Medicare Hospital Pharmaceuticals: Survey Shows Price Variation  
and Highlights Data Collection Lessons and Outpatient		 
Rate-Setting Challenges for CMS (28-APR-06, GAO-06-372).	 
                                                                 
In 2003, the Medicare Modernization Act required the Centers for 
Medicare & Medicaid Services (CMS) to establish payment rates for
a set of new pharmaceutical products--drugs and 		 
radiopharmaceuticals--provided to beneficiaries in a hospital	 
outpatient setting. These products were classified for payment	 
purposes as specified covered outpatient drugs (SCOD). The	 
legislation directed CMS to set 2006 Medicare payment rates for  
SCODs equal to hospitals' average acquisition costs and included 
requirements for GAO. As directed, GAO surveyed hospitals and	 
issued two reports, providing information to use in setting 2006 
SCOD rates. To address other requirements in the law, this report
analyzes SCOD price variation across hospitals, advises CMS on	 
future surveys it might undertake, and examines both lessons from
the GAO survey and future challenges facing CMS.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-372 					        
    ACCNO:   A52723						        
  TITLE:     Medicare Hospital Pharmaceuticals: Survey Shows Price    
Variation and Highlights Data Collection Lessons and Outpatient  
Rate-Setting Challenges for CMS 				 
     DATE:   04/28/2006 
  SUBJECT:   Cost analysis					 
	     Data collection					 
	     Data integrity					 
	     Hospitals						 
	     Payments						 
	     Pharmaceutical industry				 
	     Prescription drugs 				 
	     Prices and pricing 				 
	     Surveys						 
	     Comparative analysis				 

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GAO-06-372

     

     * Results in Brief
     * Background
          * MMA Established SCOD Payment Categories for Certain Pharmace
          * MMA Required Us to Survey Hospitals to Determine Their Acqui
          * MMA Defined ASP, Which Is Reported by Manufacturers and Used
          * Radiopharmaceuticals Can Be Purchased in Different Forms
     * Hospitals' Teaching Status, Location, and Size Affected Pric
          * Teaching Status, Location, and Size Were Each Significant Fa
          * Hospitals with Combination of Major Teaching Status, Urban L
     * Our Survey of Hospitals Suggests that the Burden of Large-Sc
          * Using Hospitals as Data Source for SCOD Prices Had A Major A
          * Survey Indicates that Accounting for Dynamic Drug Market and
     * CMS Faces Challenges in Future Data Collection Efforts to Se
          * Validating ASP Would Pose Challenges for CMS Because of Lack
          * Radiopharmaceuticals Pose Unique Challenges for Obtaining Ac
     * Conclusions
     * Recommendations for Executive Action
     * Agency Comments and Our Evaluation
          * SCOD Price Data
          * Factors Potentially Affecting SCOD Prices
          * Methods and Results of Price Analysis
     * GAO Contact
     * Acknowledgments
     * GAO's Mission
     * Obtaining Copies of GAO Reports and Testimony
          * Order by Mail or Phone
     * To Report Fraud, Waste, and Abuse in Federal Programs
     * Congressional Relations
     * Public Affairs

Report to Congressional Committees

United States Government Accountability Office

GAO

April 2006

MEDICARE HOSPITAL PHARMACEUTICALS

Survey Shows Price Variation and Highlights Data Collection Lessons and
Outpatient Rate-Setting Challenges for CMS

GAO-06-372

Contents

Letter 1

Results in Brief 4
Background 6
Hospitals' Teaching Status, Location, and Size Affected Prices for SCOD
Products by Different Magnitudes 9
Our Survey of Hospitals Suggests that the Burden of Large-Scale Annual
Surveys Could Outweigh Gains in Data Accuracy 11
CMS Faces Challenges in Future Data Collection Efforts to Set SCOD Payment
Rates Accurately 15
Conclusions 18
Recommendations for Executive Action 19
Agency Comments and Our Evaluation 19
Appendix I Methodology for Analysis of SCOD Price Differences among
Hospital Types 22
Appendix II Purchase Prices for Drug SCODs 30
Appendix III Purchase Prices for Radiopharmaceuticals SCODs 38
Appendix IV Comments from the Department of Health and Human Services 43
Appendix V GAO Contact and Staff Acknowledgments 47

Tables

Table 1: Factors Accounting for Variation in SCOD Prices among Hospitals
10
Table 2: Factors Included in Analysis of Price Variation among Hospitals
Purchasing SCODs 23
Table 3: Estimated Effects of Selected Factors on Prices Hospitals Paid
for Drug SCODs 26
Table 4: Estimated Effects of Selected Factors on Prices Hospitals Paid
for Radiopharmaceutical SCODs 28
Table 5: Purchase Prices for SCODs Accounting for 86 Percent of Medicare
Spending on SCODs 32
Table 6: Purchase Prices for Radiopharmaceutical Accounting for 9 Percent
of Medicare Spending on SCODs 40

Abbreviations

ASP average sales price CMS Centers for Medicare & Medicaid Services HHS
Department of Health and Human Services MMA Medicare Prescription Drug,
Improvement, and Modernization Act of 2003 MSA metropolitan statistical
area NDC national drug code OPPS outpatient prospective payment system
SCOD specified covered outpatient drug

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United States Government Accountability Office

Washington, DC 20548

April 28, 2006

The Honorable Charles E. Grassley Chairman The Honorable Max Baucus
Ranking Minority Member Committee on Finance United States Senate

The Honorable Joe Barton Chairman The Honorable John D. Dingell Ranking
Minority Member Committee on Energy and Commerce House of Representatives

The Honorable William M. Thomas Chairman The Honorable Charles B. Rangel
Ranking Minority Member Committee on Ways and Means House of
Representatives

In 2003, federal legislation required the establishment of Medicare
payment rates for a particular set of new pharmaceutical products that
were provided to beneficiaries in hospital outpatient settings but were
generally paid for differently than other services paid under Medicare's
hospital outpatient prospective payment system (OPPS). These products were
newly introduced drugs, biologicals, and radiopharmaceuticals used to
treat and in some cases diagnose serious conditions such as cancer.1
Specifically, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) required the Centers for Medicare &
Medicaid Services (CMS) in the Department of Health and Human Services
(HHS) to set rates for these pharmaceuticals. MMA classified them for
payment purposes as specified covered outpatient drugs (SCOD).2 In
addition, MMA defined a SCOD as a drug or radiopharmaceutical, used in
hospital outpatient departments, covered by Medicare, and paid for as an
individual product for which CMS established a separate payment category
rather than placing it in a category that included other services.

1In this report, the term drugs refers to both drugs and biologicals.
Biologicals are products derived from living sources, including humans,
animals, and microorganisms. Radiopharmaceuticals are radioactive
substances used for diagnostic or therapeutic purposes.

The MMA directed CMS to set 2006 payment rates for SCOD products equal to
hospitals' average acquisition costs-the cost to hospitals of acquiring a
product, net the cost of rebates.3 In several related requirements, the
MMA directed us to provide information on SCOD costs and CMS's proposed
rates.4 First, we were required to conduct a survey of a large sample of
hospitals to obtain data on their acquisition costs of SCODs and provide
information based on these data to the Secretary of Health and Human
Services for his consideration in setting 2006 Medicare payment rates.5 We
provided information from this survey in two reports6-one on drugs and
another on radiopharmaceuticals. These reports presented systematic
information on hospitals' purchase prices of SCODs and limited information
on rebates.7 Second, we were required to evaluate CMS's proposed rates for
SCODs and comment on their appropriateness in light of the survey of SCOD
prices we conducted. We provided our comments in a report issued in
October 2005.8

2Pub. L. No. 108-173, sec. 621(a), S: 1833(t)(14), 117 Stat. 2066, 2307-08
(to be codified at 42 U.S.C. S: 1395l(t)(14)).

3Specifically, the MMA required that payment rates equal the average
acquisition costs as determined by the Secretary of Health and Human
Services, unless hospital acquisition cost data are not available. If such
data are not available, the law permitted payment rates to equal one of
several amounts, including average sales price, as calculated and adjusted
by the Secretary. MMA 117 Stat. 2307.

4MMA 117 Stat. 2308-09. The law also required the Medicare Payment
Advisory Commission (MedPAC) to report on overhead and related expenses
(such as pharmacy services and handling costs) and authorized the
Secretary to adjust the SCOD rates for these costs. MMA 117 Stat. 2309.
See ch. 6, "Payment for pharmacy handling costs in hospital outpatient
departments," in MedPAC's mandated report, Issues in a Modernized Medicare
Program (Washington, D.C.: June 2005).

5The Secretary of HHS considered the price data we provided but elected
not to use these data as the basis for 2006 rates.

6GAO, Medicare: Drug Purchase Prices for CMS Consideration in Hospital
Outpatient Rate Setting, GAO-05-581R (Washington, D.C.: June 30, 2005),
and GAO, Medicare: Radiopharmaceutical Purchase Prices for CMS
Consideration in Hospital Outpatient Rate Setting, GAO-05-733R
(Washington, D.C.: July 14, 2005).

7The term purchase price refers to the price that hospitals paid upon
receiving a product. The term rebates refers to price concessions given to
hospitals by manufacturers subsequent to receipt of the product.

Two other MMA requirements had a role for us-to report on any variation
found in our survey results in acquisition costs among hospitals and to
advise on future data collection efforts by CMS based on our survey
experience.9 This report addresses these requirements and examines (1) the
extent to which SCOD prices identified in our survey differed among
hospitals with different characteristics, (2) lessons the MMA-mandated
survey experience provided for the methodology and frequency of future
collection of SCOD price data, and (3) the challenges CMS faces in
collecting data to set SCOD payment rates accurately after 2006.

To examine price variation among a sample consisting of 1,157 hospitals
purchasing SCOD products, we conducted a multivariate statistical analysis
and grouped hospitals by certain key characteristics, including teaching
status, location, and size. We defined a hospital's teaching status as
major, other teaching, or nonteaching, based on the hospital's
intern/resident-to-bed ratio;10 location as urban or rural based on
metropolitan statistical areas (MSA); and size as a hospital's total
Medicare outpatient charges, classifying a hospital as large if its
Medicare charges were at or above the 80th percentile of all hospital
outpatient charges. The prices we examined were drawn from our survey of
hospitals' purchase prices for 62 SCODs for the period July 1, 2003,
through June 30, 2004.11 We determined that our survey data were reliable
for estimating SCOD prices. For details on our methodology, see appendix
I.

8GAO, Medicare: Comments on CMS Proposed 2006 Rates for Specified Covered
Outpatient Drugs and Radiopharmaceuticals Used in Hospitals, GAO-06-17R
(Washington, D.C.: Oct. 31, 2005).

9MMA 117 Stat. 2308-09.

10Major teaching hospitals were defined as having an
intern/resident-to-bed ratio of 0.25 or more. Hospitals with other
teaching programs had an intern/resident-to-bed ratio above 0 but less
than 0.25.

11The products in these SCOD categories represented 95 percent of all
Medicare spending on SCOD products (53 drugs and 9 radiopharmaceuticals)
during the first 9 months of 2004. The nine radiopharmaceuticals accounted
for 90 percent of all Medicare hospital outpatient spending on
radiopharmaceutical SCODs.

