The Medicare DME fee schedule payment rate for a device  is based on either the manufacturer’s retail price or historic reasonable  Medicare charges, which CMS considers equivalent measures. MMA  provided for a 0 percent annual update for most Medicare DME fee  schedule payment rates from 2004 through 2008. Manufacturers of class III devices pay higher FDA user fees for review of  their devices, because of the more complex FDA review required prior to  marketing, than do manufacturers of class II devices. According to FDA  data, compared to class II manufacturers, class III manufacturers have a  longer period before approval during the FDA application process, which  lengthens the time before they can market their devices and begin  receiving revenue. FDA requires that manufacturers submit clinical data  for class III devices, but only occasionally requires the same for class II  devices. However, class II manufacturers also  stated that they incur substantial premarketing costs related to other  research and development. Specifically,  manufacturers of class III devices subject to this review pay the FDA user  fee for PMA, which in 2005 was $239,237 for each PMA. Because we did not  evaluate proprietary data for other premarketing research and  development costs, we were unable to determine whether a difference in  other premarketing research and development costs exists between class  III and class II manufacturers. DME Fee Schedule Rate-Setting Methodology Accounts for Premarketing Costs of Class II and III Devices in a Consistent Manner

The CMS rate-setting methodology for Medicare’s DME fee schedule  accounts for the premarketing costs of class II and class III devices in a  consistent manner. Manufacturers of class III devices we spoke with, whose devices  accounted for over 96 percent of class III DME payments in 2004, stated  that when setting their retail prices, they take into account the  premarketing costs of complying with federal agencies’ requirements,  including the costs of collecting clinical data, and the costs of research  and development. In addition, for these devices, for 2007, MMA provided for a  payment update to be determined by the Secretary of Health and Human  Services, and for 2008, a payment update equal to the annual percentage  increase in the CPI-U. From 2004 through 2008, for class II devices,  however, MMA provided for a 0 percent payment update. Manufacturers of class III devices, with limited exceptions, have higher  premarketing costs than manufacturers of class II devices, specifically,  higher costs related to FDA user fees and submission of clinical data. Concerning comments about the class II manufacturers we interviewed, as  noted in the draft report, our conclusion that class III devices have higher  premarketing costs than do manufacturers of class II devices is based on  FDA requirements and FDA data that apply to class III and class II  manufacturers and not on information obtained from class III and class II  manufacturers. Two class III  manufacturers we spoke with volunteered that they take these labor costs  into account when setting retail prices prior to the device going to market. We interviewed  the four manufacturers of osteogenesis stimulators and one manufacturer  of both implantable infusion pumps and automatic external defibrillators,  all class III medical devices, about the types of costs they incur in  producing the devices, including FDA fees for device review and the costs  of research and development, both for any clinical data the manufacturer  is required to submit and for other research and development costs, such  as labor costs related to designing a device.
Why GAO Did This Study

Medicare fee schedule payments for durable medical equipment (DME) that the Food and Drug Administration (FDA) regulates as class III devices, those that pose the greatest potential risk, increased by 215 percent from 2001 through 2004. From 2004 through 2006, and for 2008, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) provided for a payment update for class III DME equal to the increase in the consumer price index for all urban consumers (CPI-U). For 2007, MMA requires the Secretary of Health and Human Services to determine the payment update. MMA also requires that other DME receive a 0 percent update from 2004 through 2008. MMA directed GAO to report on an appropriate payment update for 2007 and 2008 for class III DME. In this report, GAO (1) examined whether class III devices have unique premarketing costs and (2) determined how the fee schedule rate-setting methodology accounts for the premarketing costs of such devices.

What GAO Found

GAO found that manufacturers of class III devices, with limited exceptions, have higher premarketing costs than do manufacturers of class II devices that are similar to class III devices. Premarketing costs consist of FDA user fees and research and development costs, both for any clinical data the manufacturer is required to submit and for other research and development costs. Manufacturers of class III devices pay higher FDA user fees, because of the more complex FDA review required prior to marketing, than do manufacturers of class II devices. Specifically, the user fee for class III devices subject to this review in 2005 was $239,237, while the fee for class II devices in 2005 was $3,502. The FDA application and approval process takes longer for class III manufacturers, which lengthens the time it takes before they can market their devices and begin receiving revenue. FDA requires that manufacturers submit clinical data for class III devices, but only occasionally requires the same for class II devices. In interviews with GAO, class III manufacturers stated that they incur higher premarketing costs for other research and development, such as labor costs related to designing a device, compared to manufacturers of class II devices. Class II manufacturers also told GAO that they incur substantial costs related to other research and development. GAO did not evaluate proprietary data to determine whether a difference in other premarketing research and development costs exists between the two types of manufacturers. GAO found that the Medicare DME fee schedule rate-setting methodology accounts for the respective premarketing costs of class II and class III devices in a consistent manner. Regardless of device classification, the Medicare DME fee schedule payment rate for a device is based on either the manufacturer's retail price or historic reasonable Medicare charges, which the Centers for Medicare & Medicaid Services considers equivalent measures. In interviews with GAO, manufacturers of class III devices stated that when setting their retail prices, they take into account the premarketing costs of complying with federal regulatory requirements, including the costs of required clinical data collection and other research and development. These manufacturers accounted for over 96 percent of class III DME payments in 2004. Manufacturers of class II devices also stated that they take into account these costs when setting retail prices.