-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-06-971T
TITLE: Medicare Part B Drugs: CMS Data Source for Setting
Payments Is Practical but Concerns Remain
DATE: 07/13/2006
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GAO-06-971T
* Background
* ASP Is a Price Measure Established in Law and Calculated wit
* Varying Payment Arrangements Affect the Price Purchasers Pay
* ASP Is a Practical Payment Approach, Given the Limitations o
* CMS Lacks Information on ASP Necessary to Monitor Payment Ra
* Concluding Observations
* Contact and Staff 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
Testimony
Before the Subcommittee on Health, Committee on Ways and Means, House of
Representatives
United States Government Accountability Office
GAO
For Release on Delivery Expected at 1:00 p.m. EDT
Thursday, July 13, 2006
MEDICARE PART B DRUGS
CMS Data Source for Setting Payments Is Practical but Concerns Remain
Statement of A. Bruce Steinwald
Director, Health Care
GAO-06-971T
Madam Chairman and Members of the Subcommittee:
I am pleased to be here as you discuss Medicare's method of paying for
outpatient drugs covered under the program's Part B, the part of Medicare
that covers a broad range of medical services, including physician,
laboratory, and hospital outpatient department (HOPD) services and durable
medical equipment (DME). Part B-covered drugs are typically administered
by a physician or other medical professional rather than by patients
themselves. In contrast, drugs covered under the new prescription drug
benefit, known as Part D, are generally self-administered by patients.1 In
2005, Medicare paid more than $9 billion for Part B drugs furnished in
conjunction with physician services, HOPD services, dialysis services, and
services performed using DME, such as nebulizers.2, 3
Until 2005, Medicare's method of paying physicians for Part B drugs was
based on the drug's average wholesale price (AWP), which, despite its
name, was neither an average nor what wholesalers charged.4 It was a price
that manufacturers derived using their own criteria; there were no
requirements or conventions that AWP reflect the price of an actual sale
of drugs by a manufacturer.5 An analysis we conducted in 2001 on Part B
drug prices found that Medicare's AWP-based payments often far exceeded
market prices that were widely available to health care providers.6
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) mandated that, beginning in 2005, payments for
physician-administered drugs be based on the drug's average sales price
(ASP)-that is, an average, calculated from price and volume data reported
by drug manufacturers, of sales to all U.S. purchasers.7 The law directed
that ASPs be net of rebates and other price concessions and that 2005
payments to physicians for these drugs be set at 106 percent of ASP.8
1Medicare Part A covers inpatient hospital services; Medicare Part C,
known as Medicare Advantage, covers beneficiaries enrolled in managed care
plans.
2In this testimony, we will refer to physicians, hospital outpatient
services, dialysis services, and durable medical equipment suppliers
collectively as providers.
3A nebulizer is a device driven by a compressed air machine. It allows the
patient to inhale medicine in the form of a mist.
4Until 2004, Medicare paid physicians 95 percent of AWP. Legislation
changed Medicare's payment to 85 percent of AWP in 2004.
5Manufacturers reported AWPs to organizations that published them in drug
price compendia, and the Medicare claims administration contractors that
pay claims for Part B drugs based physicians' payments on the published
AWPs.
6GAO, Medicare: Payments for Covered Outpatient Drugs Exceed Providers'
Costs, GAO-01-1118 (Washington, D.C.: Sept. 21, 2001).
The MMA took a different approach to setting rates for a subset of
Medicare Part B drugs delivered in the HOPD setting. Prior to the MMA,
Medicare paid HOPDs for Part B drugs based on hospitals' 1996 median costs
for these drugs. In response to concerns that payments would not reflect
the cost of newly introduced pharmaceutical products-such as those used to
treat cancer or rare blood disorders-1999 legislation authorized augmented
payments for these drugs on a temporary basis.9 Subsequently, the MMA
defined a new payment category for these drugs called specified covered
outpatient drugs (SCOD). The MMA required the Centers for Medicare &
Medicaid Services (CMS) in the Department of Health and Human Services
(HHS) to set rates for this subset of Part B drugs. Specifically, it
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 of rebates. Subsequently, CMS selected ASP as the basis to
pay for SCODs provided at HOPDs.