To identify lessons learned from our hospital survey experience as well as
challenges for CMS's future data collection,12 we reviewed the findings
from our issued reports on SCOD drug prices,13 SCOD radiopharmaceutical
prices,14 and CMS's proposed SCOD rates;15 consulted on methodological
issues with an advisory panel of experts in pharmaceutical economics,
pharmacy, medicine, survey sampling, and Medicare payment;16 interviewed
officials from CMS and several dozen hospitals; and reviewed CMS's final
rule on Medicare's 2006 payment rates for SCODs.17 In particular, we
reviewed CMS's published method for collecting the average sales prices
(ASP) of drug SCODs: manufacturers report their ASPs quarterly to CMS,
which uses them as a proxy for average acquisition costs in setting drug
SCOD payment rates. We performed our work according to generally accepted
government auditing standards from September 2005 through April 2006.

                                Results in Brief

In an analysis of price data collected from our survey of hospitals, we
found that prices hospitals paid for the SCOD products they purchased
varied across hospitals. Certain factors-namely, whether the hospital had
a major teaching program or not, was in an urban or rural area, and had a
large or small hospital outpatient department-were associated with whether
hospitals paid higher or lower prices for the SCOD products they
purchased. Specifically,

           o  compared with nonteaching hospitals, major teaching hospitals
           paid prices that were, on average, an estimated 3.2 percent lower
           for drug SCODs;
           o  compared with urban hospitals, rural hospitals paid prices that
           were, on average, an estimated 4.4 percent higher for
           radiopharmaceutical SCOD;, and
           o  compared with smaller hospitals, large hospitals paid prices
           that were, on average, an estimated 1.4 percent lower for drug
           SCODs and 3.1 percent lower for radiopharmaceutical SCODs.

           Combining the three factors, we found that large, urban, major
           teaching hospitals generally paid lower prices, on average, for
           all SCOD products than did hospitals grouped by other combinations
           of factors.

           A key lesson for CMS that we learned from conducting the 2004
           MMA-mandated hospital survey is that such a survey would not be
           practical for collecting the data needed to set and update SCOD
           rates routinely. However, it would be useful, on occasion, for CMS
           to survey hospitals so that the rate-setting data it obtained from
           other sources could be validated by an independent source. Our
           2004 hospital survey produced accurate hospital drug price data,
           but it also created a considerable burden for hospitals as data
           suppliers and considerable costs for us as the data
           collector-signaling the difficulties that CMS would face in
           implementing similar surveys in the future. Hospitals told us
           that, to submit the required price data, they had to divert staff
           from their normal duties, thereby incurring additional costs.
           Similarly, we incurred substantial staff and contractor costs to
           make data obtained from diverse information systems comparable and
           usable for SCOD rate-setting. Nevertheless, we found that the
           benefit of obtaining data on actual prices paid by hospitals could
           make such surveys advantageous for validating, on an occasional
           basis-possibly every 5 or 10 years-ASP data that manufacturers
           report to CMS for developing SCOD payment rates.

           CMS will face important challenges as it seeks to obtain accurate
           data on hospitals' acquisition costs for both drug and
           radiopharmaceutical SCODs.

           o  With regard to drug SCODs, CMS lacks the detail on
           manufacturers' ASP data needed to determine if the Medicare
           payment rates developed from these data are appropriate
           specifically for hospitals. Manufacturers report ASP as a single
           price paid by all purchasers-as defined by law-but do not identify
           purchasers by type or share of purchases. Therefore, CMS could not
           determine whether hospitals pay more or less than physicians, for
           example, for drug SCODs. If other providers paid more or less than
           hospitals, that could result in an average that was either higher
           or lower than what hospitals paid. In our October 2005 report, we
           recommended that CMS collect information on manufacturers' ASP
           that would identify purchaser types.18 In addition, CMS instructs
           manufacturers to report ASP net of rebates but does not provide
           guidance on how to allocate to an individual product rebates that
           are based on purchases of more than one product.
           o  With regard to radiopharmaceutical SCODs, their complex nature
           as compared with drugs poses challenges for collecting and
           interpreting cost data. Because radiopharmaceuticals consist of a
           radioisotope and a medicine or pharmaceutical agent, hospitals can
           purchase them in ready-to-use unit dose form, as most hospitals
           do, multidose, or as separate components to be subsequently
           compounded. The different purchase options available to hospitals
           make pricing radiopharmaceuticals uniformly across hospitals
           infeasible. In addition, the short half-life of certain
           radioisotopes, which causes these products to decay over time,
           makes the hospital's distance from its supplier a factor in how
           much is purchased. This can lead to differences among hospitals in
           the amount purchased per beneficiary served. Given the
           complexities of radiopharmaceuticals, it is also important to note
           that the amount spent on radiopharmaceuticals is less than 1.5
           percent of total Medicare spending on hospital outpatient
           services. This small percentage together with the complexities of
           radiopharmaceuticals complicate CMS's ability to select a data
           source that can provide reasonably accurate data efficiently.

           In this report, we make recommendations to the Secretary of Health
           and Human Services regarding both drugs and radiopharmaceuticals.
           We recommend that CMS occasionally validate manufacturers'
           reported ASPs as a measure of hospitals' acquisition costs, using
           hospital purchases obtained from a survey or other method. We also
           recommend the use of ready-to-use unit-dose prices as the data
           source for radiopharmaceutical SCOD rate-setting. In commenting on
           a draft of this report, HHS agreed to consider our
           recommendations, but expressed several reservations. In
           particular, it was concerned about the burden of a hospital survey
           for both hospital staff and the agency. We recognize the burden of
           hospital surveys and for this reason recommended only occasional
           hospital surveys-or an alternative method-to validate price data
           reported by manufacturers.

           Background
			  
			  In the period following the enactment of legislation establishing
           Medicare's OPPS and leading up to the MMA in 2003, concerns were
           expressed about the adequacy of payments for innovative
           pharmaceutical products. The MMA addressed these concerns by
           establishing a payment policy for SCODs. As mandated by the MMA,
           we conducted a hospital survey and provided HHS with information
           about prices hospitals paid for SCOD products. Details follow on
           the background of SCODs, our survey, CMS's new rates for drug
           SCODs, and the nature of radiopharmaceutical products.

           MMA Established SCOD Payment Categories for Certain Pharmaceutical
			  Products to Ensure Beneficiary Access to New Products
			  
			  CMS uses OPPS to pay hospitals for services that Medicare
           beneficiaries receive as part of their treatment in hospital
           outpatient departments. Under OPPS, Medicare pays hospitals
           predetermined rates for most services. When OPPS was first
           developed as required by the Balanced Budget Act of 1997,19 the
           rates for hospital outpatient services, drugs, and
           radiopharmaceuticals were based on hospitals' 1996 median costs.
           However, these rates prompted concerns that payments to hospitals
           would not reflect the costs of newly introduced pharmaceutical
           products used to treat, for example, cancer, rare blood disorders,
           and other serious conditions. In turn, congressional concerns were
           raised that beneficiaries might lose access to some of these
           products if hospitals avoided providing them because of a
           perceived shortfall in payments. In response to these concerns,
           the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act
           of 1999 authorized pass-through payments, which were a way to
           temporarily augment the OPPS payments for newly introduced
           pharmaceutical products first used after 1996.20 The MMA modified
           this payment method for some of these pharmaceutical products. As
           part of the modification, the MMA defined the new SCOD payment
           category, which includes many of these newly introduced
           pharmaceutical products. The MMA requires that SCODs be placed in
           separate payment categories-that is, not packaged with related
           services.

           MMA Required Us to Survey Hospitals to Determine Their Acquisition
			  Costs for SCOD Products
			  
			  As directed by the MMA, we conducted a survey of a large sample of
           hospitals to determine their acquisition costs for SCOD products.
           We surveyed 1,400 hospitals and received usable data from 83
           percent of the hospitals for drug SCODs and from 61 percent of the
           1,322 hospitals that had submitted Medicare claims for
           radiopharmaceutical SCODs in the first 6 months of 2003. We found
           that we could not obtain data that would permit calculation of
           hospitals' acquisition costs, because, in general, hospitals were
           unable to report accurately or comprehensively on rebates.21
           Consequently, we reported average purchase prices for drug and
           radiopharmaceutical SCODs, which are prices net of discounts but
           not rebates.22 Of the 251 SCODs that we identified, we reported
           average purchase prices for the 62 SCODs that accounted for 95
           percent of Medicare spending on all SCODs in the first 9 months of
           2004. (These prices and related information are included as app.
           II and app. III.)

           MMA Defined ASP, Which Is Reported by Manufacturers and Used to Set
			  Rates for Drug SCODs
			  
			  ASP is a price measure established in the MMA to provide a basis
           for payment rates for physician-administered drugs and now used by
           CMS in setting rates for drug SCODs.23 CMS instructs
           pharmaceutical manufacturers to report ASP data to CMS within 30
           days after the end of each quarter. The MMA defined ASP as the
           average sales price for all U.S. purchasers of a drug, net of
           volume, prompt pay, and cash discounts; free goods contingent on a
           purchase requirement; and charge-backs and rebates.24 Under CMS's
           final rule governing 2006 payment rates for hospital outpatient
           services, including SCOD products, CMS uses manufacturers' ASPs in
           setting drug SCOD rates.25 For radiopharmaceuticals, CMS has set
           2006 rates based on an estimate of hospitals' costs derived from
           charges, but the agency has not decided how to pay for
           radiopharmaceutical SCODs after 2006.26

           Radiopharmaceuticals Can Be Purchased in Different Forms
			  
			  Hospitals can purchase radiopharmaceuticals, which consist of a
           radioisotope and a medicine or pharmaceutical agent, in different
           forms. They can purchase vials of the product in ready-to-use unit
           doses or in multidoses, or they can purchase a product's
           radioactive and nonradioactive components separately and compound
           them in-house. In a survey conducted by the Society of Nuclear
           Medicine and the Society of Nuclear Medicine Technologist Section,
           76 percent of hospitals reported that they purchased their
           radiopharmaceuticals in unit doses.27

           Hospitalsï¿½ Teaching Status, Location, and Size Affected Prices for
			  SCOD Products by Different Magnitudes
			  
			  Using our hospital survey of prices hospitals paid for SCOD drugs
           and radiopharmaceuticals, we examined the extent to which prices
           varied among the approximately 1,200 hospitals that submitted
           survey data. To do this, we looked at several hospital
           characteristics, or factors-including teaching status, location,
           and size of the outpatient department-while controlling for
           differences in the costliness of the mix of SCODs that hospitals
           purchased. We analyzed both (1) the separate effect of each
           factor, controlling for other factors; and (2) the effect of the
           three factors combined. We found that teaching status had the
           largest separate effect on drug SCOD prices, whereas location had
           the largest effect on radiopharmaceutical SCOD prices. Combining
           the three factors, we found, for example, that large, urban,
           hospitals with major teaching programs paid lower prices, on
           average, for drug SCODs-compared with small urban hospitals with
           other teaching programs.

           Teaching Status, Location, and Size Were Each Significant Factors
			  Affecting Price Variation among Hospitals
			  
			  The importance of the three factors in accounting for variation in
           SCOD prices among hospitals differed by type of product
           purchased-that is, drug or radiopharmaceutical.28 A hospital's
           teaching status, for example, affected prices paid for drug SCODs
           but did not matter for the radiopharmaceutical SCOD prices
           pertaining to unit dose purchases in our survey. In contrast, a
           hospital's location was an important factor linked to price
           differences for radiopharmaceuticals but did not matter with
           respect to prices for drugs. In addition, hospital size was
           important in affecting price differences for both drugs and
           radiopharmaceuticals. (See table 1.)

           Table 1: Factors Accounting for Variation in SCOD Prices among
           Hospitals

           Sources: GAO analysis of GAO survey data and CMS data on hospital
           characteristics.

