approximately 16.9 million multiple-service claims
to set its rates, respectively. In the same years, the exclusion of the
multiple-service claims from the analysis resulted in CMS using only 81
and 83 percent of all claims, respectively.
21 Beginning in 2004, CMS uses the dates of service associated with
packaged services listed on a claim to match them to primary services with
the same dates of service to create a single service claim. Thus, claims
with only chemotherapy administration and packaged services including
drugs, and no other primary services delivered on the same dates, would be
included in rate setting, however claims with chemotherapy administration,
packaged services, and additional primary services delivered on the same
date or dates would be excluded.
available do not allow for the comparison of single-service claims and
multiple-service claims to determine whether excluding many
multipleservice claims has an effect on OPPS payment rates. It is possible
that excluding many multiple-service claims has little or no effect on
OPPS payment rates. However, if the types or costs of services on excluded
claims differ from the types or costs of services on included claims, the
payment rates of some or all APCs may not uniformly reflect hospitals'
costs of performing these services.
Rate-Setting Methodology Does Not Account for Variation in Hospital
Charge-Setting Practices
The costs of drugs, devices, and other outpatient services that CMS
calculates from hospital charges and uses to set payment rates may not
uniformly approximate hospitals' costs. CMS multiplies charges by
hospital-specific cost-to-charge ratios to calculate hospitals' costs,
which decreases the charges by a constant percentage. This methodology is
based on the assumption that each hospital marks up its costs by a uniform
percentage within each department to set each service's charge. However,
we found that not all hospitals use this methodology to establish their
charges, and that drug, device, and general charge-setting methodologies
vary greatly among hospitals and even among departments within the same
hospitals.
We received information from 113 hospitals, although not all hospitals
responded to each question. Of the 92 hospitals responding, 40 reported
that they mark up all drug costs by a uniform percentage to establish
charges, but 33 reported that they mark up low-cost drugs by a higher
percentage and high-cost drugs by a lower percentage. Of 85 hospitals
responding, 39 reported that they mark up all device costs using a uniform
percentage, but 39 reported that they mark up low-cost devices using a
higher percentage and high-cost devices using a lower percentage. In
addition, 19 hospitals reported using other methods to set drug charges
and 7 reported doing so for devices, such as a lower percentage markup for
low-cost drugs and devices than for high-cost drugs and devices. (See
appendix II for a more detailed description of hospital charge-setting
methodologies.)
Because CMS uses the same rate-setting methodology to determine drug and
device payment rates as it uses for all other OPPS services, we also asked
hospitals about more general charge-setting practices and found that they
varied as well. To set base charges for clinic visits, hospitals reported
using a wide variety of prices and methods, including cost, market
comparisons, and the rates Medicare pays for outpatient services as well
as
payment rates for other benefit categories. To mark up clinic visits, 29
of the 45 hospitals responding used a uniform percentage increase; the
remaining 16 hospitals reported using a variety of other methods,
including using a higher percentage markup for low-cost visits than for
high-cost visits.
In addition to variation in charge-setting methodologies among hospitals,
variation also can exist within an individual hospital. Hospital
consultants told us that a single item can be assigned different charges
if it is provided through more than one department within the same
hospital.
All 58 hospitals responding reported that they update their charges for
inflation; 40 reported they did so annually, 12 did so at other times, and
6 did so both annually and at other times. Of the 58 hospitals that
reported updating their charges for inflation, 25 reported that they apply
a uniform, across-the-board percentage increase to all their charges, and
4 hospitals reported using both a uniform percentage and another type of
increase. The remaining 29 hospitals reported using another method, such
as applying an increase only to selected departments within the hospital.
In addition, 33 of the 57 hospitals reported that they excluded some
charges from these updates. The type of charges they excluded varied
widely, but included drug and laboratory charges. The variation in methods
hospitals use to update their charges reduces the likelihood that charges
will uniformly reflect costs.
Conclusions CMS's rate-setting methodology may result in OPPS payment
rates that do not uniformly reflect hospitals' costs of providing
services. We identified two areas of this methodology that are of
particular concern because not enough data are currently available to
assess their impact. First, CMS excludes many multiple-service claims from
its rate-setting calculations. To the extent that the types and costs of
services on these claims are different from services on the claims
included in the analysis, OPPS payment rates may not reflect hospitals'
costs. The current structure of the outpatient claims does not allow for
an analysis to determine the effect of these exclusions. Second, in its
rate-setting calculations, CMS assumes that each hospital uses a uniform
markup percentage to set its charges within each department, although we
found that hospitals use a variety of markup methodologies. Therefore,
CMS's application of a constant cost-tocharge ratio may not result in an
accurate calculation.
