April 26, 2005 - The Medicare Payment Advisory Commission has released the transcript from its April 21 meeting. 408-page pdf file.

As a service to our readers, RenalWEB has extracted the 38 pages (96-134) that apply to the April 21 meeting brief, "Improving Outpatient Dialysis Payment Policy". It appears below.

Note: Commissioner votes during the meeting to approve, oppose, or abstain on recommendations were not recorded in the transcript!!

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MR. HACKBARTH: First up this afternoon is dialysis payment.

MS. RAY: Good afternoon. This is the fourth in a series of discussions that we have been having about the issues raised by the MMA and the new regulations with respect to outpatient dialysis payment policy. I'd like to acknowledge the important contributions of Dana Kelley and Margo Harrison in putting together your draft chapter.

Recall that MedPAC has called for modernizing the outpatient dialysis payment system. In 2001, we recommended broadening the payment bundle and adjusting for factors that affect providers' costs. In 2004 we recommended implementing pay for performance for both dialysis facilities and physicians treating dialysis patients.

Together, these recommendations should improve the efficiency of the payment system, better align incentives for providing cost effective care, and reward providers for providing high quality care.

The MMA does take some small steps towards our recommendations, most notably by implementing case-mix and mandating a demonstration of a broader payment bundle that is mandated to begin in 2006.

But the MMA has created some issues, however, in the current system. Under the new law, freestanding and hospital-based providers continue to be paid differently for both composite rate services and drugs. In addition, we have concerns about the design of the add-on adjustment to the composite rate.

You've seen this diagram before. It shows the post-MMA payment system for outpatient dialysis services as these services are currently being paid in 2005. We're going to be focusing now on the composite rate and the add-on adjustment first, and then the payment for injectable drugs.

We have two concerns with the composite rate payment design in 2005. First, the current policy continues to pay hospitals and freestanding facilities a different rate. This $4 different rate, on average, stems from the 1981 statute implementing the prospective payment system. When CMS implemented and set the composite rate back then, they derived this difference from cost report data from the late 1970s.

If there is still lingering concern that this $4 difference may be about case mix, the difference is not needed because now the composite rate is case-mix adjusted.

Our second concern is the design of the add-on adjustment. If the intent of the add-on adjustment to the composite rate is to address the cross-subsidy then it should be combined together with the composite rate.

We also have a concern with the MMA and how it recalibrates the add-on. Beginning in 2006, the MMA calls for the add-on to be updated based on the growth in drug spending. This may not be good policy moving forward, that the add-on maybe be recalibrated by a factor, the increase in drug spending, that is not linked to efficient providers' costs.

Some stakeholders contend that hospitals should continue to get the $4 difference because of differences in staffing and quality, and we looked at this issue. Our analysis of 2003 cost report data show freestanding and hospitals do use different inputs. This graph compares the percentage of patient care staff that are technicians versus RNs. Now patient care staff includes dietitians, social workers, technicians, RNs, nurses aides and LPNs.

You can see here that a greater percentage of the patient care staff is composed of technicians at freestanding facilities, by contrast for hospitals a greater percentage is RNs.

Nonetheless, quality is comparable. Here you see, first, the URR greater than or equal to 65 percent. That represents the percentage of patients receiving adequate dialysis. And you can see, it is high for both freestanding and hospital-based facilities. 92 percent of all patients at freestanding facilities are receiving adequate dialysis versus 91 percent at hospital-based.

In addition, we looked at hematocrit greater or equal to 33 percent. and here, 89 percent of all patients treated at freestanding facilities have their anemia under control, versus 88 percent at hospital-based. Nationally, 91 percent of patients are receiving adequate dialysis and 89 percent have their anemia under control. These data were derived from CMS's Dialysis Compare web site that's online.

This leads us to draft recommendation one, that the Congress should direct the Secretary to eliminate the differences in paying for composite rate services between hospital-based and freestanding facilities and combine the composite rate and the add-on adjustment.