           Note: We determined the importance of these factors using a
           multivariate statistical analysis that examined how prices varied
           for SCODs by hospitals' teaching status, location, and size of
           outpatient department, while controlling for differences in the
           costliness of the mix of SCODs that hospitals purchased. Factors
           marked with an "x" are statistically significant at the 5 percent
           level.

           In assessing the magnitude of each factor's separate effect on
           prices, we found the following results:

           o  Teaching status: Compared with nonteaching hospitals, major
           teaching hospitals paid prices that were, on average, an estimated
           3.2 percent lower for drug SCODs. Teaching status had no
           independent effect on the prices of radiopharmaceutical SCODs
           purchased in ready-to-use unit doses.29 
           o  Location: Compared with hospitals located in urban areas, the
           prices paid by hospitals located in rural areas for
           radiopharmaceutical SCODs were, on average, an estimated 4.4
           percent higher.
           o  Size: Compared with smaller hospitals, hospitals with large
           outpatient departments paid prices, on average, that were an
           estimated 1.4 percent lower for drugs and 3.1 percent lower for
           radiopharmaceuticals.

           Certain circumstances may help explain why each factor had an
           effect on price. Regarding the effect of teaching status on drug
           prices, for example, manufacturers may want to influence
           prescribing patterns of physicians in training and may therefore
           offer drugs at lower prices to hospitals with teaching programs.
           As for location's effect on radiopharmaceutical SCOD prices,
           industry experts suggested that the short half-life of certain
           radioactive products could make transporting them to hospitals in
           rural areas more costly. As for hospital size, hospitals with
           large outpatient departments may have benefited from volume
           discounts.

           Hospitals with Combination of Major Teaching Status, Urban Location,
			  and Large Size Obtained Lowest SCOD Prices
			  
			  To examine the combined effect of the three key factors on prices
           paid by hospitals, we compared hospitals grouped by one
           combination-major teaching program, urban location, and large
           outpatient department-with hospitals grouped by other
           combinations. Our analysis indicates that large, urban, major
           teaching hospitals generally paid lower prices, on average, for
           all SCOD products than did hospitals grouped by other combinations
           of factors. For example, compared with small urban hospitals with
           other teaching programs, large major teaching hospitals in urban
           areas paid prices, on average, that were an estimated 4 percent
           lower for drugs and 3 percent lower for radiopharmaceuticals. In
           contrast, compared with small urban hospitals with other teaching
           programs, small rural hospitals with no teaching programs paid
           prices, on average, that were about the same for drugs and 4
           percent higher for radiopharmaceuticals.30

           Our Survey of Hospitals Suggests that the Burden of Large-Scale
			  Annual Surveys Could Outweigh Gains in Data Accuracy
			  
			  Our MMA-mandated survey of hospitals produced accurate hospital
           price data. However, for CMS to use such a survey to routinely
           collect data in the future for SCOD rate-setting, the burden could
           outweigh the benefit. Instead, similar surveys of hospitals could
           be a useful tool to validate price data obtained from
           manufacturers, if conducted on an occasional basis.

           Using Hospitals as Data Source for SCOD Prices Had A Major Advantage
			  and Serious Drawbacks
			  
			  Based on our survey experience, we noted that hospitals as a SCOD
           data source had one important advantage as well as substantial
           drawbacks. We found that, as a data source for estimating
           hospitals' SCOD acquisition costs, hospitals offered a key
           advantage: our average purchase prices obtained from hospitals, by
           definition, represent actual prices paid by hospitals.31 In this
           respect, our data differ from other data sources available to
           CMS-such as suggested list prices, ASPs, and hospitals' Medicare
           claims. As a result, none of these alternatives provide, as our
           survey data do, nationwide data on the actual purchase prices paid
           by hospitals for drugs and radiopharmaceutical SCODs.

           However, based on our experience, we found that there would be
           drawbacks in using hospitals as an annual data source on SCOD
           prices, owing primarily to the considerable burden created for
           hospitals as suppliers of data and the considerable costs we
           incurred as data collectors, signaling the difficulties that CMS
           would face in implementing similar surveys in the future.
           Hospitals told us that, to submit the required price data, they
           had to divert staff from their normal duties, thereby incurring
           additional staff and contractor costs. The burden was more taxing
           for some hospitals than for others. Most hospitals had the
           advantage of relying on price data downloaded from their drug
           wholesalers' information systems. A number of hospitals, however,
           either collected the data manually, provided us with copies of
           paper invoices, or had automated information systems that were not
           designed to retrieve the detailed price data needed and required
           additional data processing effort. Hospitals' data collection
           difficulties were particularly pronounced regarding information on
           manufacturers' rebates, which affect a drug's net acquisition
           cost. Typically, hospitals did not systematically track all
           manufacturers' rebates on drug purchases, although nearly 60
           percent of hospitals reported receiving one or more rebates.32

           As collectors of data on SCOD prices, we also experienced
           difficulties obtaining the information needed from hospitals.
           Hospitals' information systems were diverse and produced data in
           many different formats, causing substantial resource and timing
           difficulties in the data collection process.33 Specifically, we
           had to reconfigure data submitted in multiple formats to produce
           data comparable across hospitals and usable for SCOD rate-setting.
           This reconfiguration required us to deploy substantial resources
           and to allow additional time for processing before the data could
           be made available to CMS. The difficulties we encountered would
           likely be faced by any organization undertaking a survey using a
           similar approach.

           As we previously reported, using SCOD price and related data from
           drug manufacturers-as CMS is doing in 2006-is a practical strategy
           for setting Medicare payment rates to hospitals for SCODs.34
           However, our experience obtaining information on actual purchase
           prices and our observation of the pace of change in the drug
           marketplace suggest that an occasional survey of
           hospitals-possibly once or twice in a decade-may be advantageous
           for validating the accuracy of manufacturers' price information as
           a proxy for hospital acquisition cost.35 Drawing on our experience
           and using data about sampling variability from our 2004 hospital
           survey,36 CMS could design a similar but streamlined hospital
           survey.37 Other options available to CMS for validating the
           accuracy of the price data as a proxy for hospitals' acquisition
           costs include audits of manufacturers' price submissions or an
           examination of proprietary data the agency considers reliable for
           validation purposes.

           Survey Indicates that Accounting for Dynamic Drug Market and
			  Infrequently Purchased Drugs Has Implications for Accuracy and
			  Efficiency
			  
			  Our hospital survey experience not only identified data collection
           issues associated with hospitals but also underscored accuracy and
           efficiency concerns in collecting SCOD data from any source.
           Specifically, the accuracy of the rates Medicare pays for drugs
           within a SCOD payment category, based on the average price of
           drugs included in the SCOD, may be compromised if the price of any
           drug-that is, any national drug code (NDC)-is omitted from the
           average price of the SCOD category.38 In the conduct of our 2004
           survey, we began with a list, which CMS provided to us, of drug
           categories that included SCODs as well as other drugs that
           potentially could be considered SCODs in the future. To ensure the
           accuracy of our calculation of a hospital's average purchase price
           for SCODs, we took additional steps using industry experts and
           data sources to classify the NDCs and assign them to the
           appropriate SCOD categories.39 Since the drug market is
           dynamic-new drugs enter the market and other drugs drop out in the
           course of a year-CMS's list of SCOD drugs and their component NDCs
           could become out of date unless updated frequently to ensure that
           all SCOD drugs purchased by hospitals are identified and figured
           into the calculation of a SCOD's average price.

           With regard to efficiency in analyzing our survey results, we
           concentrated our data processing and statistical resources on the
           roughly one-quarter of SCODs that account for most of Medicare's
           total SCOD spending. In particular, the 62 SCODs for which we
           produced price estimates accounted for 95 percent of Medicare
           spending on all 251 SCODs in the first 9 months of 2004.40 We
           would not have been able to produce price estimates for all SCODs
           in time for CMS to take account of our data in setting the 2006
           rates. Our experience-especially the amount of time and resources
           necessary for each step in the data collection and analysis
           process-could be used by CMS to determine in advance the number of
           SCODs on which to collect data and estimate prices. There might be
           some benefit in gathering data and producing price estimates for
           all SCODs; on the other hand, if resources were limited, CMS might
           choose to focus on fewer SCODs.

           CMS Faces Challenges in Future Data Collection Efforts to Set SCOD
			  Payment Rates Accurately
			 
			  CMS will face important challenges in its efforts to collect
           accurate data for setting SCOD payment rates. In our October 2005
           report on CMS's proposed SCOD rates, we expressed reservations
           about the ASP data CMS used to set 2006 payment rates for drug
           SCODs. We cautioned that manufacturers' reporting of ASPs in
           summary form-without any further detail-does not provide the
           agency the information needed to ensure that ASPs are a
           sufficiently accurate measure of hospitals' acquisition costs.
           Data collection and rate-setting for radiopharmaceutical SCODs
           present unique challenges because of these products' distinctive
           characteristics.

           Validating ASP Would Pose Challenges for CMS Because of Lack of
			  Detail in Data
			  
			  Under CMS's current policy, manufacturers are required to report
           only summary ASP data, limiting CMS's ability to validate the
           data's accuracy. Specifically, manufacturers report ASP as a
           single price, with no breakdown of price and volume by type of
           purchaser. CMS instructs manufacturers to average together prices
           for each drug paid by all U.S. purchasers. However, different
           purchaser types-for example, hospitals, physicians, and
           wholesalers-may receive prices that, by purchaser type, are on
           average higher or lower than one another's. Because CMS does not
           receive price data at this level of detail, it cannot determine
           whether price differences among purchaser types exist. To the
           extent that nonhospital providers pay different prices than
           hospitals and account for a proportion of the SCODs purchased, ASP
           will differ from the prices paid on average by hospitals.41 CMS
           has not presented evidence, in its final rule or in discussions
           with us, that physicians and hospitals pay the same prices.

           An additional weakness in CMS's instructions for computing ASPs
           compounds the challenge of testing the accuracy of the ASPs that
           manufacturers report. No instruction is provided to manufacturers
           on the treatment of rebates that apply to several drug products in
           calculating ASP.42 This is of particular concern to the extent
           that manufacturers differ in their rules for calculating these
           rebates. When a rebate applies to a group of a manufacturer's
           products-which may include several SCODs, other pharmaceuticals,
           and other products-netting out the rebate attributable to a
           specific SCOD's purchase is less than straightforward. In the
           absence of clear and specific instructions, each manufacturer must
           identify or develop a method for allocating rebates to each of its
           drug SCOD products. To the extent that manufacturers' methods
           differ, they are likely to yield inconsistent results. Moreover,
           CMS's final rule does not provide for a follow-up process to check
           that rebate allocations have been made or have been made
           appropriately.

           Radiopharmaceuticals Pose Unique Challenges for Obtaining Accurate
			  Cost Data Efficiently
			  
			  The complex nature of radiopharmaceuticals as compared with drugs
           poses special challenges for collecting and interpreting cost
           data. These challenges include (1) obtaining consistent data for
           radiopharmaceutical SCODs produced in very different forms and (2)
           the short half-life for certain products. Moreover, since Medicare
           spends relatively little on radiopharmaceuticals-less than 1.5
           percent of Medicare spending on hospital outpatient services-the
           challenge is to find a source of data for setting rates that is
           low cost and reasonably accurate.

