oversight

Medicare: Payment for Blood Clotting Factor Exceeds Providers' Acquisition Cost

Published by the Government Accountability Office on 2003-01-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

               United States General Accounting Office

GAO            Report to the Ranking Minority
               Member, Subcommittee on Health,
               Committee on Ways and Means, House
               of Representatives

January 2003
               MEDICARE

               Payment for Blood
               Clotting Factor
               Exceeds Providers’
               Acquisition Cost




GAO-03-184
                                               January 2003


                                               MEDICARE

                                               Payment for Blood Clotting Factor
Highlights of GAO-03-184, a report to          Exceeds Providers’ Acquisition Cost
Ranking Minority Member, Subcommittee
on Health, Committee on Ways and
Means, House of Representatives




In 2001, Medicare’s outpatient                 Medicare’s payment for clotting factor, like other outpatient drugs, is 95
expenditures for blood clotting                percent of the average wholesale price (AWP), a price established for each
factor used to treat the estimated             drug by its manufacturer. Medicare’s payment is substantially more than the
1,100 beneficiaries with hemophilia            actual acquisition costs of hemophilia treatment centers (HTC) and
totaled about $105 million, or more            homecare companies, which provide a majority of Medicare beneficiaries
than 2 percent of total Medicare
spending on outpatient drugs.
                                               with clotting factor. Most HTCs obtain prices from manufacturers that are
Earlier work by GAO indicated that             35 to 48 percent below AWP by participating in a federal program that
Medicare’s payment for certain                 guarantees them low prices. Homecare companies obtain prices that range
outpatient drugs is substantially              from 22 to 40 percent below AWP.
higher than providers’ acquisition
costs. Concerns have been raised               Providers incur additional costs associated with delivering clotting factor
about Medicare’s payment for                   that are not separately reimbursed by Medicare. GAO estimates that these
blood clotting factor. GAO was                 additional costs in 2000 and 2001 ranged from $0.03 to $0.08 per unit sold by
asked to compare provider costs of             HTCs. (Hemophilia patients use an average of 78,000 units of clotting factor
purchasing clotting factor with                annually.) GAO did not receive enough data from homecare companies to
Medicare’s payment for it and to               estimate their costs. Delivery costs are generated in inventory management,
identify costs to providers
associated with delivering clotting
                                               specialized refrigerated storage, shipping, and the provision of ancillary
factor.                                        supplies such as needles, syringes, and tourniquets to patients.



GAO recommends that the
Administrator of the Centers for
Medicare & Medicaid Services
(CMS) establish Medicare payment
levels for clotting factor that are
more closely related to providers’
acquisition costs and then establish
a separate payment for the cost of
delivering clotting factor to
Medicare beneficiaries. The
Department of Health and Human
Services (HHS) agreed with our
recommendations.




www.gao.gov/cgi-bin/getrpt?GAO-03-184.

To view the full report, including the scope
and methodology, click on the link above.
For more information, contact Laura A.
Dummit at (202) 512-7119.
Contents


Letter                                                                                       1
              Results in Brief                                                               3
              Background                                                                     4
              Small Number of Providers Buy Clotting Factor Directly from
                Manufacturers                                                                7
              Providers Obtain Clotting Factor Products for Substantially Less
                than Medicare’s Payment                                                    10
              Providers Incur Costs Associated with Delivering Clotting Factor
                to Medicare Beneficiaries That Are Not Separately Reimbursed               11
              Conclusions                                                                  13
              Recommendations for Executive Action                                         14
              Agency Comments                                                              14

Appendix I    Scope and Methodology                                                        16



Appendix II   Comments from the Department of Health and
              Human Services                                                               18




Table
              Table 1: Disease Type and Disease Severity for the Total
                       Hemophilia Population and the Medicare Subpopulation                  7


Figure
              Figure 1: Participants in the Clotting Factor Market                           9




              Page i                           GAO-03-184 Medicare Payment for Clotting Factor
Abbreviations

AMP         average manufacturer price
AWP         average wholesale price
CDC         Centers for Disease Control and Prevention
CMS         Centers for Medicare & Medicaid Services
HHS         Department of Health and Human Services
HIV         human immunodeficiency virus
HRSA        Health Resources and Services Administration
HTC         hemophilia treatment center
OIG         Office of Inspector General




Page ii                     GAO-03-184 Medicare Payment for Clotting Factor
United States General Accounting Office
Washington, DC 20548




                                   January 10, 2003

                                   The Honorable Pete Stark
                                   Ranking Minority Member
                                   Subcommittee on Health
                                   Committee on Ways and Means
                                   House of Representatives

                                   Dear Mr. Stark:

                                   In 2001, Medicare’s outpatient expenditures for blood clotting factor
                                   totaled about $105 million, or more than 2 percent of total Medicare
                                   spending on all covered outpatient drugs and biologicals.1 Blood clotting
                                   factor is a biological used by persons with hemophilia to prevent
                                   uncontrolled internal bleeding that could result in disability or death.2 The
                                   Centers for Disease Control and Prevention (CDC) estimate that
                                   approximately 18,000 Americans, nearly all male, have hemophilia and
                                   about 1,100 of these individuals are Medicare beneficiaries.