This recommendation should result in a more simplified payment system and it's consistent with MedPAC's principle of payment not varying across sites. Although this recommendation combines the composite rate and the add-on adjustment, we of course don't want to lose sight of the big picture that we ultimately want to broaden the bundle.

We will address the budget implications of this recommendation together with our draft recommendations to refine drug payment policies a couple slides from now.

Moving on to issues with the current drug payment policy, we have three concerns. First, under current policies there are multiple ways that Medicare is using right now to pay for drugs: average acquisition payment, ASP+6 and reasonable cost.

The second issue is that payment for drugs other than erythropoietin differs between freestanding and hospital-based facilities.

The third issue is that the AAP, the average acquisition payment data, that is being used to pay for most dialysis injectables right now may not be sustainable over the long-term. CMS derived the AAP data from a 2004 report by the IG. There is no requirement for the IG to update the 101
pricing data.

And let me just go into AAP a little more. The average acquisition payment was derived, like I said, from the acquisition cost data that the IG obtained from freestanding dialysis providers. The IG went to the four 5
largest chains and obtained the purchase price for the 10 most frequently used dialysis drugs. The IG also went to a sample of other facilities not affiliated with the four largest chains.

As included in the IG's report, the acquisition costs represents the purchase price reported by these providers net of all rebates and discounts.

At this point, I'd like Joan to talk a little bit more about ASP data and contrast ASP to AAP.

DR. SOKOLOVSKY: In response to some commissioner questions last month ago, we thought we'd talk a little bit more about what ASP is and how it would compare with AAP. ASP stands for average sales price but it doesn't actually represent a price that anybody pays. However, it is derived from actual market transactions.

CMS, every quarter, collects from manufacturers the price that they receive for each product contained in the HCPC codes which are the basis for the Medicare payment system for drugs. This reflects all the discounts, all the rebates, everything that Nancy listed for AAP is also listed in ASP.

Theoretically, these two systems should produce the same results. They don't.

One of the reasons is that ASP also includes whatever money off the top that wholesalers make would still be reflected in the money that the manufacturers got for the drug, which is why ASP would have to be a little bit more than 100 percent of ASP, although the 6 percent is derived from a sample from looking at what the average provider pays and trying to get a range so that prices are included.

When we compare it to AAP, the average acquisition price, again theoretically they both should be the same. They both represent transaction prices. They both include an economic incentive for the provider to try to get the best price they can because if they can get below average they will get the additional money. So there is an incentive for providers to try to get the best deal they can.

Now we start coming into the differences and Nancy alluded to it before. The main one is the frequency of update. AAP was collected once based on a sample of freestanding facilities and the four chains. That survey was done in 2003. In order to get the 2005 payment rate, rather than doing another sample, it was updated by the PPI for drugs which doesn't reflect the fact that in some negotiations for some drugs prices did not go up that much.

And in fact, as Nancy will show you in the next slide, for most drugs now that we have both prices available, the AAP is actually higher than the ASP+6%.

Another difference between ASP and AAP is what prices it considers. AAP doesn't consider hospital-based prices but it is specific to dialysis facilities. ASP considers the prices that physicians obtain in their offices, hospitals and other sources. It does not include everything. For example, it doesn't include VA prices, which no private purchaser could hope to get.

Theoretically, if the system was including too many irrelevant prices, the CMS and the manufacturers have the ability to limit the number of channels that it includes. Right now it includes all of those channels and that was part of the MMA.

For dialysis, this seems like less of a problem because most of the drugs used by dialysis facilities are only used for dialysis.

But probably for us, the most important reason why we think about using ASP instead of AAP is the ease of collection and comparability with other sites. ASP is something that's already being collected. It doesn't require going out and doing another survey and adding additional burden to any providers. It's based on numbers that there is already a process in place to collect quarterly.

AAP either will continue to be increased by an inflation factor that may have nothing to do with what's actually going on in the market for these drugs or would require more surveys being done periodically.

Additionally, it would put purchasing of dialysis drugs in line with the way we pay for other Part B drugs.