In several related requirements, the MMA directed us to provide
information on SCOD costs and CMS's proposed rates. Among them was a
requirement to conduct a survey of a large sample of hospitals to obtain
data on their acquisition costs for 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.10 We were also
required to evaluate CMS's proposed rates for SCODs, comment on their
appropriateness in light of the survey we conducted, and advise on future
data collection efforts by CMS based on our survey experience.11 We issued
reports in 2005 and 2006 in response to these requirements, and my remarks
about ASP are based on that work. Specifically, my remarks today will
focus on (1) ASP as a practical and timely data source for use in setting
Medicare Part B drug payment rates and (2) components of ASP that are
currently unknown and implications for Medicare rate-setting. Our work was
conducted in accordance with generally accepted government auditing
standards.
7Certain prices were excluded, including prices paid to federal purchasers
and prices for drugs furnished under the Part D program.
8The term rebates refers to price concessions given to purchasers by
manufacturers subsequent to receipt of the product.
9See the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of
1999, Pub. L. No. 106-113, app. F, S: 201 (b), 113 Stat. 1501A-321,
1501A-337-1501A-339.
10We provided information from this survey in two reports-one on drugs and
another on radiopharmaceuticals. See GAO, 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). The Secretary of HHS
considered the price data we provided but elected not to use these data as
the basis for 2006 rates.
In summary, using an ASP-based method to set payment rates for Part B
drugs is a practical approach compared with methods based on alternative
data sources, for several reasons. First, ASP is based on actual
transactions and is a better proxy for health care providers' acquisition
costs than AWP or health care providers' charges included on claims for
payment, neither of which is based on transaction data. Second, ASPs,
which manufacturers update quarterly, offer information that is relatively
timely for rate-setting purposes. In comparison, rates for other Medicare
payment systems are based on data that may be at least 2 years old.
Finally, using manufacturers as the data source for prices is preferable
to collecting such data from health care providers, as the manufacturers
have data systems in place to track prices, whereas health care providers
generally do not have systems designed for that purpose.
Despite these advantages, CMS lacks certain information about the
composition of ASP that prompted us, in our report commenting on CMS's
proposed 2006 SCOD rates, to call ASP "a black box."12 Significantly, CMS
lacks sufficient information on how manufacturers allocate rebates to
individual drugs sold in combination with other drugs or other products;
this is important, as CMS does not have the detail it needs to validate
the reasonableness of the data underlying the reported prices. In
addition, CMS does not instruct manufacturers to provide a breakdown of
price and volume data by purchaser type-that is, by physicians, hospitals,
other health care providers, and wholesalers, which purchase drugs for
resale to health care providers. As a result, CMS cannot determine how
well average price data represent acquisition costs for different
purchaser types. In particular, to the extent that some of the sales are
to wholesalers that may subsequently mark up the manufacturer's price in
their sales to health care providers, the ASP's representation of
providers' acquisition costs is weakened. Additionally, a sufficient
empirical foundation does not exist for setting the payment rate for
Medicare Part B drugs at 6 percent above ASP, further complicating efforts
to determine the appropriateness of the rate. Given these information
gaps, CMS is not well-positioned to validate the accuracy or
appropriateness of its ASP-based payment rates.
11We provided our comments on the proposed rates in GAO, 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). We provided information on our data collection experience
in GAO, Medicare Hospital Pharmaceuticals: Survey Shows Price Variation
and Highlights Data Collection Lessons and Outpatient Rate-Setting
Challenges for CMS, GAO-06-372 (Washington, D.C.: Apr. 28, 2006).
12 GAO-06-17R .
Background
CMS calculates payment rates for each Part B drug with information on
price data that manufacturers report quarterly to the agency. In reporting
their price data to CMS, manufacturers are required to account for price
concessions, such as discounts and rebates, which can affect the amount
health care providers actually pay for a drug.
ASP Is a Price Measure Established in Law and Calculated with Manufacturers'
Data
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; charge-backs and
rebates. Certain prices, including prices paid by federal purchasers, are
excluded, as are prices for drugs furnished under Medicare Part D. CMS
instructs pharmaceutical manufacturers to report data to CMS-within 30
days after the end of each quarter-on the average sale price for each Part
B drug sold by the manufacturer. For drugs sold at different strengths and
package sizes, manufacturers are required to report price and volume data
for each product, after accounting for price concessions. CMS then
aggregates the manufacturer-reported ASPs to calculate a national ASP for
each drug category.13
Varying Payment Arrangements Affect the Price Purchasers Pay at the Time of Sale
Common drug purchasing arrangements can substantially affect the amount
health care providers actually pay for a drug. Physicians and hospitals
may belong to group purchasing organizations (GPO) that negotiate prices
with wholesalers or manufacturers on behalf of GPO members. GPOs may
negotiate different prices for different purchasers, such as physicians,
suppliers of DME, or hospitals. In addition, health care providers can
purchase covered outpatient drugs from general or specialty pharmaceutical
wholesalers or can have direct purchase agreements with manufacturers. In
these arrangements, providers may benefit from discounts, rebates, and
charge-backs that reduce the actual costs providers incur. Discounts are
applied at the time of purchase, while rebates are paid by manufacturers
some time after the purchase. Rebates may be based on the number of
several different products purchased over an extended period of time.