                                   Medicare’s payment for clotting factor, like other outpatient drugs and
                                   biologicals, is 95 percent of the average wholesale price (AWP). Often
                                   described as a “sticker price” or “list price,” AWP is established for each
                                   drug by its manufacturer. Medicare’s AWP-based payment has recently
                                   come under scrutiny. In 2001, we reported that providers were able to
                                   purchase certain drugs at prices significantly less than the payment they
                                   received from Medicare.3 Although providers contended that this
                                   overpayment was necessary to compensate for underpayment for other



                                   1
                                    Under Medicare part B, outpatient prescription drugs and biologicals are covered if they
                                   are not usually self-administered and are provided incident to a physician’s services or if
                                   they are used in conjunction with durable medical equipment. Certain self-administered
                                   drugs and biologicals, such as oral drugs used in association with cancer treatment and
                                   blood clotting factor (and the items related to the administration of such factor), are also
                                   covered.
                                   2
                                    Hemophilia is a deficiency in one of the proteins that causes blood to clot, referred to as a
                                   blood clotting factor. Hereafter, we refer to blood clotting factor as “clotting factor” and
                                   use the term to generally refer to both the deficient proteins and the biological substance
                                   infused for hemophilia treatment.
                                   3
                                   U.S. General Accounting Office, Medicare: Payments for Covered Outpatient Drugs
                                   Exceed Providers’ Cost, GAO-01-1118 (Washington, D.C.: Sept. 21, 2001).



                                   Page 1                                   GAO-03-184 Medicare Payment for Clotting Factor
services, we concluded that Medicare should not rely on potential
overpayments for some services to offset potential inadequate payments
for other services.

The method of delivery of clotting factor has implications for Medicare
payment. Most outpatient drugs covered by Medicare are administered in a
physician’s office. When a beneficiary visits a physician in order to receive
a drug, the physician receives one payment from Medicare for the drug
and another payment through the physician fee schedule for administering
the drug. Clotting factor, however, is generally not administered in a
physician’s office. Medicare pays clotting factor providers, mainly
hemophilia treatment centers (HTC)4 and homecare companies,5 solely for
the drug. These providers generally purchase clotting factor products
directly from the manufacturers, rather than from drug wholesalers, and
deliver them directly to the very small hemophilia population.6

Because clotting factor products were not included in our 2001 report, you
asked us to evaluate whether Medicare’s payment for clotting factor is
higher than its acquisition cost and to identify and describe any aspects of
the production and delivery of clotting factor that may relate to how
Medicare payment should be determined. In this report, we (1) describe
characteristics of the clotting factor delivery system, (2) compare provider
costs of purchasing clotting factor with Medicare’s payment for it, and
(3) identify any costs to providers associated with delivering clotting
factor and furnishing related services to Medicare beneficiaries with
hemophilia.

To conduct this study, we obtained data on the hemophilia population
from CDC. We analyzed the most recent data available from the Health
Resources and Services Administration (HRSA) on HTC clotting factor
acquisition prices obtained through a federal discount program. We also
analyzed data on clotting factor acquisition prices from two large, national



4
 HTCs are federally funded facilities that provide medical care to persons with hemophilia.
Created in 1975 [see Pub. L. No. 94-63, § 606, 89 Stat. 304, 350 (1975)], HTCs are currently
funded by the Health Resources and Services Administration’s Maternal and Child Health
Bureau and CDC.
5
Homecare companies are also known as “specialty pharmacies.”
6
 There are 13 unique clotting factor products used to treat the two most common types of
hemophilia. These products vary by manufacturer, protein composition, and manufacturing
process.




Page 2                                  GAO-03-184 Medicare Payment for Clotting Factor
                   homecare companies. In addition, we analyzed acquisition price data
                   provided to us by an HTC association for seven HTCs that had purchased
                   clotting factor outside the federal discount program. We also analyzed
                   related data on clotting factor prices from the Centers for Medicare &
                   Medicaid Services (CMS), the agency that administers Medicare. We
                   analyzed data on provider delivery costs for four HTCs, which we obtained
                   from a representative of an HTC association, and for two large, national
                   homecare companies, which we contacted directly. We interviewed
                   officials at the Department of Health and Human Services (HHS) Office of
                   Inspector General (OIG), two patient advocacy organizations, four of the
                   six clotting factor manufacturers, two wholesalers, and several additional
                   HTCs and homecare companies. Our work was performed from February
                   through December 2002 in accordance with generally accepted
                   government auditing standards. See appendix I for more detailed
                   discussion of our scope and methodology.