Recommendations for Executive Action
We recommend that the Administrator of CMS take the following three
actions. First, the Administrator should gather the necessary data and
perform an analysis that compares the types and costs of services on
single-service claims to those on multiple-service claims. Second, the
Administrator should analyze the effect that the variation in hospital
charge-setting practices has on the OPPS rate-setting methodology. Third,
the Administrator should, in the context of the first two recommendations,
analyze whether the OPPS rate-setting methodology results in payment rates
that uniformly reflect hospitals' costs of the outpatient services they
provide to Medicare beneficiaries, and, if it does not, make appropriate
changes in that methodology.
Agency and External Reviewer Comments and Our Evaluation
We received written comments on a draft of this report from CMS (see app.
III). We also received oral comments from external reviewers representing
seven industry organizations. They included the Advanced Medical
Technology Association (AdvaMed), which represents manufacturers of
medical devices, diagnostic products, and medical information systems; the
American Hospital Association (AHA); the Association of American Medical
Colleges (AAMC), which represents medical schools and teaching hospitals;
the Association of Community Cancer Centers (ACCC); the Biotechnology
Industry Organization (BIO), which represents biotechnology companies and
academic institutions conducting biotechnology research; the Federation of
American Hospitals (FAH), which represents for-profit hospitals; and the
Pharmaceutical Research and Manufacturers of America (PhRMA).
CMS Comments and Our Evaluation
In commenting on a draft of this report, CMS stated that it has continued
to review and refine its OPPS data collection and analysis. In responding
to our recommendation that CMS gather the necessary data and perform an
analysis comparing the types and costs of services on single-service
claims to those on multiple-service claims, CMS stated that it is
searching for ways to use more data from multiple-service claims, and it
has made efforts in recent rate-setting analyses to include data from more
of these claims. We noted these efforts in the draft report. CMS noted
that there are continuing challenges and costs, to both the federal
government and hospitals, to expanding its efforts in this area. In its
comments, CMS suggested that an analysis could be done using an algorithm
to allocate charges among multiple-service claims, but noted that such an
approach could create further distortions in the relative weights. Our
recommendation to CMS,
however, is that the agency should gather additional data on the relative
costs of services on single and multiple-service claims, rather than
continuing to analyze existing data.
In response to our recommendation that CMS analyze the effect of hospital
charge-setting practices on the OPPS rate-setting methodology, CMS stated
that we should recognize that its rate-setting methodology that converts
hospital charges to costs using a cost-to-charge ratio does so at the
level of an individual hospital department. The draft report noted the
fact that CMS generally calculates cost-to-charge ratios on a
department-specific basis; however, we have revised the report to
highlight that information throughout. CMS also said that the application
of cost-to-charge ratios to charges of a hospital has long been the
recognized method of establishing reasonable costs for hospital services
and was an important component of the cost-based reimbursement system that
was used by Medicare to pay for hospital outpatient services before OPPS
was implemented. While we agree that it was an important component of the
prior payment system, we believe the implementation of the current payment
system has changed the relevance of applying cost-to-charge ratios to
determine hospitals' costs. OPPS, rather than reimbursing individual
hospitals on the basis of their costs of providing outpatient services,
uses costs from individual hospitals to construct a prospective payment
system that sets rates for individual services that apply to all
hospitals. Finally, CMS stated that the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 specified that cost-to-charge
ratios would be used to set payment amounts for brachytherapy sources;
however, a discussion of brachytherapy payment is outside of the scope of
this report.
In response to our recommendation that CMS analyze whether the OPPS
rate-setting methodology results in payment rates that uniformly reflect
hospitals' costs of the services they provide to Medicare beneficiaries
and make any appropriate changes in the methodology, CMS stated that it
will consider our recommendations as it continues to assess and refine the
ratesetting methodology. CMS said that it believes it has made great
strides on this issue and is continuing to pursue the analyses necessary
to create means by which all claims can be used to set the OPPS relative
payment weights and rates.
