	Background

CMS calculates payment rates for each Part B drug with information on  price data that manufacturers report quarterly to the agency. 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. 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. 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. 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. 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. This bundle may  include more than one drug or a mixture of drugs and other products, such  as bandages and surgical gloves. As a result, CMS lacks  the detail it needs to validate the reasonableness of the data underlying the  reported prices. 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. 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. 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 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. Lacking detail on the components of ASP, CMS is not well-positioned to  confirm ASP’s accuracy. 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. Equally important is the  ability to evaluate the appropriateness of Medicare’s ASP-based rate for all  providers of Part B drugs over time.
Why GAO Did This Study

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

What GAO Found

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.