                   The clotting factor market is characterized by a small number of
Results in Brief   manufacturers and providers. The six clotting factor manufacturers sell
                   their products directly to providers, predominantly HTCs and homecare
                   companies. About half of the 137 HTCs can provide clotting factor and
                   related ancillary supplies, such as syringes and bandages, to their patients.
                   Individuals may also obtain clotting factor from homecare companies,
                   which ship drugs and biologicals and related ancillary supplies directly to
                   persons with chronic conditions. Shortages of particular clotting factor
                   products periodically occur. When HTCs and homecare companies need to
                   obtain a clotting factor product outside their typical supply arrangements,
                   such as during a shortage, they may purchase it from certain specialty
                   wholesalers, known as distributors.

                   Provider costs for acquiring clotting factor are significantly below
                   Medicare’s payment, which is 95 percent of AWP. Through a federal drug
                   discount program, HTCs obtain prices from manufacturers that are
                   approximately 35 to 48 percent below AWP. Homecare companies are able
                   to obtain clotting factor at prices 22 to 40 percent below AWP. HTCs and
                   homecare companies do not generally face higher acquisition prices from
                   manufacturers during product shortages.

                   Medicare does not make a separate payment to providers for the costs of
                   delivering clotting factor, which include dispensing costs and furnishing




                   Page 3                           GAO-03-184 Medicare Payment for Clotting Factor
             related ancillary supplies. We estimate that dispensing and ancillary
             supply costs in 2000 and 2001 ranged from approximately $0.03 to $0.08 for
             each unit of clotting factor provided by HTCs.7 We did not receive enough
             data from homecare companies to estimate their costs. Clotting factor’s
             biological properties and complex dosing protocols contribute to
             dispensing costs in the form of inventory management, storage, and
             shipping. In addition, the cost of ancillary supplies that are necessary for
             infusing clotting factor, such as needles, syringes, and tourniquets, is not
             reimbursed by Medicare. While providers may also furnish other services
             for which they are not separately reimbursed, such as patient education
             and community outreach, these services are not Medicare-covered
             benefits, and they are generally targeted to younger patients who are not
             Medicare beneficiaries.

             While Medicare’s payment for clotting factor is high enough to more than
             reimburse both acquisition and delivery costs, we believe that Medicare’s
             overpayment for acquisition costs should not be used to compensate for
             the lack of payment for delivery costs. Therefore, we recommend that the
             Administrator of CMS establish Medicare payment amounts for clotting
             factor delivered on an outpatient basis that are more closely related to
             providers’ acquisition costs. When payments are reduced to reflect costs
             more accurately, the Administrator should establish a separate payment
             for the costs of delivering clotting factor to Medicare beneficiaries. In
             commenting on a draft of this report, HHS agreed with our
             recommendations.


             The two most common types of hemophilia are a deficiency in clotting
Background   factor VIII, hemophilia A, and a deficiency in clotting factor IX, hemophilia
             B. Hemophilia can be mild, moderate, or severe depending on the amount
             of the clotting factor present in the blood. People with severe hemophilia,
             for example, have less than 1 percent of the normal level of clotting factor
             VIII or IX. The level of clotting factor deficiency contributes to the risk
             that a particular bleeding episode poses to an individual. In individuals
             with severe hemophilia, bleeding into the joints and adjoining tissues can
             occur spontaneously, without an actual injury. Persons with mild



             7
              Clotting factor dosage is measured in international units; one international unit is the
             amount of clotting factor contained in one milliliter of normal plasma. The average annual
             use of clotting factor by patients with the most common form of hemophilia, based on CDC
             statistics for 1998, is 78,000 units.




             Page 4                                 GAO-03-184 Medicare Payment for Clotting Factor
                             hemophilia usually experience prolonged bleeding only after surgery or a
                             major trauma, such as a head wound.


Hemophilia Is Treated with   Historically, people with hemophilia relied on high-volume transfusions of
Clotting Factor              whole blood or plasma for treatment. These treatments, however, did not
                             provide enough clotting factor to stop serious bleeding and could be
                             performed only in a medical facility. With the introduction in the 1960s of
                             concentrated clotting factor products that could be infused at home,
                             hemophilia began to be more effectively and conveniently treated.

                             Early clotting factor products were produced from human plasma.
                             Recombinant clotting factor products, which are genetically engineered or
                             cloned, were introduced in the 1990s to reduce the risk of blood-borne
                             infections. New manufacturing processes and safety protocols have also
                             reduced the risk of infections to individuals using plasma clotting factor
                             products. Because recombinant products are not derived from human
                             plasma, they are generally considered the current treatment of choice,
                             although many older individuals continue to use plasma products. There is
                             not enough recombinant clotting factor manufactured to treat all
                             individuals with hemophilia.