CMS also made technical comments, which we incorporated where appropriate.
Industry Comments and Our Evaluation
Industry representatives generally agreed with the findings, conclusions,
and recommendations in the draft report. Comments on specific portions of
the draft report centered on three areas: payment rates of former
passthrough drugs and devices, provision of services associated with drugs
and devices, and CMS's rate-setting methodology.
Several industry representatives commented on our analysis of Medicare
payment for former pass-through drugs and devices. AHA stated that
although when drugs have expired from pass-through status their payment
rates may have decreased, they are now more consistent, relative to costs,
with the payment rates for other OPPS services. PhRMA agreed with our
finding that the payment rates for former pass-through drugs and devices
that are packaged cannot be evaluated and suggested that we recommend that
CMS specifically address this problem.
Industry representatives commented on our analysis of the provision of
services associated with drugs and devices among different types of
hospitals. ACCC agreed with the percentages of Medicare outpatient
services related to chemotherapy administration and cardiac services in
the draft report; however, it stated that it believed that these
percentages demonstrated that large hospitals provided a disproportionate
share of chemotherapy administration. ACCC and AAMC stated that these
percentages also demonstrated that major teaching hospitals provided a
disproportionate share of chemotherapy administration services. In
addition, both groups suggested that we perform other analyses by type of
hospital, such as the proportion of total payments, proportion of total
services excluding clinic services, or absolute number of services for
which chemotherapy administration and cardiac services accounted.
Many of the reviewers addressed our finding that CMS's rate-setting
methodology may result in OPPS payment rates that do not uniformly reflect
hospitals' costs. Representatives from AAMC, ACCC, AdvaMed, BIO, and PhRMA
agreed with our conclusion that CMS may not be using a representative
sample of claims to set payment rates and that CMS's ratesetting
methodology does not account for variation in hospital chargesetting
practices. Several of these representatives suggested we analyze and
discuss other factors that could further skew CMS's calculation of
hospital costs, such as its use of incorrect or incomplete claims in rate
setting.
Regarding the suggestion that we specifically recommend that CMS address
the issue that the payment rates for former pass-through drugs that
are packaged and former pass-through devices cannot be evaluated, we
believe that our more general recommendation allows the agency the
flexibility to determine the most appropriate analyses for examining the
rate-setting methodology.
With respect to the comment that the percentages of Medicare outpatient
services accounted for by chemotherapy administration demonstrate that
certain types of hospitals provide a disproportionate share of these
services, we disagree. As noted in the draft report, we found that these
percentages differ by type of hospital, but the differences are not
substantial, as all types of hospitals provided a relatively small
proportion of these services. No type of hospital provided a
disproportionately large number of these services. We analyzed the
proportion of services, rather than payments as industry representatives
suggested, because we believe that is the better analysis for determining
whether a certain type of hospital provides a disproportionate share of
these services. We did not analyze the proportion of total services except
for clinic services or the absolute number these services made up, as we
do not believe such an analysis would accurately and comparably reflect
potential differences between hospitals for all outpatient services they
perform.
The industry representatives also made technical comments, which we
incorporated where appropriate.
We are sending a copy of this report to the Administrator of CMS. 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.
If you or your staff have any questions, please call me at (202) 512-7119.
Another contact and key contributors to this report appear in appendix IV.
Sincerely yours,
A. Bruce Steinwald Director, Health Care-Economic and Payment Issues
Appendix I
Scope and Methodology
We analyzed Medicare claims data used by the Centers for Medicare &
Medicaid Services (CMS) to set the 2003 outpatient prospective payment
system (OPPS) payment rates. In addition, we analyzed drug average
wholesale prices (AWPs), drug sources (sole-source, multi-source, or
generic), and OPPS payment rates obtained from CMS. We interviewed
officials at CMS and representatives from the American Hospital
Association, Association of American Medical Colleges, Association of
Community Cancer Centers (ACCC), Federation of American Hospitals, Greater
New York Hospital Association, as well as from one large hospital system,
one large hospital alliance, and five individual hospitals. In addition,
we spoke with representatives from the Advanced Medical Technology
Association, Biotechnology Industry Organization, California Healthcare
Institute, Pharmaceutical Research and Manufacturers of America, as well
as from seven drug manufacturers and three device manufacturers. We also
spoke with consultants that advise hospitals on setting their charges.