           In our hospital survey, we faced the challenge of uniformly
           pricing products purchased in very different forms. We focused on
           prices for radiopharmaceuticals purchased in unit doses. Most of
           the hospitals purchased radiopharmaceuticals in this ready-to-use
           form, and only a small fraction of hospitals purchased
           radiopharmaceuticals in separate components (the radioisotope and
           the nonradioactive substance), which need to be compounded.43 We
           were unable to make prices for separately purchased components
           comparable to those obtained for unit doses, as the labor costs
           for compounding the products are included in hospitals' reported
           prices of ready-to-use products but not in their reported prices
           of products they purchased as separate components.

           The short half-life of certain radiopharmaceutical SCODs can also
           pose challenges for collecting and interpreting price data.
           Because the radioactive component decays over time, the amount of
           the product purchased for a given patient may vary with the
           distance between where the radiopharmaceutical is compounded and
           where it is administered. The result is that for those short-lived
           radiopharmaceuticals paid on a per-dose basis, the cost per dose
           is more for the doses prepared far from the point of
           administration than for those prepared closer by, as more of a
           radioactive product must be purchased to account for its decay in
           transit. This applies most commonly to F-18 radiopharmaceuticals,
           the most common of which, F-18 FDG, has a half-life of 1.8
           hours.44 F-18 radiopharmaceuticals, including F-18 FDG, are used
           in the diagnosis of various diseases, such as cancer, heart
           disease, and liver disease.

           Finally, CMS faces the challenge of balancing accuracy and
           efficiency in obtaining price data on radiopharmaceutical SCODs.
           Our approach in estimating prices from our survey data was to use
           only information on unit dose prices, the form purchased by most
           hospitals.45 CMS, as stated in the 2006 final rule governing
           payment rates for SCODs, has not found what it considers a
           satisfactory method for obtaining data on acquisition costs of
           radiopharmaceuticals and is continuing to explore both ASP and
           other alternatives.46 Hospitals and manufacturers47 are the most
           direct source of price data because both are parties to the
           transactions in which the hospitals acquire the
           radiopharmaceuticals.48 In its notice of proposed rulemaking for
           radiopharmaceutical SCODs, CMS proposed collecting ASPs from
           manufacturers for use in setting 2007 payment rates.49 In light of
           many comments regarding the difficulty of this undertaking, CMS
           decided not to collect radiopharmaceutical ASPs for 2007 rates,
           but left open the possibility of using ASP in the future.

           CMS has also discussed the possibility of using charges from
           hospitals' Medicare claims to approximate acquisition costs for
           radiopharmaceutical SCODs, rather than obtaining price data from
           invoices provided by hospitals or from manufacturers. Using claims
           data may be a more efficient but less accurate means of obtaining
           price estimates than obtaining price data directly from
           manufacturers or from hospitals' invoices. In its final rule, CMS
           stated that it was basing 2006 payments on hospitals' charges
           (derived from outpatient claims) for radiopharmaceuticals. CMS
           plans to adjust these charges to reflect costs and noted that it
           did not plan to use this methodology permanently. For rate-setting
           after 2006, CMS also noted the possibility of using invoice data
           submitted to Medicare by physicians who administer
           radiopharmaceuticals in their offices.50 In its final rule, CMS
           did not present evidence that hospitals and physicians pay similar
           prices for these radiopharmaceutical drugs nor, if these prices
           differ, whether using these physician data would be appropriate
           for use in setting hospital outpatient rates.

           Conclusions
			  
			  Basing Medicare's payment rates for hospitals' SCOD purchases on
           current, accurate price data is important both to ensuring that
           Medicare pays appropriately-neither too much nor too little-and to
           ensuring beneficiary access to these innovative pharmaceutical
           products. As we previously reported, we agree with CMS that ASP is
           a practical data source for setting and updating rates for drug
           SCODs on a routine basis. However, we remain concerned about
           whether CMS can determine that ASP accurately represents purchases
           made by hospitals and believe that CMS should implement our
           October 2005 recommendation to collect sufficient information on
           ASP to make such a determination. We are also concerned about the
           likelihood that ASPs are not calculated consistently across all
           manufacturers, owing to CMS's lack of detailed instructions. As
           for validating the data CMS collects to set payment rates equal to
           hospitals' acquisition costs, an examination of hospitals' actual
           purchase prices, by definition, is optimal for assessing accuracy.
           Recognizing the operational difficulties of a hospital survey and
           using the knowledge gained from our survey, CMS could conduct a
           similar but streamlined hospital survey, possibly once or twice in
           a decade. Other options available to CMS for validating price data
           could include audits of manufacturers' price submissions or an
           examination of proprietary data the agency considers reliable for
           validation purposes.

           In contrast, we found that the diversity of forms in which
           radiopharmaceutical SCODs can be purchased-ready-to-use unit
           doses, multidoses, or separately purchased radioactive and
           nonradioactive components-complicates CMS's efforts to select a
           data source that can provide reasonably accurate price data
           efficiently. Our experience suggests that the best option
           available to CMS, in terms of accuracy and efficiency, is to
           collect price data on radiopharmaceuticals purchased in
           ready-to-use unit doses, the form in which an estimated
           three-quarters of hospitals purchase these products.

           Recommendations for Executive Action
			  
			  To ensure that Medicare payments for SCOD products are based on
           sufficiently accurate data, we recommend that the Secretary of
           Health and Human Services take the following two actions:

           o  validate, on an occasional basis, manufacturers' reported drug
           ASPs as a measure of hospitals' acquisition costs using a survey
           of hospitals or other method that CMS determines to be similarly
           accurate and efficient; and
           o  use unit-dose prices paid by hospitals when available as the
           data source for setting and updating Medicare payment rates for
           radiopharmaceutical SCODs.

           Agency Comments and Our Evaluation
			  
			  We received written comments on a draft of this report from HHS
           (see app. IV), which noted that it had considered information from
           our survey of hospitals in developing 2006 hospital outpatient
           payment policy and expressed appreciation for our effort and
           analysis.

           Regarding the first recommendation-that HHS validate ASPs as a
           measure of hospital acquisition costs through occasional hospital
           surveys or other methods-HHS highlighted our finding that an
           annual hospital survey could place considerable burdens on both
           the agency and hospital staff. However, HHS agreed to consider
           this recommendation, saying that it would continue to analyze the
           best approach for setting payment rates for drugs and
           radiopharmaceutical SCODs in view of our recommendation. It will
           also continue to analyze the adequacy of paying for drugs at ASP+6
           percent in the light of claims data, which persuaded HHS that for
           2006 ASP + 6 percent was the best available proxy for hospital
           acquisition and handling costs.

           Regarding the second recommendation-that HHS use unit-dose prices
           to set and update payment rates for radiopharmaceuticals-HHS
           agreed with us that the multiple forms in which
           radiopharmaceuticals can be purchased makes setting their payment
           rates difficult. While agreeing to consider our recommendation,
           HHS expressed several reservations. First, it noted that we had
           not specified whether the survey to collect acquisition cost data
           should be a survey of hospitals or manufacturers and asked that we
           clarify this point. Second, it noted that we had emphasized the
           burden of annual surveys of hospital drug prices and expressed the
           concern that an annual survey of hospital radiopharmaceutical
           prices would be equally burdensome. Finally, HHS noted that we had
           confined our report to 9 of the approximately 55
           radiopharmaceuticals that are paid separately, and questioned
           whether unit-dose data would be available for all or most
           radiopharmaceuticals.

           Our recommendation that HHS validate ASPs through occasional
           surveys or by using other methods is based in considerable part on
           our experience of the difficulty of a hospital survey. The burden
           that annual surveys would place on both hospitals and the agency
           is the reason that we rejected annual surveys as a source of
           acquisition cost data and instead proposed only occasional surveys
           to validate ASPs. Furthermore, as we noted in the recommendation,
           HHS could use a method other than a survey if that method were
           similarly accurate and efficient.

           In our recommendation on radiopharmaceuticals, we did not comment
           on whether the survey to collect acquisition cost data should be a
           survey of hospitals or manufacturers, because we have not analyzed
           the feasibility of obtaining these data from manufacturers. We
           recognize the potential burden of hospital surveys; this burden
           would need to be taken into account in weighing the merits of a
           hospital survey versus other alternatives. Regarding our
           recommendation to collect unit-dose prices, we have clarified it,
           saying that unit-dose prices should be used when available. In our
           survey, we used unit-dose data when we reported purchase prices
           for the 9 radiopharmaceuticals that accounted for 90 percent of
           Medicare's costs for hospital outpatient drugs. For
           radiopharmaceuticals that are prepared exclusively in-house HHS
           could, if necessary, establish an alternative method for
           determining payment rates.

           We are sending copies of this report to the Secretary of Health
           and Human Services, the Administrator of the Centers for Medicare
           & Medicaid Services, and other interested parties. We will also
           make copies available to others upon request. In addition, the
           report will be available at no charge on the GAO Web site at
           http://www.gao.gov .

           If you or your staff members have any questions about this report,
           please contact me at (202) 512-7119 or at [email protected] .
           Contact points for our Office of Congressional Relations and
           Public Affairs may be found on the last page of this report. GAO
           staff who made major contributions to this report are listed in
           appendix V.

           A. Bruce Steinwald Director, Health Care

           Appendix I: Methodology for Analysis of SCOD Price Differences
			  among Hospital Types
			  
			  This appendix describes the data and methods we used to examine
           SCOD price variation among hospitals purchasing SCOD products. In
           particular, we describe (1) the SCOD price data we analyzed, (2)
           the factors potentially affecting SCOD prices and the measurement
           of these factors, and (3) the methods underlying the statistical
           analysis of prices we conducted and the statistical results we
           obtained.

           SCOD Price Data
			  
			  Drawing on data from our survey of 1,157 hospitals,1 we examined
           hospitals' purchase prices for 53 drug SCODs and 9
           radiopharmaceutical SCODs for the period July 1, 2003, through
           June 30, 2004.2 Combined, these 62 SCOD categories represented 95
           percent of Medicare spending on SCOD products during the first 9
           months of 2004. We analyzed invoice data that hospitals submitted
           to us; specifically, our analysis included one SCOD price for each
           SCOD purchase listed on an invoice. As a result, for a hospital
           that purchased SCODs and other drugs once a month, our analysis
           included 1 price for each month's purchase of a particular SCOD or
           a total of up to 12 invoice prices for that SCOD during the
           12-month period. We were advised in our analysis by an expert
           panel consisting of Joseph P. Newhouse, John D. MacArthur
           Professor of Health Policy and Management, Harvard University;
           Robert A. Berenson, Senior Fellow, Urban Institute; Ernst R.
           Berndt, Professor of Applied Economics, Sloan School of
           Management, Massachusetts Institute of Technology; Andrea G.
           Hershey, Clinical Coordinator and Pharmacy Residency Program
           Director, Union Memorial Hospital (Baltimore, Md.); and Richard L.
           Valliant, Senior Research Scientist, University of Michigan.

           Factors Potentially Affecting SCOD Prices
			  
			  To analyze SCOD price variation among hospitals purchasing SCODs,
           we identified characteristics of hospitals that could plausibly
           explain why prices vary: teaching status, location, and size. We
           also identified a fourth factor: differences in the costliness of
           the mix of SCODs that hospitals purchased. Table 2 lists these
           factors and describes operational measures of these factors and
           the sources of data used to calculate these measures.

12For setting SCOD payment rates after 2006, the Secretary was directed to
conduct periodic surveys to obtain cost information.

13 GAO-05-581R .

14 GAO-05-733R .

15 GAO-06-17R .

16See app. I.