                             Both plasma and recombinant clotting factor are biological substances
                             that differ in many respects from conventional, chemically synthesized
                             drugs. For example, biologicals such as clotting factor are derived from
                             living sources, so the concentration and potency of the original source
                             material can vary. Furthermore, biologicals cannot be manipulated during
                             the manufacturing process in a way that produces a consistent and precise
                             yield of product. As a biological product, clotting factor is susceptible to
                             microbial contamination and sensitive to environmental conditions, such
                             as temperature.

                             Individuals with hemophilia generally self-infuse clotting factor.8 Clotting
                             factor can be infused on demand, when a bleeding episode occurs, or for
                             prevention, known as prophylactic use. By self-infusing, individuals can
                             avoid waiting for care at a medical facility. Timely infusion relieves short-
                             term pain and swelling and helps prevent chronic joint disease, which
                             results from recurrent bleeding into the joints. Prophylactic infusions can



                             8
                              Young children and individuals with severe disabilities, who may require assistance from
                             caregivers, are exceptions.




                             Page 5                                 GAO-03-184 Medicare Payment for Clotting Factor
                         be intermittent, such as before major surgery, or continuous, to prevent
                         uncontrolled bleeding over time. Continuous prophylactic infusion is
                         generally confined to younger individuals to prevent prolonged bleeding
                         episodes and long-term complications. Physicians prescribe a dosage of
                         clotting factor units that is based on the nature of treatment.9 Generally,
                         younger and smaller individuals are prescribed lower quantities of clotting
                         factor than older and larger individuals.

                         Because people infuse clotting factor in large doses, a substantial quantity
                         is used annually in the United States. Total clotting factor use is about 1
                         billion units per year. Although the average annual use of clotting factor
                         VIII for a person with hemophilia A is 78,000 units, individual use varies
                         widely. In any given year, approximately 23 percent of individuals with
                         hemophilia use no clotting factor at all, while a very small percentage of
                         individuals may use more than 500,000 units.


Characteristics of       According to CDC estimates, 6 percent of the hemophilia population, or
Medicare Beneficiaries   about 1,100 individuals, are Medicare beneficiaries.10 The average age of a
with Hemophilia          Medicare beneficiary with hemophilia is 53, nearly three decades older
                         than the average age of the total hemophilia population, which is 24.11 In
                         addition, Medicare beneficiaries with hemophilia show higher rates of
                         chronic joint disease and two viral infections, hepatitis C and human
                         immunodeficiency virus (HIV), than the general hemophilia population.
                         Because clotting factor products were not available when most Medicare
                         beneficiaries were young, they typically experienced prolonged and
                         repeated bleeding episodes, a situation that in vulnerable joint areas leads
                         to the destruction of joint tissues. As a result, 28 percent of Medicare


                         9
                          An individual’s prescription varies according to weight and whether the individual is
                         infusing on demand or for prophylactic purposes. Physicians use their own discretion in
                         calculating the exact quantity to prescribe in any given situation. According to a physician
                         at one HTC, a 150 lb. individual with a moderate injury should be prescribed approximately
                         1,500 to 2,000 units of factor VIII. The same individual should be prescribed 3,000 to 3,500
                         units for a severe injury, such as a head injury. While patients infuse once or twice in
                         response to a bleeding episode, those under preventive treatment infuse three times per
                         week to maintain their baseline amount of clotting factor. According to the physician we
                         consulted, a total of 5,700 to 6,500 units of factor VIII infused over the course of each week
                         would be a suitable preventive strategy for a 150 lb. individual.
                         10
                          CDC bases these estimates on data from the 1993-1998 Hemophilia Surveillance System
                         Project, the most recent data available.
                         11
                          Certain disabled individuals qualify for Medicare in addition to individuals age 65 and
                         over.




                         Page 6                                   GAO-03-184 Medicare Payment for Clotting Factor
                  beneficiaries with hemophilia have chronic joint disease, compared to 14
                  percent of the general hemophilia population. Also, because many
                  Medicare beneficiaries began using clotting factor products before the
                  blood supply was tested for hepatitis C and HIV and before recombinant
                  products were available, beneficiaries have high rates of infection with
                  those viruses: 60 percent have hepatitis C and 45 percent have HIV. For the
                  total hemophilia population, the rates of hepatitis C and HIV infection are
                  39 and 24 percent, respectively.

                  The Medicare beneficiary subpopulation and overall hemophilia
                  population do not differ, however, in terms of the frequency of disease
                  type or severity of clotting factor deficiency (see table 1). Also, the annual
                  use of clotting factor among Medicare beneficiaries and the overall
                  population with hemophilia is similar.

                  Table 1: Disease Type and Disease Severity for the Total Hemophilia Population
                  and the Medicare Subpopulation

                                                                                       Percentage of Medicare
                                                             Percentage of total                  hemophilia
                                                          hemophilia population                subpopulation
                  Type of clotting factor deficiency
                  • Factor VIII (hemophilia A)                                   79                          80
                  • Factor IX (hemophilia B)                                     21                          20
                  Total                                                         100                         100
                  Severity
                  • Mild                                                         32                          32
                  • Moderate                                                     24                          23
                  • Severe                                                       41                          43
                  • Unknown                                                       3                           2
                  Total                                                         100                         100

                  Source: CDC analysis of data from the 1993-1998 Hemophilia Surveillance System Project.