To compare payment for drugs to previous pass-through payments, we relied
on information provided by CMS on drug sources and 2003 and 2004 drug
payment rates, and on CMS's calculations of the AWPs for these drugs,
which we supplemented with our own calculations. From CMS, we obtained the
drug source and the payment rate for the 115 drugs and the 7 drugs whose
pass-through eligibility expired as of January 1, 2003 and January 1,
2004, respectively, that were assigned to separate ambulatory payment
classification (APC) groups. We used Medicare's January 2003 and January
2004 Single Drug Pricer files to determine the 2003 and 2004 AWPs,
respectively, for most of the drugs. For the 37 drugs that were not
included in the 2003 Single Drug Pricer file, we used the 2002 Drug Topics
Red Book, published by Thomson Medical Economics, to calculate their AWPs.
For the 2 drugs that were not in the 2004 Single Drug Pricer file, we used
the 2003 Drug Topics Red Book, published by Thomson PDR, to calculate
their AWPs. We calculated payment rates as a percentage of AWP for all
drugs in 2003 and 2004. From our 2003 analysis, we excluded 1 multi-source
drug for which we calculated an AWP from the 2002 Drug Topics Red Book
that was inconsistent with the 2002 AWP CMS provided to us and another
multi-source drug with an AWP of $0.34, but a payment rate of almost
29,000 percent of that amount.
To determine whether a particular type or types of hospitals provide a
disproportionate number of outpatient services associated with drugs and
devices, we used the outpatient claims file that CMS used to calculate the
Appendix I Scope and Methodology
2003 OPPS payment rates.1 To perform our own data reliability check of
this file, we examined selected services to determine the reasonableness
of their frequency in the data set, given the population of the
beneficiaries receiving services and the setting in which they are
delivered. We determined the data were reasonable for our purposes.
Using the claims, we determined which outpatient services were most often
associated with drugs and devices and found that drugs were most often
associated with chemotherapy administration services and devices were most
often associated with cardiac services. Then, also using the claims, we
compared proportions of chemotherapy administration and cardiac services
for all hospitals, as well as for cancer center and noncancer center
hospitals, major teaching and other hospitals, urban and rural hospitals,
and hospitals with different outpatient service volumes.2 We included only
those hospitals identified in CMS's 2003 OPPS impact file, a data file CMS
constructs to analyze projected effects of policy changes on various
hospital groups, such as urban and rural hospitals. We excluded hospitals
with fewer than 1,100 total outpatient services, or approximately 3
outpatient services per day, as we believe such hospitals are not
representative of most hospitals with outpatient departments. We defined
cancer center hospitals as those hospitals that were members of ACCC as of
February 28, 2003, the latest data available when we performed this
analysis. We obtained the membership list from the ACCC. Using the
September 2002 Medicare Provider of Services file and information obtained
directly from the ACCC, we determined the Medicare provider numbers of
ACCC members to identify claims billed by these hospitals. We defined
major teaching hospitals as those hospitals having an
intern/resident-to-bed ratio of 0.25 or more. We defined the urban or
rural location of a hospital based on the urban/rural location indicator
in the Medicare hospital OPPS impact file from calendar year 2003. We
defined volume based on the number of services a hospital provided, also
as
1 This data file contains claims for services performed from April 1, 2001
through March 31, 2002.
2 For both chemotherapy administration and cardiac services, we included
in our analysis the procedure or administration codes associated with
those services. We also included any chemotherapy or cardiac drugs that
were assigned to their own APC for payment in 2003. We identified only
separately paid drugs, and did not include packaged drugs, because the
structure of the data file would have counted the packaged codes twice in
our analysis - once with the procedure code and again if they were also
listed separately on the claim. For the same reason we excluded all of the
device codes from our analysis, as all devices that lost pass-through
eligibility were packaged in 2003.
Appendix I Scope and Methodology
indicated in the impact file. Small volume hospitals were those with fewer
than 11,000 services, medium volume hospitals were those with at least
11,000 services but fewer than 43,000 services, and large volume hospitals
were those with at least 43,000 services.
We interviewed representatives from hospitals, hospital associations, and
drug and device manufacturers and the associations that represent them to
obtain information about hospital charging practices. We received
information on charge-setting practices from 5 hospitals whose officials
we interviewed. We indirectly received information from 50 other hospitals
through association and industry representatives with whom we spoke.