1770 Fed. Reg. 68,516 (Nov. 10, 2005).

18 GAO-06-17R .

                                   Background

MMA Established SCOD Payment Categories for Certain Pharmaceutical Products to
Ensure Beneficiary Access to New Products

MMA Required Us to Survey Hospitals to Determine Their Acquisition Costs for
SCOD Products

19Pub. L. No. 105-33, S: 4523, 111 Stat. 251, 445-50.

20Pub. L. No. 106-113, app. F, S: 201(b), 113 Stat. 1501A-321,
1501A-337-1501A-339.

21Rebates are price concessions given to hospitals by manufacturers
subsequent to receipt of the product. For a discussion of rebates and
their relationship to hospital acquisition costs, see GAO-06-17R , p. 5.

MMA Defined ASP, Which Is Reported by Manufacturers and Used to Set Rates for
Drug SCODs

Radiopharmaceuticals Can Be Purchased in Different Forms

22Discounts are price concessions given by manufacturers and wholesalers
that are reflected in the purchase price-the price hospitals pay at the
time of delivery.

23MMA 117 Stat. 2239-45. MMA specifically required use of ASP to set rates
for drugs furnished in physicians' offices on or after January 1, 2005;
CMS began using ASP to set rates for SCOD products delivered in hospital
outpatient departments on or after January 1, 2006.

24MMA 177 Stat. 2240-41.

2570 Fed. Reg. 68,642. In total, the payment rate for drug SCODs is ASP+6
percent, which includes overhead and handling that CMS had previously
estimated at 2 percent of ASP. The implied rate for the product without
overhead is ASP+4 percent.

2670 Fed. Reg. 68,654.

Hospitals' Teaching Status, Location, and Size Affected Prices for SCOD Products
                            by Different Magnitudes

Teaching Status, Location, and Size Were Each Significant Factors Affecting
Price Variation among Hospitals

27See Denise A. Merlino, "Nuclear Medicine Faculty Survey: SNM 2003 Survey
Reporting on 2002 Cost and Utilization," Journal of Nuclear Medicine
Technology, vol. 32, no. 4 (2004), pp. 215-219.

28Our estimated purchase prices for radiopharmaceutical SCODs were based
on hospitals' purchases of ready-to-use unit-doses only; we did not report
prices for the generally less prevalent forms-multidoses or doses prepared
in-house using a kit.

Hospital characteristic Drugs Radiopharmaceuticals 
Teaching status               
Location                      
Size                          

29Compared with nonteaching hospitals, some teaching hospitals may obtain
a larger proportion of their radiopharmaceuticals by compounding
components purchased separately than by purchasing unit doses. Therefore,
the result might have been different had we been able to include the
prices hospitals paid for radiopharmaceuticals purchased as multidoses or
as separate components.

Hospitals with Combination of Major Teaching Status, Urban Location, and Large
Size Obtained Lowest SCOD Prices

 Our Survey of Hospitals Suggests that the Burden of Large-Scale Annual Surveys
                     Could Outweigh Gains in Data Accuracy

Using Hospitals as Data Source for SCOD Prices Had A Major Advantage and Serious
Drawbacks

30The estimated percentage differences were derived from two multivariate
statistical models-one explaining variation in prices of 53 drug SCODs,
the second explaining price variation of 9 radiopharmaceutical SCODs. Each
model attributed variation in SCOD prices to three hospital
characteristics (teaching status, size, and location) and to the
particular set of SCODs purchased by each hospital.

31CMS collects ASPs from manufacturers that include prices paid by all
purchasers, not just hospitals. Average prices paid by hospitals may not
be equal to average prices paid by other purchasers, such as physicians'
offices.

32Many hospitals reported receiving rebates for a set of drugs (and
sometimes drugs and other products). In these cases, it was generally not
feasible to allocate rebates to specific drugs.

33We accepted data from hospitals in any format. We believed that we had
to make the task of submitting data as easy as possible for hospitals in
order to gain their cooperation. Reflecting on our experience, we think
that this decision was critical to achieving good response rates.

34GAO, Medicare: Comments on CMS Proposed 2006 Rates for Specified Covered
Outpatient Drugs and Radiopharmaceuticals Used in Hospitals, GAO-06-17R
(Washington, D.C.: Oct. 31, 2005). In addition to the product's ASP,
manufacturers must report the manufacturer's name, the product's National
Drug Code (NDC), and the number of units.

35Although HHS chose to use ASP data submitted by manufacturers to set
2006 payment rates, it is required to conduct hospital surveys subsequent
to ours to determine hospital acquisition costs. MMA 117 Stat. 2308.

36We refer to our survey of hospitals as the 2004 survey because data
collection began in 2004. We collected data for SCODs purchased from July
1, 2003, through June 30, 2004.

37For details on the sample design for our survey, see GAO-05-581R ,
enclosure I.

Survey Indicates that Accounting for Dynamic Drug Market and Infrequently
Purchased Drugs Has Implications for Accuracy and Efficiency

38A SCOD category may contain one or many NDCs. NDCs may differ by
manufacturer, strength, or package size.

39Each SCOD and each NDC is assigned a specific number of units (for
example, 10 mg.), and the NDC units must also be converted to SCOD units,
in order to place on the same basis all the NDCs that make up a SCOD. For
a discussion of issues in converting NDC prices to SCOD prices, see
Department of Health and Human Services, Office of Inspector General,
Calculation of Volume-Weighted Average Sales Price for Medicare Part B
Prescription Drugs, OEI-03-05-00310 (Washington, D.C.: February 2006).

40The number of SCODs can change from year to year as CMS designates
additional SCODs or combines previously separate SCODs.

CMS Faces Challenges in Future Data Collection Efforts to Set SCOD Payment Rates
                                   Accurately

Validating ASP Would Pose Challenges for CMS Because of Lack of Detail in Data

41We recommended in a previous report that CMS collect information on ASP
by purchaser type to validate its reasonableness as a measure of hospital
acquisition cost. See GAO-06-17R .

4242 C.F.R. S:S: 414.800-414.806 (2005).

Radiopharmaceuticals Pose Unique Challenges for Obtaining Accurate Cost Data
Efficiently

43In a survey conducted by the Society of Nuclear Medicine and the Society
of Nuclear Medicine Technologist Section, 76 percent of hospitals reported
that they purchased their radiopharmaceuticals in unit doses. See Merlino,
pp. 215-219.

44Of the nine radiopharmaceuticals for which we estimated prices, F-18 FDG
is the only one that is an F-18 radiopharmaceutical. However, as more F-18
labeled products become available, the category may expand.

45See GAO-05-733R .

4670 Fed. Reg. 68,656-57.

47We consider manufacturers to include independent nuclear pharmacies and
hospitals that compound radiopharmaceuticals that they supply to other
hospitals.

48A small part of the business of some independent nuclear pharmacies, as
well as retail outlets for large radiopharmaceutical manufacturers,
involves supplying ready-to-use radiopharmaceuticals from their parent
companies and other manufacturers.

4970 Fed. Reg. 42,674, 42,727-28 (July 25, 2005).

                                  Conclusions

5070 Fed. Reg. 68,656.

                      Recommendations for Executive Action

                       Agency Comments and Our Evaluation

Appendix I: MeSCOD PriceTypes Appendix I: Methodology for Analysis of SCOD
Price Differences among Hospital Types

SCOD Price Data

Factors Potentially Affecting SCOD Prices

1See GAO-05-581R for technical details on the survey we conducted.

2Purchase price refers to the price that hospitals paid upon receiving a
product. Purchase price incorporates a manufacturer's or other vendor's
discounts but excludes any rebates, which manufacturers may pay a hospital
purchaser at a later date. In this appendix, price refers to purchase
price, unless otherwise stated.

Table 2: Factors Included in Analysis of Price Variation among Hospitals
Purchasing SCODs

                                                          Source and date of  
                                                          data used to        
Factor           Measure                               calculate measure   
Teaching statusa Major teaching: Binary variable equal CMS: Medicare       
                    to                                    Hospital Cost       
                                                          Report, 2002        
                       o  1 if the hospital had a major   
                       teaching program                   
                       o  0 if hospital had no major      
                       teaching program                   
                                                          
                    Other teaching: Binary variable equal 
                    to                                    
                                                          
                       o  1 if the hospital had other     
                       teaching program                   
                       o  0 if hospital had no other      
                       teaching program                   
                                                          
                    Nonteaching: Binary variable equal to 
                                                          
                       o  1 if the hospital had no        
                       teaching program.                  
                       o  0 if hospital had a teaching    
                       program                            
Location         Binary variable equal to              CMS: Provider of    
                                                          Services File, end  
                       o  1 if the hospital was in a      of 2004             
                       rural area-that is, outside a      
                       metropolitan statistical area      
                       (MSA)                              
                       o  0 if the hospital was in an     
                       urban area-that is, in an MSA      
Sizeb            Binary variable equal to              CMS: Health Care    
                                                          Information System, 
                       o  1 if hospital is                2003                
                       large-indicated by outpatient      
                       Medicare charges at or above the   
                       80th percentile of all Medicare    
                       hospital outpatient charges        
                       o  0 if small-less than this       
                       amount                             
Mix of SCODs     Binary variable equal to              GAO: Survey of      
purchased                                              Hospitals' SCOD     
                       o  1 if the product purchased as a Prices, 2003 and    
                       given SCOD - that is, the it h     2004                
                       SCOD, where i = 1,...n             
                       o  0 if the product purchased were 
                       any other SCOD                     

Sources: GAO analysis of CMS and GAO information.

aMajor teaching hospitals were defined as hospitals with an
intern/resident-to-bed ratio of 0.25 or more. Hospitals with other
teaching programs were defined as hospitals with an intern/resident-to-bed
ratio above 0 but less than 0.25.

bHospitals with outpatient Medicare charges of $59.1 million or higher
were at the 80th percentile or higher of hospitals, ranked by their
outpatient Medicare charges, for our analysis of drug SCODs.

In addition to the measures listed in table 2, we considered alternative
measures for location and for size:

           o  We examined two geographic classification systems as
           alternatives to an MSA (metropolitan statistical area)/nonMSA
           classification: (1) urban influence codes, which classify counties
           based on each county's largest city and its proximity to other
           areas with large, urban, populations; and (2) rural-urban
           continuum codes, which classify metropolitan counties (that is,
           those in an MSA) by the size of the urban area and classify
           nonmetropolitan counties by the size of the urban population and
           proximity to a metropolitan area.3 
           o  Before selecting our preferred measure of hospital size
           (hospital outpatient charges at the 80th percentile or higher,
           where hospitals were ranked by their outpatient Medicare charges),
           we considered other measures of hospital size: the number of
           hospital beds, the number of unique SCODs purchased by a hospital,
           and the number of hospital outpatient visits.

           In assessing our regression results for each of the several
           measures of location and size that we considered, we took into
           account statistical criteria including the statistical
           significance of each measure and the overall explanatory power of
           each model. We also considered qualitative factors when selecting
           our preferred measures of location and size. For example, we
           selected hospital outpatient charges as our measure of size,
           instead of number of hospital beds, because both measures had
           similar statistical properties and our analysis focuses on the
           hospital outpatient setting.

           In addition to conducting separate regression analyses of the
           price data for drug SCODs and for radiopharmaceutical SCODs, we
           analyzed price variation separately for each of four therapeutic
           categories of drug SCODs. We also conducted separate regression
           analyses of SCOD price variation for drugs without biologicals,
           for biologicals, and for radiopharmaceuticals. We determined that
           any gains in statistical properties did not outweigh the greater
           complexity of these analyses.