On the other hand, ASP is not a perfect system and I just want to move on for one final reminder. In 2003, when we look at payment for Part B drugs, we looked at the pluses and minuses of different systems and we found there was no perfect system.

One thing that's going to happen in 2006 is that there's going to be a new option for Part B drugs, and that is the Competitive Acquisition Program where some physicians will be able to get drugs from entities that are set out to provide drugs for physicians. These entities would be paid directly by Medicare based on their bids and they would be responsible for collecting the copayments for beneficiaries, and the providers would be completely out of the purchase of drug system. They would write the prescription and the drugs would be brought to them.

As the system develops, there is the possibility that that could be extended to dialysis facilities as well. Right now the physician has the choice of either getting paid ASP+6 or going to this competitive system. You could imagine that some of the smaller dialysis facilities that don't have the bargaining power of the large chains might, in fact, welcome such a system.

So I don't think we're saying that ASP should be the end all, but we think right now it has much to recommend it.

MS. RAY: This table contrasts and compares the average acquisition payment that's currently being paid right now for the four top dialysis drugs. These four drugs together account for probably about we estimate 93 percent of all drug payments. Epo by itself accounts for about 74 percent of all drug payments.

So in the first column you see average acquisition payment. That's the 2005 payment rate that providers are currently being paid per unit of drug. The next column is the ASP+6% that CMS posted for these drugs for the first quarter of 2005. And then the last column is the ASP+6% for the second quarter of 2005.

Now I'd like to point out, you see $9.76 being paid under AAP for epo. This figure was derived from the 2003 weighted average acquisition costs of $8.98. What CMS did to set the 2005 payment rate is first inflate it by 4.81 percent, which was the PPI between '03 and '04, and then inflate it by 3.72 percent, the PPI between '04 and '05.

You'll notice first that the average acquisition payment is greater than the ASP+6% and thus, may better reflect providers' actual purchase price, the ASP+6%. I would also like you to notice the change between the first quarter and the second quarter average sales price plus 6 percent payment rates.

There have been some changes, some decreases. Again, this suggests that it is reflecting real world negotiation practices.

Another issue to consider is at what level should ASP be set at? We thought about this a little bit and we concluded that the purchase price does vary between dialysis providers. First, we looked at the IG report from 2004 and the IG reported, they found that the four largest chains had drug acquisition costs that were 6 percent lower than the ASP of the top 10 dialysis injectables. And the sample of the remaining freestanding providers had acquisition costs 4 percent above ASP.

We also conducted a survey, NORC Georgetown conducted for us, of small providers, small freestanding providers and hospital-based facilities. Preliminary results from that survey suggest that the small providers used GPOs and wholesalers to obtain dialysis injectables. By contrast, the larger providers negotiate directly with manufacturers.

Finally, we obtained IMS data for the top 10 dialysis injectables to look at differences in the purchase price between freestanding facilities and hospital-based facilities. And there, we found that freestanding facilities were able to purchase these dialysis injectables for about 4 percent lower than hospital-based providers.

Setting the rate at ASP+6%, as Joan pointed out, is consistent with payment policies for other Part B providers, both provisions as well as the hospital outpatient department. It's also consistent with how CMS pays for dialysis injectables other than the top provided by freestanding providers right now. And setting it at 6 percent may better accommodate the variation in purchase price.

That leads us to draft recommendation two. CMS should eliminate differences in paying for separately billable dialysis drugs between hospital-based and freestanding dialysis facilities; and use average sales price data to base payment for all separately billable dialysis drugs.

Again, this is consist with MedPAC's policy principle of paying the same across different sites of care.

Here are our implications for draft recommendations one and two. In terms of spending, this recommendation is intended to be budget neutral relative to expected spending in 2006. For beneficiaries, no adverse impacts on their access and quality of care are anticipated. And it is not expected to affect providers willingness and ability to provide quality care to beneficiaries.