                  A small number of providers and manufacturers are involved in the
Small Number of   clotting factor market. The two main types of providers, HTCs and
Providers Buy     homecare companies, furnish clotting factor and related ancillary supplies
                  to individuals with hemophilia. These providers obtain clotting factor
Clotting Factor   directly from the six clotting factor manufacturers. Providers rarely
Directly from     purchase from distributors.
Manufacturers


                  Page 7                                    GAO-03-184 Medicare Payment for Clotting Factor
HTCs and Homecare          HTCs and homecare companies are the two main providers of clotting
Companies Provide          factor. HTCs provide annual checkups and ongoing medical care, physical
Clotting Factor            therapy, and social and other services to persons with hemophilia. HTCs
                           are located in 47 states, the District of Columbia, Puerto Rico, and Guam
                           and treat an average of about 90 hemophilia patients each. Approximately
                           half the HTCs, 67 out of 137, can furnish clotting factor and related
                           ancillary supplies to individuals they treat.12

                           Homecare companies are the main source of clotting factor for individuals
                           who do not obtain their clotting factor from HTCs. There are several large
                           national homecare companies, as well as smaller regional companies.
                           Homecare companies ship drugs and related ancillary supplies directly to
                           individuals with chronic conditions. While homecare companies do not
                           provide physician services to their patients, they may provide nursing
                           services, patient education, community outreach, and case management.
                           Homecare companies can ship clotting factor to individuals throughout
                           the United States through their licensed pharmacies.


Small Number of Clotting   There are six manufacturers of clotting factors VIII and IX that sell directly
Factor Manufacturers       to HTCs and homecare companies. In addition, distributors buy the small
Contribute to Periodic     amount of clotting factor, approximately 5 percent of all clotting factor
                           delivered in the United States, that manufacturers have not sold to HTCs,
Product Shortages          homecare companies, or other medical entities such as hospitals. These
                           distributors sell to HTCs, homecare companies, and hospitals and other
                           medical entities to meet their emergency or short-term needs. (See fig. 1
                           for a depiction of the clotting factor market.)




                           12
                             According to an HTC representative, one reason some HTCs may not provide clotting
                           factor is the high initial start-up costs of a factor program; such costs arise from the
                           structural modifications to facilities that storing and dispensing clotting factor require, the
                           initial supply of clotting factor, and the salaries for a dedicated staff to run the program.
                           The HTC representative also stated that some HTCs affiliated with larger organizations,
                           typically medical schools or hospitals, may have had difficulty receiving institutional
                           approval for such a program.




                           Page 8                                    GAO-03-184 Medicare Payment for Clotting Factor
Figure 1: Participants in the Clotting Factor Market

                       Six manufacturers of clotting factor




                                                                     Distributors


               Hemophilia treatment                 Homecare
                    centers                         companies




                    Patients                          Patients

Source: GAO.




Shortages of particular clotting factor products occur periodically.
Because the six manufacturers run at capacity, a decrease in production
by any one reduces availability of a particular product and strains the
general clotting factor supply. Increasing clotting factor production in
response to a shortage is difficult. Manufacturing clotting factor takes an
average of 6 months; opening an additional plant can take several years. In
2001, there was a severe shortage of recombinant clotting factor VIII when
production problems at one manufacturer occurred concurrently with a
routine maintenance shutdown by another. Many individuals were unable
to obtain recombinant products at that time, causing them to rely on
plasma clotting factor, straining its supply as well. Because some HTCs
and homecare companies could not obtain the needed clotting factor
products from manufacturers, they turned to distributors to obtain
alternative products.




Page 9                                  GAO-03-184 Medicare Payment for Clotting Factor
                         HTCs and homecare companies are able to purchase clotting factor at
Providers Obtain         prices considerably lower than Medicare’s payment for clotting factor.
Clotting Factor          Almost all HTCs that provide clotting factor participate in a federal
                         program that allows them to obtain prices from manufacturers that are 35
Products for             to 48 percent below AWP. Homecare companies can obtain prices that
Substantially Less       range from 22 to 40 percent below AWP. While clotting factor shortages
                         can affect providers’ ability to procure specific products for their
than Medicare’s          customers, HTCs and homecare companies do not generally face higher
Payment                  acquisition prices from manufacturers during periods of product
                         shortages.