           Methods and Results of Price Analysis
			  
			  In analyzing SCOD price variation, our dependent variable was the
           natural logarithm of SCOD price.4 SCOD prices are not distributed
           symmetrically around the average. SCOD prices are skewed to the
           right and are not distributed normally, reflecting some SCODs with
           particularly high prices. Taking the natural logarithm of price is
           intended to take skewness into account and make the resulting
           distribution consistent with the statistical assumptions of a
           regression.

           We weighted prices paid by hospitals for individual drugs and
           radiopharmaceuticals by the purchase amount of each invoice. That
           is, we weighted prices more heavily in the statistical analysis
           for invoices that represented a larger proportion of total annual
           purchases of a particular SCOD than for invoices that represented
           a smaller proportion of purchases. In addition, our analysis took
           into account the fact that multiple prices paid by a particular
           hospital were not necessarily statistically independent of each
           other-a phenomenon known as clustering. In estimating our
           statistical models, we corrected the potential bias in our
           estimates due to clustering by using the robust and cluster
           options in STATA, a statistical software package.5

           To gauge the effects of our explanatory factors on price variation
           among hospitals, we estimated one regression model for drug SCODs
           and a separate model for radiopharmaceutical SCODs. Table 3 shows
           estimates of the first model, which indicate the effects of three
           hospital characteristics on the natural logarithm of price of drug
           SCODs.

           Table 3: Estimated Effects of Selected Factors on Prices Hospitals
           Paid for Drug SCODs

           Source: GAO analysis.

           Notes: SCOD refers to a specified covered outpatient drug. The
           results in this table pertain to the top 53 drug SCOD products,
           ranked by Medicare spending on SCODs during the first 9 months of
           2004.

           This table presents estimates from a regression model. The model's
           dependent variable is the natural logarithm of the purchase price
           paid by a particular hospital for a SCOD. SCOD prices are not
           distributed symmetrically around the average SCOD price but are
           skewed to the right, reflecting some SCODs with particularly high
           prices. Taking the natural logarithm of price takes this skewness
           into account. The effect of a measure, such as rural location, is
           estimated relative to a reference group (urban location).
           Therefore, the reference group is not explicitly included in the
           model. A major teaching program refers to a hospital that has an
           intern/resident-to-bed ratio of 0.25 or more. Urban refers to a
           hospital inside a metropolitan statistical area. Large refers to a
           hospital at or above the 80th percentile of hospitals, ranked by
           Medicare outpatient charges.

           aSignificant at the 5 percent level.

           bNot available because the method calculates estimated
           coefficients for the included groups relative to the reference
           group.

           To examine the separate effect of each factor, holding constant
           the effects of the remaining factors, we referred to the estimated
           coefficients for each factor in the model. From the estimated
           coefficient, we calculated the percentage difference in price
           attributable to each factor.6 For example, major teaching
           hospitals paid lower prices for drugs compared to nonteaching
           hospitals: major teaching hospitals paid 3.2 percent less than
           nonteaching hospitals, holding constant location, size, and the
           mix of SCODs purchased. In contrast, we found no statistically
           significant difference in prices paid by hospitals with other
           teaching programs and those paid by nonteaching hospitals, holding
           the other factors constant.

           Although the R-squared statistic in table 3 indicates that the
           model accounts for over 99 percent of the variation in the
           logarithm of the SCOD price, this feature of the estimated model
           requires careful interpretation. Most of the variation in the
           logarithm of the drug SCOD price was due to the particular SCODs
           that were purchased-for some, hospitals paid on average about $300
           per unit while for others, hospitals paid about $3 per unit.
           Consequently, after accounting for differences in the mix of SCODs
           purchased by different hospitals, only a small amount of variation
           in price remains to be explained by other factors. As a result,
           the R-squared for this model should not be interpreted as an
           indicator of the three factors' success in explaining SCOD price
           variation. Instead, the t-statistics associated with teaching
           status, location, and size are more useful, since they signal
           these factors' statistical significance-that is, whether the
           difference between the estimated effect of each factor and zero is
           statistically significant.

           Table 4 presents the results for the second model, which estimates
           the effects of the three factors on the prices of
           radiopharmaceutical SCODs.

           Table 4: Estimated Effects of Selected Factors on Prices Hospitals
           Paid for Radiopharmaceutical SCODs

           Source: GAO analysis.

           Notes: SCOD refers to a specified covered outpatient drug. The
           results in this table pertain to the top nine radiopharmaceutical
           SCOD products, ranked by Medicare spending on SCODs during the
           first 9 months of 2004. This table presents estimates from a
           regression model. The model's dependent variable is the natural
           logarithm of the purchase price paid by a particular hospital for
           a radiopharmaceutical SCOD. SCOD prices are not distributed
           symmetrically around the average SCOD price but are skewed to the
           right, reflecting some SCODs with particularly high prices. Taking
           the natural logarithm of price takes this skewness into account.
           The effect of a measure, such as rural location, is estimated
           relative to a reference group (urban location). Therefore, the
           reference group is not explicitly included in the model. A major
           teaching program refers to a hospital that has an
           intern/resident-to-bed ratio of 0.25 or more. Urban refers to a
           hospital inside a metropolitan statistical area. Large refers to a
           hospital at or above the 80th percentile of hospitals, ranked by
           Medicare outpatient charges.

           aNot available because the method calculates estimated
           coefficients for the included groups relative to the reference
           group.

           bSignificant at the 5 percent level.

           As table 4 shows, two factors-location and size-are statistically
           significant in the model examining radiopharmaceutical SCOD
           prices. Other things equal, a rural hospital paid prices for
           radiopharmaceutical SCODs that were an estimated 4.4 percent
           higher than urban hospitals, while large hospitals paid prices an
           estimated 3.1 percent lower than small hospitals.

           To examine the effect of the three factors combined, while
           controlling for differences in the costliness of SCODs that
           hospitals purchased, we used the estimates from two models-one for
           drug SCODs and one for radiopharmaceutical SCODs-to simulate the
           prices that certain groups of hospitals paid. In particular, we
           focused on comparing the prices paid by hospitals with one
           combination of characteristics-major teaching, urban, and
           large-with the prices paid by hospitals with a different
           combination of characteristics-nonteaching, rural, and small.

           Appendix II: Purchase Prices for Drug SCODs
			  
			  Table 5 appears as table 1 in our report Medicare: Drug Purchase
           Prices for CMS Consideration in Hospital Outpatient Rate-Setting,
           GAO-05-581R (Washington, D.C.: June 30, 2005). The label of the
           second column-HCPCS code-refers to the Healthcare Common Procedure
           Coding System, which CMS uses to define SCODs.

Methods and Results of Price Analysis

3For more information on urban influence codes, see Measuring Rurality:
Urban Influence Codes, http://www.ers.usda.gov/Briefing/Rurality/urbaninf/
(downloaded Feb. 2, 2006). For more information on rural-urban continuum
codes, see Rural-Urban Commuting Area Codes,
http://www.ers.usda.gov/Briefing/Rurality/RuralurbCon/ (downloaded Feb.
14, 2006).

4Each observation of price was drawn from a particular invoice for the
purchase of a particular SCOD purchased by a particular hospital.

5StataCorp, Stata Statistical Software: Release 9 (College Station, Tex.:
StataCorp LP, 2003).

                                                           Estimated          
Factor              Measure of factor                 coefficient  t-value
Teaching status     Major teaching program                 -.0321   -5.33a 
                       Other teaching program                 -.0054    -1.54 
                       Nonteaching (reference group)            n/ab     n/ab 
Location            Rural                                   .0009     0.17 
                       Urban (reference group)                  n/ab     n/ab 
Size                Large                                  -.0138   -2.18a 
                       Small (reference group)                  n/ab     n/ab 
Mix of SCODs        SCOD category (one binary                     
purchased by a      variable for each of 53 drug                  
particular hospital SCODs)                         (not reported) 
                       Intercept                                4.11 1810.16a 
                       R-squared                               .9974 
                       Number of observations                439,988 

6Since each of the three "hospital characteristic" factors (teaching
status, location, and size) is measured as one or more binary variables
and the dependent variable, price, is measured as the natural logarithm,
we used a standard method to calculate the percentage difference in price
attributable to a particular measure of the factor, relative to its
comparison group. Paul Kennedy, A Guide to Econometrics, 4th Ed.
(Cambridge, Mass.: MIT Press, 1998), p. 108.

                                                            Estimated         
Factor              Measure of factor                  coefficient t-value
Teaching status     Major teaching program                  -.0021    -.12 
                       Other teaching program                  -.0001    -.01 
                       Nonteaching (reference group)             n/aa    n/aa 
Location            Rural                                    .0434   2.23b 
                       Urban (reference group)                   n/aa    n/aa 
Size                Large                                   -.0311  -2.55b 
                       Small (reference group)                   n/aa    n/aa 
Mix of SCODs        SCOD category (one binary                      
purchased by a      variable for each of 9                         
particular hospital radiopharmaceutical SCODs)      (not reported) 
                       Intercept                                 4.74  522.06 
                       R-squared                                .9913 
                       Number of observations                 185,237 

Appendix II: Purchase Prices for Drug SCODs Appendix II: Purchase Prices
for Drug SCODs

Table 5: Purchase Prices for SCODs Accounting for 86 Percent of Medicare
Spending on SCODs

                                                 Medicare      % of           
Rank in                                    spending on  Medicare           
Medicare                                   SCOD, 2004a  spending Number of 
spending on HCPCS                                ($ in on SCODs, hospitals
drug SCODs  code   Description               millions)     2004b in sample
1           Q0136  Injection, Epoetin                                      
                      Alpha (for non-ESRD                           
                      use), per 1,000 units         199.8      10.1       973
2           J9310  Rituximab, 100 mg             158.4       8.0       871 
3           J2505  Injection,                                              
                      Pegfilgrastim, 6 mg           144.8       7.3       759
4j          Q9941  Injection, Immune                                       
                      Globulin, Intravenous,                        
                      Lyophilized, 1 g                  k         k       626
4j          Q9943  Injection, Immune                                       
                      Globulin, Intravenous,                        
                      Non-Lyophilized, 1 g              k         k       281
5           J1745  Injection, Infliximab,                                  
                      10 mg                         114.8       5.8       897
6           Q0137  Injection, Darbepoetin                                  
                      alfa, 1 mcg (non-ESRD                         
                      use)                          100.6       5.1       743
7           J9170  Docetaxel, 20 mg               73.7       3.7       829 
8           J9045  Carboplatin, 50 mg             70.7       3.6       893 
9           C9205  Injection, Oxaliplatin,                                 
                      per 5 mg                       67.0       3.4       708
10          J3487  Injection, Zoledronic                                   
                      Acid, 1 mg                     66.9       3.4       862
11          J9201  Gemcitabine Hcl, 200 mg        55.0       2.8       855 
12          J9206  Irinotecan, 20 mg              39.4       2.0       786 
13          J2324  Injection, Nesiritide,                                  
                      0.25 mg                        37.6       1.9       892
14          J9265  Paclitaxel, 30 mg              32.0       1.6       792 
15          J9355  Trastuzumab, 10 mg             31.4       1.6       679 
16          J9217  Leuprolide Acetate (for                                 
                      depot suspension), 7.5                        
                      mg                             30.8       1.6       804
17          J0256  Injection, Alpha 1 -                                    
                      Proteinase Inhibitor -                        
                      Human, 10 mg                   20.9       1.1        38
18          J9035m Injection, Bevacizumab,                                 
                      10 mg                          19.8       1.0       436
19          J1441  Injection, Filgrastim                                   
                      (G-CSF), 480 mcg               17.1       0.9       928
20          J1950  Injection, Leuprolide                                   
                      Acetate (for depot                            
                      suspension), per 3.75                         
                      mg                             16.9       0.9       541
21          J9001  Doxorubicin                                             
                      Hydrochloride, all                            
                      lipid formulations, 10                        
                      mg                             16.3       0.8       614
22          J2353  Injection, Octreotide,                                  
                      depot form for                                
                      intramuscular                                 
                      injection, 1 mg                15.7       0.8       545
23          J9055m Injection, Cetuximab,                                   
                      10 mg                          15.1       0.8       286
24          J9041m Injection, Bortezomib,                                  
                      0.1 mg                         14.1       0.7       452
25          J9350  Topotecan, 4 mg                13.9       0.7       585 
26          J1440  Injection, Filgrastim                                   
                      (G-CSF), 300 mcg               13.0       0.7       956