Under a charge-back arrangement, the provider negotiates a price with the
manufacturer that is lower than the price the wholesaler normally charges
for the product, and the provider pays the wholesaler the negotiated
price. The manufacturer then pays the wholesaler the difference between
the wholesale price and the price negotiated between the manufacturer and
the provider.
13Manufacturers' reported price data are based on the Food and Drug
Administration's (FDA) system of National Drug Codes, while the ASP that
CMS calculates for each drug is based on the agency's Healthcare Common
Procedure Coding System, which uses categories that are broader than the
FDA's coding system.
ASP Is a Practical Payment Approach, Given the Limitations of Other Data Sources
Available for Rate-Setting
Using an ASP-based method to set prices for Medicare Part B drugs is a
practical approach compared with alternative data sources for several
reasons. First, unlike AWP, ASP is based on actual transactions, making it
a useful proxy for health care providers' acquisition costs. Whereas AWPs
were list prices developed by manufacturers and not required to be related
to market prices that health care providers paid for products, ASPs are
based on actual sales to purchasers. For similar reasons, payments based
on ASPs are preferable to those based on providers' charges, as charges
are made up of costs and mark-ups, and mark-ups vary widely across
providers, making estimates of the average costs of drugs across all
providers wide-ranging and insufficiently precise. In addition, basing
payments on charges does not offer any incentives for health care
providers to minimize their acquisition costs.
Second, ASPs offer relatively timely information for rate-setting
purposes. Manufacturers have 30 days following the completion of each
quarter to report new price data to CMS. Before the end of the quarter in
which manufacturers report prices, CMS posts the updated Part B drug
payment rates, to take effect the first day of the next quarter. Thus, the
rates set are based on data from manufacturers that are, on average, about
6 months old. In comparison, rates for other Medicare payment systems are
based on data that may be at least 2 years old.
Third, acquiring price data from manufacturers is preferable to surveying
health care providers, as the manufacturers have data systems in place
that track prices, whereas the latter generally do not have systems
designed for that purpose. In our survey of 1,157 hospitals, we found that
providing data on drug acquisition costs made substantial demands on
hospitals' information systems and staff. In some cases, hospitals had to
collect the data manually, provide us with copies of paper invoices, or
develop new data processing to retrieve the detailed price data needed
from their automated information systems.14 Hospital officials 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. Officials told us their data collection difficulties were
particularly pronounced regarding information on manufacturers' rebates,
which affect a drug's net acquisition cost.15 In addition, we incurred
considerable costs as data collectors, signaling the difficulties that CMS
would face should it implement similar surveys of hospitals in the future.
CMS Lacks Information on ASP Necessary to Monitor Payment Rate Accuracy and
Appropriateness
Despite its practicality as a data source, ASP remains a "black box." That
is, CMS lacks detailed information about the components of manufacturers'
reported price data-namely, methods manufacturers use to allocate rebates
to individual drugs and the sales prices paid by type of purchaser.
Furthermore, for all but SCODs provided in the HOPD setting, no empirical
support exists for setting rates at 6 percent above ASP, and questions
remain about setting SCOD payment rates at ASP+6 percent. These
information gaps make it difficult to ensure that manufacturers' reported
price data are accurate and that Medicare's ASP rates developed from this
information are appropriate.
Significantly, CMS has little information about the method a manufacturer
uses to allocate rebates when calculating an ASP for a drug sold with
other products. Unlike discounts, which are deducted at the point of
purchase, rebates are price concessions given by manufacturers subsequent
to the purchaser's receipt of the product. In our survey of hospitals'
purchase prices for SCODs, we found that hospitals received rebate
payments following the receipt of some of their drug purchases but often
could not determine rebate amounts. Calculating a rebate amount is
complicated by the fact that, in some cases, rebates are based on a
purchaser's volume of a set, or bundle, of products defined by the
manufacturer. This bundle may include more than one drug or a mixture of
drugs and other products, such as bandages and surgical gloves. Given the
variation in manufacturers' purchasing and rebate arrangements, the
allocation of rebates for a product is not likely to be the same across
all manufacturers. CMS does not specifically instruct manufacturers to
provide information on their rebate allocation methods when they report
ASPs. As a result, CMS lacks the detail it needs to validate the
reasonableness of the data underlying the reported prices.