Now I'd like to move on to our third draft recommendation and this addresses a technical issue. Recall that hospitals right now are currently paid reasonable costs for drugs other than erythropoietin. To implement our draft recommendation budget neutral, that all drugs are paid using average sales price, it will be necessary to collect the per unit payment data and acquisition cost data for these drugs provided by hospitals. That is, we need to collect data to calculate the impact of paying ASP to hospitals instead of reasonable costs.

One potential source that we looked at are the claims submitted by hospitals. We spent a fair amount of time looking at these claims data but we concluded that we were unsure about the accuracy of the payment per unit data that we derived from the claims data because hospitals are not paid according to the number of units they report.

Now it just so happens that the IG is mandated to conduct a second study on dialysis injectables. This study is due to the Congress on April the 1st, 2006. And so this would probably provide an excellent opportunity to collect this data.

That leads us to draft recommendation three, that the IG should collect data on the acquisition cost and payment per unit for drugs other than erythropoietin provided by hospital-based providers.

We don't expect, in terms of spending, that this will increase federal program spending relative to current law. No adverse impacts on beneficiary access and quality of care are anticipated. When this recommendation is implemented, some facilities could receive higher payments or lower payments but it is not expected to affect providers' willingness and ability to provide quality care.

We conducted an impact analysis to illustrate the effect of our draft recommendations on aggregate spending for freestanding and hospital-based facilities. In conducting this impact analysis, to the extent possible we replicated CMS's approach that they set forth in the final Part B rule. And our objective was to maintain budget neutrality, as specified in our recommendation, to pre-MMA spending levels in 2006.

So this impact reflects several factors. And actually, before I get into that, let me just say that the table you see in front of you represents total payments in 2006 dollars. The first column that's titled pre-MMA are the payments providers would have received if Medicare had kept on paying according to pre-MMA payment policies. The last column, entitled MedPAC's recommendations, is 2006 spending implementing MedPAC's recommendations.

So the impact reflects, first of all, the changes that have already been implemented by CMS in its final Part B rule when it implemented the MMA. That is, dollars got transferred from freestanding to hospital-based facilities when the add-on adjustment to the composite rate was implemented.

This impact also reflects our draft recommendation of doing away with the $4 difference and spreading that $4 difference across all treatments, and paying according to average sales price plus 6 percent. It also reflects our recommendation of combining the composite rate and the add-on adjustment and, for both pre-MMA and MedPAC's recommendation, we have updated payments using our most recent update recommendation for composite rate services by
2.5 percent.

So the intent is budget neutrality to 2006 to pre-MMA. So you will notice here a $41 million budget neutrality factor, and that is applied to composite rate services. So across both facility types total drug payments will go down by about 13 percent, composite rate payments will go up by about 10 percent, but overall this is being done in a budget neutral fashion.

There is a distributional impact. Payments to freestanding providers will go down roughly by about 0.5 percent. For hospital-based facilities, payments will go up in total by about 3 percent. But again, I want to stress that this impact analysis is purely illustrative. If our draft recommendations were implemented, CMS would have to conduct an impact analysis which would differ, the last bullet point. One of the reasons is because we assumed constant payments for non-epo drugs provided by hospital-based providers. We had no basis of determining what their pre-MMA payment per unit data was.

At this point, I'd like to raise four other issues for you to consider. We raised some issues in your draft chapter about the wage index adjustment. We will be coming back to you in September with the results of our detailed
analysis that looks at the impact of using more recent geographic areas on providers payments.

The second issue is with respect to the current case mix adjustment as implemented by CMS. Providers have raised concerns about how it works, particularly with how age is being adjusted for. It's basically a U-shaped curve, and what I mean by that is pediatric cases using the age adjuster are paid the most. Then patients 18 to 44, and then patients greater than 80 years of age. They have raised concerns about that.

We asked Chris Hogan of Direct Research to look at this data and he ran several regressions for us and confirmed CMS's findings, that indeed the relationship between providers' costs and age is U-shaped. We're going to be continuing to work on this issue, as well as case mix adjusting for the broader bundle, and we'll come back to you hopefully this fall with additional information on that.