Providers Obtain Large   In an analysis of 2001 and first quarter 2002 data, we found that HTCs
Discounts from AWP       purchase clotting factor from manufacturers at a 35 to 48 percent discount
                         from AWP. The largest discounts are for plasma clotting factor VIII
                         products, and the smallest discounts are for recombinant clotting factor
                         VIII products, with the discounts for clotting factor IX products falling in
                         between. HTCs obtain these substantial discounts through the Public
                         Health Service 340B program,13 which enables certain federally funded
                         entities to buy drugs directly from manufacturers at discounted prices.14
                         The 340B prices, which are updated quarterly, equal a set discount from a
                         manufacturer’s price.15

                         Our analysis of data from 2001 and 2002 shows that homecare companies
                         can also purchase clotting factor from manufacturers at prices
                         substantially below Medicare’s payment.16 With prices from 22 to 40
                         percent below AWP, the discounts that homecare companies receive are
                         somewhat less than those received by HTCs. Like HTCs, homecare
                         companies receive the largest discounts on plasma clotting factor VIII



                         13
                           See Pub. L. No. 102-585, Title VI, § 602, 106 Stat. 4943, 4967 (1992) (adding section 340B to
                         the Public Health Service Act).
                         14
                           Of the 67 HTCs that can operate clotting factor programs, 4 have chosen not to participate
                         in the 340B program.
                         15
                          Generally, the 340B price equals the average manufacturer price (AMP) minus 15.1
                         percent. AMP represents the average unit price paid to the manufacturer by wholesalers for
                         drugs distributed to retail pharmacies. Because wholesalers make up such a small portion
                         of the clotting factor market, AMP calculations for clotting factor are based primarily on
                         direct sales to providers.
                         16
                          See appendix I for a detailed discussion of our analysis of homecare company acquisition
                         prices.




                         Page 10                                  GAO-03-184 Medicare Payment for Clotting Factor
                             products and the smallest on recombinant clotting factor VIII products,
                             with discounts for clotting factor IX products falling in between.


Providers Do Not             Because most HTCs obtain their prices through a federal discount
Generally Face Higher        program, they are typically protected from price increases during periods
Prices during Shortages      of product shortage. According to certain homecare companies and other
                             stakeholders we interviewed, shortages do not result in price fluctuations
                             for homecare companies over the course of the contracts they sign with
                             manufacturers. During shortages, sufficient supplies of particular clotting
                             factor products may not be available directly from manufacturers. In such
                             rare cases, providers may pay higher prices to other entities, mainly
                             distributors, to secure needed products. However, a distributor we spoke
                             with sold clotting factor products to providers at prices that were still
                             lower than Medicare’s payment.


                             Providers incur costs associated with delivering clotting factor that are not
Providers Incur Costs        separately reimbursed by Medicare. We estimate that total delivery costs
Associated with              in 2000 and 2001 ranged from $0.03 to $0.08 per unit of clotting factor sold
                             by HTCs.17 We did not receive enough data from homecare companies to
Delivering Clotting          estimate their costs. Delivery costs are generated in inventory
Factor to Medicare           management, storage, shipping, and the provision of ancillary supplies
                             necessary for the infusion of clotting factor. Providers may also furnish
Beneficiaries That Are       other services for which they are not separately reimbursed, such as
Not Separately               patient education and community outreach. These services are not
Reimbursed                   Medicare-covered benefits, and they are generally targeted to younger
                             patients who are not Medicare beneficiaries.


Delivering Clotting Factor   Medicare does not make a separate payment for the costs of delivering
Generates Dispensing and     clotting factor, including costs associated with inventory management,
Ancillary Supply Costs       storage and shipping, and the provision of ancillary supplies. Due to its
                             complex dosing protocols and biological properties, clotting factor
                             requires considerable inventory management. Because the number of units
                             of clotting factor prescribed is determined by an individual’s size and
                             treatment needs, each prescription is specific to the individual. However,



                             17
                              A delivery cost of $0.03 to $0.08 per unit of factor is equivalent to about 4 to 17 percent of
                             HTCs’ acquisition costs, depending on the specific product purchased, the individual
                             provider, and the amount provided to the patient.




                             Page 11                                  GAO-03-184 Medicare Payment for Clotting Factor
manufacturers sell vials of clotting factor in only three standard
concentrations: 250, 500, or 1,000 units per vial. Furthermore, the
unpredictability involved in manufacturing a biological substance like
clotting factor results in manufacturers’ inability to predetermine the
precise concentration of clotting factor in a particular vial; they can only
predict its concentration within 10 percent of the standard concentration.
Therefore, a small-sized vial may be labeled anywhere from 225 to 275
units, and a large-sized vial may be labeled anywhere from 900 to 1,100
units. Managing clotting factor inventory requires more staff time than
managing the inventory of conventional drugs, in large part due to the
variations across individual prescriptions and the variable concentrations
in individual vials.

Inventory management is further complicated by product recalls as well as
shortages. If a specific product or concentration is not available as a result
of a product recall or shortage, the provider must allocate additional staff
time to consult with an individual’s physician to determine an alternate
plan of clotting factor treatment until the preferred product is available
again. One provider we spoke with said that product recalls of clotting
factor occur more often than for other drugs because of sensitivity to the
possibility of blood-borne infection resulting from the use of clotting
factor. In 2001, there was one recall of a clotting factor VIII and one recall
of a clotting factor IX product.