14The burden was more taxing for some hospitals than for others. Many
hospitals were able to rely on price data downloaded from their drug
wholesalers' information systems.
15Typically, hospitals did not systematically track all manufacturers'
rebates on drug purchases, although nearly 60 percent of hospitals
reported receiving one or more rebates.
In addition, CMS does not require manufacturers to report details on price
data by purchaser type. Because a manufacturer's ASP is a composite figure
representing prices paid by various purchasers, including both health care
providers and wholesalers, CMS cannot distinguish prices paid by purchaser
type-for example, hospitals compared with other institutional providers,
physicians, and wholesalers. In particular, to the extent that some of the
sales are to wholesalers that may subsequently mark up the manufacturer's
price in their sales to health care providers, the ASP's representation of
providers' acquisition costs is weakened. Thus, distinguishing prices by
purchaser type is important, as a central tenet of Medicare payment policy
is to pay enough to ensure beneficiary access to services while paying pay
no more than the cost of providing a service incurred by an efficient
provider. In our 2005 report on Medicare's proposed 2006 SCOD payment
rates, we recommended that CMS collect information on price data by
purchaser type to validate the reasonableness of ASP as a measure of
hospital acquisition costs.16
Better information on manufacturers' reported prices-for example, the
extent to which a provider type's acquisition costs vary from the
CMS-calculated ASP-would help CMS set rates as accurately as possible. For
most types of providers of Medicare Part B drugs-physicians, dialysis
facilities, and DME suppliers-no empirical support exists for setting
rates at 6 percent above ASP. In the case of HOPDs, a rationale exists
based on an independent data source-our survey of hospital prices-but the
process of developing rates for SCODs was not simple. In commenting on
CMS's proposed 2006 rates to pay for SCODs, we raised questions about
CMS's rationale for proposing rates that were set at 6 percent above
ASP.17 CMS stated in its notice of proposed rulemaking that purchase
prices reported in our survey for the top 53 hospital outpatient drugs,
ranked by expenditures,18 equaled ASP+3 percent on average, and these
purchase prices did not account for rebates that would have lowered the
product's actual cost to the hospital.19 We noted that, logically, for
payment rates to equal acquisition costs, CMS would need to set rates
lower than ASP+3 percent, taking our survey data into account. In effect,
ASP+3 percent was the upper bound of acquisition costs. Consistent with
our reasoning, CMS stated in its notice of proposed rulemaking that
"Inclusion of ... rebates and price concessions in the GAO data would
decrease the GAO prices relative to the ASP prices, suggesting that ASP+6
percent may be an overestimate of hospitals' average acquisition costs."
In its final rule establishing SCOD payment rates, CMS determined that our
survey's purchase prices equaled ASP+4 percent, on average, based on an
analysis of data more recent than CMS had first used to determine the
value of our purchase prices. CMS set the rate in the final rule at ASP+6
percent, stating that this rate covered both acquisition costs and
handling costs.20 We have not evaluated the reasonableness of the payment
rate established in the final rule.
16 GAO-06-17R .
17 GAO-06-17R .
Lacking detail on the components of ASP, CMS is not well-positioned to
confirm ASP's accuracy. In addition, CMS has no procedures to validate the
data it obtains from manufacturers by an independent source. In our 2006
report on lessons learned from our hospital survey,21 we noted several
options available to CMS to confirm the appropriateness of its rates as
approximating health care providers' drug acquisition costs. Specifically,
we noted that CMS could, on an occasional basis, conduct a survey of
providers, similar to ours but streamlined in design; audit manufacturers'
price submissions; or examine proprietary data the agency considers
reliable for validation purposes. HHS agreed to consider our
recommendation, stating that it would continue to analyze the best
approach for setting payment rates for drugs.
18These drugs accounted for 95 percent of Medicare spending on all SCODs
in the first 9 months of 2004.
19The purchase prices hospitals reported to us took account of discounts
but not rebates.
20Handling costs include providers' expenses associated with storing,
preparing, and disposing of drugs.