                                                   95%                    95% 
                   CMS      ASP             confidence             confidence 
               payment (average  Average   interval of   Median   interval of 
        Total rate for    sales purchase   the average purchase    the median 
    number of    2005d  price)e   pricef      purchase   priceh      purchase 
hospitalsc      ($)      ($)      ($)    priceg ($)      ($)    priceg ($) 
        2,758    11.09     9.25     9.74     9.55-9.94    10.12   10.11-10.13 
        1,418   437.83   414.92   412.31 407.43-417.20   412.30 412.13-412.52 
        1,177 2,448.50 2,017.55        i             i        i             i 
            l    80.68    36.54    36.50   36.37-36.63    37.24   37.15-37.24 
            l    80.68    53.04    50.63   50.11-51.15    50.96   50.96-52.06 
        1,903    57.40    50.20        i             i        i             i 
        1,117     3.66     3.04     3.00     2.95-3.05     3.09     3.06-3.11 
        1,257   312.69   278.95   295.03 294.10-295.96   294.61 294.46-294.89 
        1,482   129.96    71.46   132.10 131.65-132.55   132.69 132.55-132.83 
        1,172    82.53    77.86    75.91   74.90-76.91    77.69   77.65-77.76 
        1,316   197.87   187.47   185.27 183.71-186.83   190.67 190.26-191.01 
        1,317   105.73   108.79   105.69 105.13-106.24   106.54 106.44-106.65 
        1,109   127.33   119.56   116.31 113.87-118.75   122.67 122.16-123.13 
        1,619    66.23    69.64        i             i        i             i 
        1,398    79.04    17.70    14.45   14.44-14.46    14.45   14.45-21.34 
        1,089    50.79    49.99    46.72   45.92-47.53    47.97   47.93-48.04 
        1,319   543.72   213.83   234.05 223.21-244.90   198.88 195.83-215.41 
          279     3.72     3.06     2.35     2.33-2.37     2.46     2.27-2.46 
          916    57.11    53.88    53.31   53.01-53.61    53.72   53.69-53.75 
        1,679   274.40   261.46   257.21 253.46-260.96   253.64 253.45-253.78 
          904   451.98   409.18   454.10 453.04-455.17   454.66 454.03-455.72 
          955   343.78   338.66   336.33 332.22-340.44   338.70 338.28-338.97 
          852    69.44    80.95    71.13   69.63-72.62    74.04   73.54-74.87 
          506    49.66    46.85        i             i        i             i 
          631    28.38    26.77        i             i        i             i 
          858   697.76   699.75   674.91 656.60-693.21   709.19 706.34-710.50 
        1,914   162.41   165.23   161.61 156.81-166.42   159.18 159.04-159.31 

                                                 Medicare      % of           
Rank in                                    spending on  Medicare           
Medicare                                   SCOD, 2004a  spending Number of 
spending on HCPCS                                ($ in on SCODs, hospitals
drug SCODs  code   Description               millions)     2004b in sample
27          J1785  Injection,                                              
                      Imiglucerase, per unit         12.9       0.7        41
28          J3396  Injection, Verteporfin,                                 
                      0.1 mg                         12.3       0.6        10
29          J9202  Goserelin Acetate                                       
                      Implant, per 3.6 mg            11.4       0.6       392
30          J1626  Injection, Granisetron                                  
                      Hydrochloride, 100 mcg         11.1       0.6       682
31          J0585  Botulinim Toxin Type A,                                 
                      per unit                       10.8       0.5       480
32          J0207  Injection, Amifostine,                                  
                      500 mg                         10.5       0.5       477
33          J2430  Injection, Pamidronate                                  
                      Disodium, per 30 mg            10.2       0.5       945
34          J9390  Vinorelbine Tartrate,                                   
                      per 10 mg                       9.3       0.5       568
35          J2993  Injection, Reteplase,                                   
                      18.1 mg                         8.9       0.4       505
36          J9293  Injection, Mitoxantrone                                 
                      Hydrochloride, per 5 mg         8.4       0.4       672
37          J9185  Fludarabine Phosphate,                                  
                      50 mg                           7.6       0.4       669
38          C1305  Apligraf(R), per 44                                     
                      square centimeters              7.0       0.4        63
39          J9395  Injection, Fulvestrant,                                 
                      25 mg                           6.9       0.3       468
40          J3100  Injection,                                              
                      Tenecteplase, 50 mg             6.8       0.3       509
41          J9305m Injection, Pemetrexed,                                  
                      10 mg                           5.6       0.3       162
42          J9160  Denileukin Diftitox,                                    
                      300 mcg                         5.6       0.3        73
43          J0180m Injection, Agalsidase                                   
                      Beta, 1 mg                      5.3       0.3        29
44          Q0166  Granisetron                                             
                      Hydrochloride, 1 mg,                          
                      oraln                           4.8       0.2       541
45          J2469m Injection, Palonosetron                                 
                      Hcl, 25 mcg                     4.6       0.2       295
46          J9010  Alemtuzumab, 10 mg              4.4       0.2       236 
47o         Q9942  Injection, Immune                                       
                      Globulin, Intravenous,                        
                      Lyophilized, 10 mg                p         p       626
47o         Q9944  Injection, Immune                                       
                      Globulin, Intravenous,                        
                      Non-Lyophilized, 10 mg            p         p       281
48          J7190  Factor VIII                                             
                      (Antihemophilic Factor,                       
                      Human) per I.U.                 4.2       0.2        55
49          J0130  Injection, Abciximab,                                   
                      10 mg                           4.0       0.2       570
50          J0850  Injection,                                              
                      Cytomegalovirus Immune                        
                      Globulin Intravenous                          
                      (Human), per vial               3.8       0.2       156
51          J1327  Injection,                                              
                      Eptifibatide, 5 mg              3.7       0.2       911
52          J9214  Interferon, Alfa-2B,                                    
                      Recombinant, 1 million                        
                      units                           3.6       0.2       619
53          C9201  Dermagraft(R), per 37.5                                 
                      square centimeters              3.4       0.2         2

                                                   95%                    95% 
                   CMS      ASP             confidence             confidence 
               payment (average  Average   interval of   Median   interval of 
        Total rate for    sales purchase   the average purchase    the median 
    number of    2005d  price)e   pricef      purchase   priceh      purchase 
hospitalsc      ($)      ($)      ($)    priceg ($)      ($)    priceg ($) 
           59     3.91     3.69     3.62     3.60-3.64     3.62     3.61-3.66 
           45     8.49     8.48        i             i        i             i 
          529   390.09   181.78   201.76 193.30-210.23   206.56 175.73-323.33 
          988    16.20     6.71     6.45     6.27-6.62     6.61     6.60-6.64 
        1,062     4.32     4.44        i             i        i             i 
          705   395.75   403.84        i             i        i             i 
        1,567   128.74    54.10    58.49   51.51-65.47    72.59   71.50-72.72 
          833    52.78    58.20    48.15   48.13-48.16    48.14   48.13-52.05 
        1,073 1,192.09   832.49   846.53 844.18-848.87   845.36 844.48-846.87 
        1,181   313.96   305.36   297.00 296.19-297.82   295.62 295.46-295.78 
          891   311.09   243.05   293.99 291.43-296.56   298.44 298.37-298.68 
          450 1,130.88 1,114.74        i             i        i             i 
          778    79.65    76.78    74.63   74.45-74.80    75.03   74.95-75.18 
        1,181 2,350.98 1,901.29        i             i        i             i 
          251    40.54    38.25        i             i        i             i 
           95 1,438.80 1,144.18        i             i        i             i 
           49   121.11   114.26   111.33 111.08-111.58   109.71 108.18-111.09 
          886    39.04    31.04    24.86   24.82-24.89    23.99   21.58-24.94 
          525    18.09    17.06        i             i        i             i 
          356   541.46   478.73        i             i        i             i 
            q     0.75     0.37     0.37     0.36-0.37     0.37     0.37-0.37 
            q     0.75     0.53     0.51     0.50-0.51     0.51     0.51-0.52 
          122     0.76     0.60     0.46     0.46-0.46     0.46             r 
          797   448.22   417.35        i             i        i             i 
          260   622.13   632.67        i             i        i             i 
        1,661    11.21    11.79    12.49   12.35-12.63    11.03   10.75-12.39 
          954    13.00    12.25    11.20   11.02-11.37    11.93   11.78-11.98 
           80   529.54   545.10        i             i        i             i 

Sources: GAO survey and CMS.

Notes: ESRD = end-stage renal disease, g = gram, I.U. = international
unit, mcg = microgram, and mg = milligram.

aMedicare spending is for the period January 1, 2004, through September
30, 2004.

bThe percentage of Medicare spending is based on Medicare spending for all
SCODs-both drugs and radiopharmaceuticals.

cThis estimate of the total number of hospitals in the population is based
on our sample.

dThis is the payment rate specified for each HCPCS for 2005. It
incorporates CMS's April 2005 update.

eCMS publishes the ASP plus 6 percent for certain drugs used in
physicians' offices. These amounts are based on data provided by
manufacturers each quarter. We are reporting ASPs for the quarter
beginning in April 2005. ASPs reported here do not include the 6 percent
added by CMS.

fThis price is based on data provided by the hospitals in our survey and
does not reflect any other costs associated with purchasing or
administering the product. We asked hospitals to report prices for drugs
purchased from July 1, 2003, through June 30, 2004. We weighted the prices
by the volume purchased as well as by the sample weights. We have excluded
prices under the 340B program, a federal program that provides drug price
discounts for certain health care entities, including those that provide
health care services for low-income individuals and individuals in
medically underserved areas. (42 U.S.C. S: 256b (2000)).

gThe confidence interval measures the precision of the estimate. The
narrower the interval, the greater the precision.

hThe median purchase price is the midpoint of all prices reported by
hospitals in our sample. Half of the prices reported by hospitals are
above the median and half are below. The median is weighted by volume
purchased and by hospital sample weights. The average purchase price
excludes prices paid under the 340B program.

iFor HCPCS codes that contain only one National Drug Code (NDC), we do not
include information on the average or median purchase price because of the
potential proprietary sensitivity of such information.

jOn April 1, 2005, CMS replaced J1563, Injection, Immune Globulin,
Intravenous, 1g, with two new codes: Q9941 and Q9943. J1563 was ranked
fourth in total Medicare spending on SCODs from January 1, 2004, to
September 30, 2004.

kJ1563, Injection, Immune Globulin, Intravenous, 1g, accounted for $127.1
million in Medicare spending from January 1, 2004, through September 30,
2004, which was 6.4 percent of total Medicare spending on SCODs for that
time period.

lOn April 1, 2005, CMS replaced J1563, Injection, Immune Globulin,
Intravenous, 1g, with two new codes: Q9941 and Q9943. Because J1563 was
replaced by two codes, we could not estimate the total number of hospitals
in the population for these new codes individually.

mOn January 1, 2005, CMS replaced C9214, C9215, C9207, C9213, C9208, and
C9210 with J9035, J9055, J9041, J9305, J0180, and J2469, respectively. The
ranks for the new codes correspond to the ranks in total Medicare spending
on SCODs from January 1, 2004, to September 30, 2004, for the former
codes.

nThe complete description for HCPCS Q0166 is "Granisetron Hydrochloride, 1
mg, Oral, Food and Drug Administration (FDA) Approved Prescription
Anti-Emetic, for Use as a Complete Therapeutic Substitute for an IV
(intravenous) Anti-Emetic at the Time of Chemotherapy Treatment, Not to
Exceed a 24 Hour Dosage Regimen."

oOn April 1, 2005, CMS replaced J1564, Injection, Immune Globulin,
Intravenous, 10 mg, with two new codes: Q9942 and Q9944. J1564 was ranked
47th in total Medicare spending on SCODs from January 1, 2004, to
September 30, 2004.

pJ1564, Injection, Immune Globulin, Intravenous, 10 mg accounted for $4.4
million in Medicare spending from January 1, 2004, through September 30,
2004, which was 0.2 percent of total Medicare spending on SCODs for that
time period.

qOn April 1, 2005, CMS replaced J1564, Injection, Immune Globulin,
Intravenous, 10 mg, with two new codes: Q9942 and Q9944. Because J1564 was
replaced by two codes, we could not estimate the total number of hospitals
in the population for these new codes individually.

rFor this SCOD, our sample data cannot be extrapolated to compute a
confidence interval for the median.