Clotting factor providers also incur costs associated with storing and
shipping clotting factor. Providers order tens of thousands of units of
clotting factor a year for each patient. Because clotting factor must be
refrigerated to prevent spoilage, the high volume of clotting factor stored
by providers requires large temperature-controlled areas with sources of
backup power. The shipment of clotting factor also involves special
arrangements. Glass vials of clotting factor must be securely wrapped to
prevent breakage and then packed with coolants. Providers ship the
products using overnight delivery services that track and monitor the
product along the delivery route to ensure that it is delivered to the
individual’s door at a specific time. Many providers have staff available 24
hours a day to ship clotting factor to patients during emergencies. Some
providers insure their shipments, while others absorb the cost of any
product lost, damaged, or spoiled during shipment.

Providers incur costs for furnishing ancillary supplies necessary to infuse
clotting factor to individuals. These include needles, syringes, alcohol
wipes, bandages, medical tape, sterile gloves, tourniquets, and needle
disposal containers.


Page 12                           GAO-03-184 Medicare Payment for Clotting Factor
                          According to our analysis of data from four HTCs, the costs to HTCs for
                          dispensing clotting factor and providing ancillary supplies directly to
                          patients ranged from $0.03 to $0.08 per unit of clotting factor based on
                          data from 2000 and 2001. We did not receive enough data from homecare
                          companies to estimate their costs. Delivery costs reflect fixed charges,
                          such as rent and insurance, and costs that vary by the quantity of clotting
                          factor sold, such as shipping and ancillary supplies. Therefore, providers’
                          per unit costs may depend on their overall product volume and the size of
                          the individual orders.


Services Related to       HTCs and homecare companies state that they provide services related to
Clotting Factor Are Not   hemophilia, such as nursing services, patient education, education on
Targeted towards          hemophilia to schools and community organizations, and case
                          management, that are not separately reimbursed by Medicare and must be
Medicare Beneficiaries    covered through clotting factor payments. To the extent that Medicare
                          beneficiaries receive services incident to a physician visit, such as case
                          management at an HTC or physician’s office, these services are
                          compensated through Medicare’s payment for the physician visit. Other
                          services are not covered under the Medicare program and predominantly
                          target families with young children and the schools and other community
                          institutions they attend.


                          Medicare’s payment for clotting factor delivered on an outpatient basis is
Conclusions               flawed in the same way that its payment is flawed for other outpatient
                          prescription drugs. In tying its payment to AWP, Medicare has been paying
                          substantially more than providers’ actual acquisition costs. The provider
                          discounts that we report result in acquisition costs that are substantially
                          below Medicare’s payment. However, the lowest prices, those from the
                          340B program, are not available to all Medicare providers of clotting
                          factor.

                          Providers also incur costs in delivering clotting factor related to inventory
                          management, specialized storage, shipping procedures, and in providing
                          ancillary supplies. These costs are not separately paid by Medicare. While
                          we can only estimate the amount of delivery costs, overpayments on
                          clotting factor are sufficiently high to more than cover them. However, we
                          believe that Medicare overpayments for some services should not be used
                          to compensate for the lack of payments for others.




                          Page 13                          GAO-03-184 Medicare Payment for Clotting Factor
                      We recommend that the Administrator of CMS establish a Medicare
Recommendations for   payment for clotting factor delivered on an outpatient basis that is more
Executive Action      closely related to providers’ acquisition costs. Medicare’s payment for
                      clotting factor should reflect actual market transaction prices. When
                      Medicare’s payment for clotting factor more closely reflects acquisition
                      costs, we recommend that the Administrator establish a separate payment
                      for providers based on the costs of delivering clotting factor to Medicare
                      beneficiaries.


                      In commenting on a draft of our report, HHS noted that our findings
Agency Comments       expand upon those in earlier reports by us and the HHS OIG on Medicare
                      payment for outpatient drugs to specifically include information on
                      payments for clotting factor. HHS agreed that Medicare should
                      appropriately pay for clotting factor and services related to furnishing
                      clotting factor. HHS’s written comments are in appendix II. The agency
                      also provided technical comments, which we incorporated where
                      appropriate.

                      We also provided a copy of the draft to representatives of two hemophilia
                      associations, the National Hemophilia Foundation and the Hemophilia
                      Federation of America, for oral comment. They agreed with our
                      recommendations and provided technical comments, which we
                      incorporated where appropriate.


                      As agreed with your office, unless you publicly announce the contents of
                      this report earlier, we plan no further distribution of it until 30 days from
                      the date of this report. We will then send copies of this report to the
                      Secretary of HHS and the Administrators of CMS and HRSA. The report is
                      available at no charge on GAO’s Web site at http://www.gao.gov. We will
                      also make copies available to others on request.