The third issue I'd like to talk with you about is an upcoming issue, we think. It's sort of the intersection between Part B and Part D coverage for drugs. The issue here is whether Medicare pays for the same dialysis drug under both Part B and Part D.

CMS has not finalized their decision about this and we will be following this closely and we may be coming back to you with this issue. This is particularly important specifically as the demonstration starts next year and CMS pays for dialysis drugs under a broader Part B payment bundle.

The last issue I'd like to address is an issue that we commented on in the draft chapter. And this applies for both the current payment system and the broader bundle. In the chapter we included a statement that an annual review of the rates is essential for dialysis given the current low margins. Congress and CMS should not assume, as they did in the 1990s, that regular rate increases were not necessary because of low margins.

That concludes our presentation. Thanks.

MR. HACKBARTH: Questions, comments?

MS. DePARLE: Nancy, thanks for all of your hard work on this.

I want to go back to page 20 or to slide number 20, just to make sure I understand the impact analysis.

When you say that payments to freestanding providers declined by 4.5 percent and payments to hospital-based providers increased by 3 percent, that's from the combination of all of the policies that we're recommending; is that correct?

MS. RAY: Yes, and that's relative to pre-MMA spending.

MS. DePARLE: I guess what I'm trying to tease out is how much of the impact to freestanding providers or what impact was there on freestanding providers from the decision last summer by CMS about the way that it spread the drug adjustment?

MS. RAY: CMS estimated that it lowered total payments by 0.6 percent. Now the pickup of the �

MR. HACKBARTH: Nancy, that's total payments to the freestanding?

MS. RAY: Yes, sir. So by limiting the $4 difference, what that does in turn is increase total payments roughly by about 0.2 percent.

MS. DePARLE: So the net is 0.5.

MS. RAY: 0.5 but that's actually rounding. It was actually 0.45 or something like that.

DR. MILLER: There some of the drug stuff going on here, too.

MS. DePARLE: I guess what I want to be certain of, we've talked about this several times and I disagreed with that policy decision that was made last summer. This doesn't make that worse though? This actually improves that slightly?

MS. RAY: Yes, slightly.

MS. DePARLE: And then going forward, what we're trying to do here is create a level playing field for payments so that there would not be, at least theoretically, an incentive for a nephrologist to say choose one versus the other, or a patient, other than their views about quality which are certainly legitimate in a given location, or convenience of the patient or things like that. Is that correct?

MS. RAY: That's correct.

MS. DePARLE: Good, that's what I wanted to be sure.

DR. SCANLON: Thanks. I think you did a great job sorting out a pretty complicated payment system. I agree with you completely about the idea that we shouldn't be paying for these drugs in several different ways.

I guess I'd raise something for us to consider, which is that in the MMA, when the Congress for the Part B drugs adopted average sales price and the plus 6 percent, they also had a provisions saying we're not sure that that's the right number and we want the IG to go and look and see if the people that we're buying from are buying at a different price. And that may have been what you were talking about in terms of channels, that at some future point we could exclude some channels.

But I go back to when we did work on this at GAO and the IG was working simultaneously. Our biggest problem was always access to data and that we really didn't have a good fix on exactly what the distribution of payments or costs to providers were.

I would raise the issue that we consider urging that the IG be given the explicit access to the information on acquisition costs from providers and simultaneously being asked to look at acquisition costs periodically, and maybe using ASP as the inflator benchmark as opposed to the actual number.

Because there's two things about ASP+6% that are potentially an issue. One is if the ASP represents more market segments than what we're dealing with. And secondly, we don't know what the 6 percent does in terms of covering a share of the distribution of the providers that we're working with. The fact that when you compared those numbers before, you had ASP+6% versus an average alone. And that's kind of telling by itself.

I think we need to know more about the actual distribution of acquisition costs to really set prices well over time.

DR. SOKOLOVSKY: One of the things we're trying to do right now is to find a commercial data source that will enable us to look at prices on different channels and see, in fact, what the variation is, just to address that particular issue.