Finally, we contacted seven state hospital associations in geographically
diverse areas not well represented in our previous sample to identify
their members' charging practices. Some hospitals responded directly to us
and others responded to their state association, which forwarded the
responses to us. We received responses from 58 hospitals. The 113
hospitals from which we received information are not a statistically
representative sample of all hospitals.
We conducted our work from March 2003 through August 2004 in accordance
with generally accepted government auditing standards.
Appendix II
Summary of Hospital Charge-Setting Methodologies
We received information from 113 hospitals, although not all hospitals
responded to each question. Hospitals reported using a variety of methods
to set the base charges for their clinic visit services (see table 3). To
set the base charges for drugs, 25 of 57 hospitals responding reported
that they used acquisition cost, 30 used the drug's average wholesale
price (AWP), and 2 used a combination of acquisition cost and AWP. To set
the base charges for devices, 55 of 57 hospitals responding reported that
they used acquisition cost. After setting base charges, 29 of 45 hospitals
responding reported that they marked up all of their clinic visit services
by the same percentage increase, although they reported using a variety of
other methods as well. To mark up base charges for drugs and devices, most
hospitals responding used either the same percentage for all drugs and for
all devices, or used a graduated percentage markup, marking up low-cost
items by a higher percentage (see table 4).
Table 3: Number and Percentage of Hospitals that Reported Methods for
Setting Base Charges for Clinic Visit Services, 2003
Number Percentage
Cost of visit 13
Comparable charges in market 10
Medicare physician fee schedule 8
Cost of visit and comparable charges in market 4
Unspecified Medicare payment 3
Outpatient prospective payment system amount
with an adjustment 1
Cost of visit and Medicare physician fee schedule 1
Unspecified Medicare payment and comparable charges 1
Other 4
Source: GAO.
Appendix II
Summary of Hospital Charge-Setting
Methodologies
Table 4: Number and Percentage of Hospitals that Reported Methods to Mark
Up Drug and Device Charges, 2003
Drugs Devices
Number Percentage Number Percentagea
Same percentage for all items 40 43 39
Graduated percentage,
higher for low-cost items 33 36 39
Graduated percentage,
lower for low-cost items 6 7 4
Other 13 14 3
Source: GAO.
aPercentage of total hospitals responding does not total 100 percent due
to rounding.
In addition, 24 of the 57 hospitals responding reported that they include
nonproduct costs as a portion of their drug charges, and 25 of 57
responding reported that they include nonproduct costs as a portion of
their device charges. The most common nonproduct costs included were
administrative and overhead costs. Of the 24 including nonproduct costs in
drug charges, 12 reported that they do so by adding an additional
percentage of the drug acquisition cost to the drug charge. Of the 25
including nonproduct costs in device charges, 16 reported that they do so
by adding an additional percentage of the device acquisition cost to the
device charge. However, the amount of the nonproduct costs as a percentage
of the charges varied widely among hospitals. Of the 24 hospitals
including nonproduct costs in drug charges, 16 reported that the amount
varied by the route of administration for the drug, such as intravenous or
intramuscular administration.
Of the 58 hospitals responding, all reported that they update their
charges for inflation; 40 reported they did so annually, 12 did so at
other times, and 6 did so both annually and at other times. While many
used a standard across-the-board percentage increase to update their
charges, the majority used other methods. In addition, 33 of the 57
hospitals responding reported that they exclude certain charges from these
updates. The types of services whose charges they excluded, such as drug,
laboratory, and room charges, varied widely. Finally, 49 of 58 hospitals
responding reported that they periodically review all their charges.
Appendix III
Comments from the Centers for Medicare & Medicaid Services
Appendix III
Comments from the Centers for Medicare &
Medicaid Services
Appendix III
Comments from the Centers for Medicare &
Medicaid Services
Appendix III
Comments from the Centers for Medicare &
Medicaid Services
Appendix III
Comments from the Centers for Medicare &
Medicaid Services
Appendix IV
GAO Contact and Staff Acknowledgments
GAO Contact Nancy A. Edwards, (202) 512-3340
Acknowledgments Beth Cameron Feldpush, Joanna L. Hiatt, Maria Martino,
and Paul M. Thomas made major contributions to this report.
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