Appendix III: Purchase Prices for Radiopharmaceuticals SCODs

Table 6 appears as table 1 in our report Medicare: Radiopharmaceutical
Purchase Prices for CMS Consideration in Hospital Outpatient Rate-Setting,
GAO-05-733R (Washington, D.C.: July 14, 2005). The label of the second
column-HCPCS code-refers to the Healthcare Common Procedure Coding System,
which CMS uses to define SCODs.

Table 6: Purchase Prices for Radiopharmaceutical Accounting for 9 Percent
of Medicare Spending on SCODs

                                                 Medicare                     
                                                 spending                     
                                                 on SCOD,      % of           
Rank in Medicare                                 2004a  Medicare 
spending on radio-                                      spending Number of
pharmaceutical     HCPCS                         ($ in on SCODs, hospitals
SCODs              code  Description         millions)     2004a in sample
1                  A9500 Technetium Tc 99m                                 
                            Sestamibi, per dose      66.5       3.4       405
2                  A9502 Technetium Tc 99m                                 
                            Tetrofosmin, per                        
                            dose                     38.8       2.0       174
3                  C1775 Fluorodeoxyglucose                                
                            (FDG) F18, per dose                     
                            (4-40 mCi/ml)            32.1       1.6        71
4                  C1083 Yttrium 90                                        
                            Ibritumomab                             
                            Tiuxetan, per dose        7.1       0.4        80
5                  A9505 Thallous Chloride                                 
                            TL 201, per mCi           6.7       0.3       292
6                  Q3005 Technetium Tc 99m                                 
                            Mertiatide, per                         
                            mCig                      6.2       0.3       292
7                  A9507 Indium In 111                                     
                            Capromab Pendetide,                     
                            per dose                  4.8       0.2        56
8                  Q3008 Indium In 111                                     
                            Pentetreotide, per                      
                            3 mCih                    4.5       0.2       193
9                  A9521 Technetium Tc 99m                                 
                            Exametazime, per                        
                            dose                      3.8       0.2       180

                                                                          95% 
                                        95% confidence             confidence 
                                           interval of            interval of 
Total number CMS payment     Average    the average     Median  the median 
             of    rate for    purchase       purchase   purchase    purchase 
     hospitalsb   2005c ($) priced  ($)     pricee ($) pricef ($)  pricee ($) 
                                                                      75.58 - 
          2,477      106.32       75.15  73.24 - 77.06      76.47       77.85 
                                                                      66.23 - 
            964      104.58       70.70  67.92 - 73.48      67.59       70.98 
                                              263.24 -               261.83 - 
            687      221.11      287.90         312.55     272.80      308.52 
                                           19,498.98 -            19,459.55 - 
            130   20,948.25   19,614.96      19,730.95  19,516.70   19,565.02 
                                                                      15.06 - 
          1,199       18.29       17.18  16.32 - 18.05      15.49       17.06 
                                                                      27.56 - 
          1,655       31.13       27.40  26.47 - 28.34      27.58       27.60 
                                            1,760.80 -             1,703.46 - 
            262    1,915.23    1,801.12       1,841.43   1,841.23    1,860.22 
                                            1,198.35 -             1,395.49 - 
            666    1,079.00    1,279.55       1,360.76   1,423.87    1,437.61 
                                              358.29 -               379.90 - 
            773      778.13      455.59         552.89     456.30      523.95 

Sources: GAO survey and CMS.

Notes: mCi = millicurie, ml = milliliter

aMedicare spending is for the period January 1, 2004, through September
30, 2004. The percentage of Medicare spending is based on all SCODs-both
drugs and radiopharmaceuticals.

bThis estimate of the total number of hospitals in the population is based
on our sample.

cThis is the payment rate specified for each HCPCS for 2005. It
incorporates CMS's April 2005 update.

dThis price is based on data provided by the hospitals in our survey and
does not reflect delivery fees or any other ancillary costs associated
with purchasing or administering this product. We asked hospitals to
report prices for drugs purchased from July 1, 2003, through June 30,
2004. We weighted the prices by the volume purchased as well as by the
sample weights.

eThe confidence interval measures the precision of the estimate. The
narrower the interval, the greater the precision.

fThe median purchase price is the midpoint of all prices reported by
hospitals in our sample. This price does not reflect delivery fees or any
other ancillary costs associated with purchasing or administering this
product. Half of the prices reported by hospitals are above the median and
half are below. The median is weighted by volume purchased and by hospital
sample weights.

gThe billing unit of measure for Q3005, Technetium Tc 99m Mertiatide, is
per mCi. The per mCi purchase price reported is based on purchase prices
for two commonly reported dose sizes, 5 mCi and 10 mCi. Since in our data
the 5 mCi dose is more common than the 10 mCi dose and the purchase price
of a 5 mCi dose and of a 10 mCi dose were similar, we treated a 10 mCi
dose as if it were a 5 mCi dose.

hThe billing unit of measure for Q3008, Indium In 111 Pentetreotide, is
per 3 mCi. The per mCi purchase price reported is based on purchase prices
for two commonly reported dose sizes, 3 mCi and 6 mCi. Since a 3 mCi dose
is the billing unit specified by CMS for Q3008 and since in our data the
purchase price of a 3 mCi dose and of a 6 mCi dose varied relatively
little, we treated a 6 mCi dose as if it were a 3 mCi dose.

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


Appendix V: GAO Contact and Staff Acknowledgments

                                  GAO Contact

A. Bruce Steinwald, (202) 512-7119 or [email protected]

                                Acknowledgments

Phyllis Thorburn, Assistant Director; Hannah Fein; Dae Park; Jonathan
Ratner; and Thomas Walke made key contributions to this report.

(290469)

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www.gao.gov/cgi-bin/getrpt? GAO-06-372 .

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Highlights of GAO-06-372 , a report to congressional committees

April 2006

MEDICARE HOSPITAL PHARMACEUTICALS

Survey Shows Price Variation and Highlights Data Collection Lessons and
Outpatient Rate-Setting Challenges for CMS

In 2003, the Medicare Modernization Act required the Centers for Medicare
& Medicaid Services (CMS) to establish payment rates for a set of new
pharmaceutical products-drugs and radiopharmaceuticals-provided to
beneficiaries in a hospital outpatient setting. These products were
classified for payment purposes as specified covered outpatient drugs
(SCOD). The legislation directed CMS to set 2006 Medicare payment rates
for SCODs equal to hospitals' average acquisition costs and included
requirements for GAO. As directed, GAO surveyed hospitals and issued two
reports, providing information to use in setting 2006 SCOD rates. To
address other requirements in the law, this report analyzes SCOD price
variation across hospitals, advises CMS on future surveys it might
undertake, and examines both lessons from the GAO survey and future
challenges facing CMS.

What GAO Recommends

GAO recommends that the Secretary of Health and Human Services seek to
ensure that CMS's SCOD payment rates are based on sufficiently reliable
data by (1) validating data collected on drug prices and (2) basing
payment rates for each radiopharmaceutical SCOD on the price of a
ready-to-use unit dose. Although expressing some reservations,
particularly concerning the burden of data collection, HHS agreed to
consider GAO's recommendations.

Analyzing pharmaceutical price data collected from its 2004 survey of
hospitals, GAO found that prices hospitals paid for SCOD products varied
across hospitals. Certain factors-namely, whether the hospital had a major
teaching program or not, was in an urban or rural area, and had a large or
small hospital outpatient department-were associated with whether
hospitals paid higher or lower prices for SCOD products. Major teaching
hospitals paid prices that were an estimated 3.2 percent lower than those
paid by nonteaching hospitals for drug SCODs; rural hospitals paid prices
an estimated 4.4 percent higher than those paid by urban hospitals for
radiopharmaceutical SCODs; and large hospitals paid prices an estimated
1.4 percent lower than those paid by small hospitals for drug SCODs and
3.1 percent lower for radiopharmaceutical SCODs. Combining these factors,
GAO found that large, urban, major teaching hospitals-compared with other
hospitals-generally paid lower prices, on average, for all SCOD products.

From conducting its hospital survey, GAO learned a key lesson that CMS
could use in the future: such a survey would not be practical for
collecting the data needed to set and update SCOD rates routinely but
would be useful for validating, on occasion, CMS's rate-setting data.
GAO's survey produced accurate hospital drug price data, but it also
created a considerable burden for hospitals as the data suppliers and
considerable costs for GAO as the data collector. Nonetheless, the benefit
of collecting actual prices paid by hospitals could make such surveys
advantageous for occasionally validating CMS's proxy for SCODs' average
acquisition costs--the average sales price (ASP) data that manufacturers
report.

CMS will face important challenges as it seeks to obtain accurate data on
hospitals' acquisition costs for drug and radiopharmaceutical SCODs.

           o  Regarding drugs, CMS lacks the detail on manufacturers' ASP
           data needed to determine if rates developed from these data are
           appropriate for hospitals. Manufacturers report ASP as a single
           price paid by all purchasers, making it impossible to distinguish
           the price paid by hospitals alone. CMS instructs manufacturers to
           report ASP net of rebates but does not specify how to allocate
           individual product rebates when several products are purchased.
           o  Regarding radiopharmaceuticals, GAO found that the diversity of
           forms in which they can be purchased-ready-to-use unit doses,
           multidoses, or separately purchased radioactive and
           non-radioactive substances-complicates CMS's efforts to select a
           data source that can provide reasonably accurate price data
           efficiently. Efficiency as well as accuracy is a factor in
           selecting a data source because radiopharmaceuticals account for
           only 1.5 percent of Medicare hospital outpatient spending. GAO's
           experience suggests that the best option available to CMS, in
           terms of accuracy and efficiency, is to collect price data on
           radiopharmaceuticals purchased in ready-to-use unit doses, the
           form in which an estimated three-quarters of hospitals purchase
           these products.
*** End of document. ***