                      Page 14                          GAO-03-184 Medicare Payment for Clotting Factor
If you or your staff have any questions, please call me at (202) 512-7119 or
Nancy A. Edwards at (202) 512-3340. Other major contributors to this
report include George H. Bogart, Beth Cameron Feldpush, and
Yorick F. Uzes.

Sincerely yours,




Laura A. Dummit
Director, Health Care—Medicare Payment Issues




Page 15                          GAO-03-184 Medicare Payment for Clotting Factor
             Appendix I: Scope and Methodology
Appendix I: Scope and Methodology


             In conducting this study, we analyzed data from the Centers for Medicare
             & Medicaid Services (CMS), the Health Resources and Services
             Administration (HRSA), and the Centers for Disease Control and
             Prevention (CDC). We also analyzed data from 11 hemophilia treatment
             centers (HTC) and 2 homecare companies. We interviewed officials at the
             Department of Health and Human Services Office of Inspector General, 2
             patient advocacy organizations, 4 clotting factor manufacturers, 2 of the 5
             largest distributors, and several HTCs and homecare companies.

             To obtain demographic and treatment information on the hemophilia
             population and Medicare subpopulation, we used data from the 1993-1998
             CDC Hemophilia Surveillance System Project, generally recognized as the
             most complete and accurate data available. Through this project, CDC
             collected medical records data on persons with hemophilia to estimate its
             national prevalence. We used these data to determine characteristics of
             Medicare beneficiaries with hemophilia and compare them to the overall
             population with hemophilia.

             To determine Medicare expenditures for clotting factor products, we used
             2001 data from the Medicare Part B Extract and Summary System, which
             are the most recent data available. We limited our analysis to four clotting
             factor payment categories of recombinant clotting factor VIII, plasma
             clotting factor VIII, recombinant clotting factor IX, and plasma clotting
             factor IX. These categories constituted over 90 percent of Medicare
             expenditures on clotting factor in 2001.

             We determined clotting factor acquisition prices for the two major
             providers of clotting factor, HTCs and homecare companies. For HTCs, we
             obtained 2001 and first quarter 2002 340B acquisition prices directly from
             HRSA. The 340B prices are the discounted prices that HTCs receive
             through their participation in a federal program.

             We obtained 2002 homecare acquisition prices from two homecare
             companies, which we supplemented with two other sources. First, we
             used 2001 and first quarter 2002 average manufacturer price (AMP) data
             obtained from CMS. AMP reflects the average price paid to a manufacturer
             by a purchaser for a drug, excluding 340B prices, other federal prices, and
             sales to hospitals and health maintenance organizations. Because of the
             limited number of provider types involved in the clotting factor market,
             the exclusion of 340B prices from AMP calculations, and the small market
             share of distributors, AMP is a satisfactory proxy for homecare acquisition
             prices. Second, we used acquisition prices from 2001, which we received
             from an HTC association, for seven HTCs that had purchased clotting


             Page 16                             GAO-03-184 Medicare Payment for Clotting Factor
Appendix I: Scope and Methodology




factor outside of the 340B program. We combined these three data sources
into a list of acquisition prices for 2001 and 2002.

To obtain the estimated discounts from the average wholesale price
(AWP) for each provider type, we first averaged the acquisition prices
within product category and year for each of our four data sources: the
340B prices, the homecare company acquisition prices, the AMP prices,
and the HTC non-340B acquisition prices. We obtained AWP data from the
2001 and 2002 Drug Topics Red Book. To obtain AWP discounts, we
calculated the difference between the corresponding AWP and the average
acquisition prices to find the average discount, by product category and
year, for each of the four data sources. We then determined the range of
HTC discounts by listing the highest and lowest average discounts among
the four product categories for 2001 and first quarter 2002 340B prices. We
determined the range of homecare company prices by listing the highest
and lowest average discounts among the four product categories for 2002
homecare prices, 2001 and first quarter 2002 AMP prices, and 2001 HTC
non-340B prices.

To identify the categories of additional costs that providers incur in
delivering clotting factor, we relied on structured interviews with
providers. From information obtained in our interviews, we developed
cost categories and asked providers to give us their operating costs for
each of these categories for 1 full year and the total number of clotting
factor units they purchased during that year. Some HTCs were unable to
provide this information because they were financially associated with
larger institutions, such as hospitals, and could not separate their costs
from those of the institutions. We did obtain costs from four HTCs and
used these data to determine the range of HTC additional costs. We did not
receive enough data from homecare companies to estimate their costs.




Page 17                             GAO-03-184 Medicare Payment for Clotting Factor
             Appendix II: Comments from the Department
Appendix II: Comments from the Department
             of Health and Human Services



of Health and Human Services




             Page 18                             GAO-03-184 Medicare Payment for Clotting Factor
           Appendix II: Comments from the Department
           of Health and Human Services




(290167)
           Page 19                             GAO-03-184 Medicare Payment for Clotting Factor
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