21 GAO-06-372 .
Concluding Observations
Because ASP is based on actual transaction data, is relatively timely, and
is administratively efficient for CMS and health care providers, we affirm
the practicality of the ASP-based method for setting Part B drug payment
rates. However, we remain concerned that CMS does not have sufficient
information about ASP to ensure the accuracy and appropriateness of the
rates. To verify the accuracy of price data that manufacturers submit to
the agency, details are needed-such as how manufacturers account for
rebates and other price concessions and how they identify the purchase
prices of products acquired through wholesalers. Equally important is the
ability to evaluate the appropriateness of Medicare's ASP-based rate for
all providers of Part B drugs over time. As we recommended in our April
2006 report, CMS should, on an occasional basis, validate ASP against an
independent source of price data to ensure the appropriateness of
ASP-based rates.
Madam Chairman, this concludes my prepared statement. I will be happy to
answer any questions you or the other Subcommittee Members may have.
Contact and Staff Acknowledgments
For further information regarding this testimony, please contact A. Bruce
Steinwald at (202) 512-7101 or [email protected] . Phyllis Thorburn,
Assistant Director; Hannah Fein; and Jenny Grover contributed to this
statement. Contact points for our Offices of Congressional Relations and
Public Affairs may be found on the last page of this statement.
(290561)
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www.gao.gov/cgi-bin/getrpt? GAO-06-971T .
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Highlights of GAO-06-971T , a testimony before the Subcommittee on Health,
Committee on Ways and Means, House of Representatives
July 13,2006
MEDICARE PART B DRUGS
CMS Data Source for Setting Payments Is Practical but Concerns Remain
In 2005, the Centers for Medicare & Medicaid Services (CMS), as required
by law, began paying for physician-administered Part B drugs using
information on the drugs' average sales price (ASP). Subsequently, CMS
selected ASP as the basis to pay for a subset of Part B drugs provided at
hospital outpatient departments. To calculate ASP, CMS uses price data
submitted quarterly by manufacturers. GAO was asked to discuss its work on
Medicare payment rates for Part B drugs. This testimony is based on
several GAO products:
o Medicare Hospital Pharmaceuticals: Survey Shows Price Variation
and Highlights Data Collection Lessons and Outpatient Rate-Setting
Challenges for CMS, GAO-06-372, Apr. 28, 2006.
o Medicare: Comments on CMS Proposed 2006 Rates for Specified
Covered Outpatient Drugs and Radiopharmaceuticals Used in
Hospitals, GAO-06-17R, Oct. 31, 2005.
o Medicare: Payments for Covered Outpatient Drugs Exceed
Providers' Costs, GAO-01-1118, Sept. 21, 2001.
Specifically, GAO's statement discusses (1) ASP as a practical and timely
data source for use in setting Medicare Part B drug payment rates and (2)
components of ASP that are currently unknown and implications for Medicare
rate-setting.
In summary, using an ASP-based method to set payment rates for Part B
drugs is a practical approach compared with methods based on alternative
data sources, for several reasons. First, ASP is based on actual
transactions and is a better proxy for providers' acquisition costs than
average wholesale price or providers' charges included on claims for
payment, neither of which is based on transaction data. Second, ASPs,
which manufacturers update quarterly, offer information that is relatively
timely for rate-setting purposes. In comparison, rates for other Medicare
payment systems are based on data that may be at least 2 years old.
Finally, using manufacturers as the data source for prices is preferable
to collecting such data from health care providers, as the manufacturers
have data systems in place to track prices, whereas health care providers
generally do not have systems designed for that purpose.
CMS lacks certain information about the composition of ASP that prompted
GAO, in commenting on CMS's 2006 proposed payment rates for a subset of
Part B drugs, to call ASP "a black box." Significantly, CMS lacks
sufficient information on how manufacturers allocate rebates to individual
drugs sold in combination with other drugs or other products; this is
important, as CMS does not have the detail it needs to validate the
reasonableness of the data underlying the reported prices. In addition,
CMS does not instruct manufacturers to provide a breakdown of price and
volume data by purchaser type-that is, by physicians, hospitals, other
health providers, and wholesalers, which purchase drugs for resale to
health care providers. As a result, CMS cannot determine how well average
price data represent acquisition costs for different purchaser types. In
particular, to the extent that some of the sales are to wholesalers that
subsequently mark up the manufacturer's price in their sales to providers,
the ASP's representation of providers' acquisition costs is weakened.
Additionally, a sufficient empirical foundation does not exist for setting
the payment rate for Medicare Part B drugs at 6 percent above ASP, further
complicating efforts to determine the appropriateness of the rate. Given
these information gaps, CMS is not well-positioned to validate the
accuracy or appropriateness of its ASP-based payment rates.
*** End of document. ***