MR. HACKBARTH: Do you have a slide comparing ASP and AAP that you can put up? Bear with me, I'd just like to go through these one by one and try to compare in my own mind what the pros and cons of the two methods are.

As I think Joan said, in a perfect world, if we had perfect instantaneous information, these two would come together. One is the price as seen by the manufacturer's perspective, and the other is the cost as seen by the provider who's buying it. In the real world, they need to match up except with regard to the middleman, the issue of the wholesaler in the middle; right?

So on that basis, in a perfect world with perfect information, there would be no inherent advantage of looking at it from one direction or the other. You should be getting the same price signal either way.

The second issue is if you use one or the other do you get better incentives? Do you make the market move towards efficiency better by using one or the other?

And here again, I don't think that one has an inherent advantage over the other. In each case, you're using an average. That's the key. So long as you're using an average, people buying the drug have an incentive to try to get at the lowest possible cost so they can be under the average and get an extra little bonus. In that sense, it operates like a prospective payment system. So it's a wash conceptually on that issue, as well.

Then we get into the frequency of update. As a practical matter, there is a difference on this score right now. The ASP is updated on a more regular basis that the AAP, although it's not clear to me that that's an inherent difference. You could change the schedules so that you get the same frequency of update either way, although -- and we'll come to this in the last bullet -- it may require an additional investment of resources to get the same frequency through the AAP.

The fourth bullet down, price differences across channels. I think this is an important part of Bill's interest and concern about this. The ASP data, as currently used, blends. And so we're not getting pure signals for dialysis providers about how much it costs them. We're getting a mixed rate. And we compensate for that with this plus 6 factor. Not specifically here but in another setting the plus 6 factor was added as a way to account for the fact that some small purchasers may not get the same favorable rates is the big ones, and then we'd be carrying that over here.

So I understand Bill's concern about the confusion, the distortion of the price signal if you're using the ASP as opposed to something specific. The question that leads me to is can you get the ASP data on a channel specific basis? Is that a resolvable issue?

DR. SOKOLOVSKY: Yes, you can. And in fact, there was a lot of debate at the time of the MMA about which channels specifically should be included. Right now they've included most channels, although again not, for example, the VA and not for charity care.

There were discussions about whether PBMs should be included or not included but it is possible. You get the channel by channel and manufacturers could include or not include different channels.

MR. HACKBARTH: So for the specific purpose of paying for dialysis services, we could have a channel specific number, not even have to have the plus 6, although there what we lose is we have a different -- you say it. What would we lose by doing that?

DR. SOKOLOVSKY: The problem with doing that, The good part would be we'd also have hospital included, and so that would be a good thing. But the difficult thing is that the channel, in general, is called clinic channel and that would include both physicians in their offices and dialysis providers. I don't know that it is possible to separate those. The way I've seen it, those have been combined.

DR. SCANLON: Given that all we've been talking about today about equality, wouldn't we want to pay the same, same regardless of setting? I think one of the issues, in terms of trying to get -- because the ASP data is coming from the manufacturer. The question is the manufacture selling to a wholesaler, in some respects, loses track of where the drug goes. And so, if we were trying to refine things beyond -- if we're trying to distinguish physician office from dialysis center, if one wholesaler is serving both we don't capture that; right?

MR. HACKBARTH: I'm not sure I heard all of that, Bill. But you're saying that if you really want to get accurate channel pricing, it's better to do it by surveying the providers as opposed to through the manufacturer channel?

DR. SOKOLOVSKY: The channel, actually the manufacturer is reporting what they get back, not what they sell it for. So they have to add in their rebates, add in their post discounts, add in their volumes. It's not an easy task and it's fairly contentious, but it is after.

DR. SCANLON: I'm just saying their definition of channel may not correspond to what we think of as providers. And it may not be a big issue. This is the king of thing that should be explored to see whether or not it's a big issue.

I think the other thing that needs to be explored is this idea that if we decide we want to get information from providers, we shouldn't necessarily think that we need to do it every year. We can potentially use ASP as the update factor and it could have a very different result than using the Producer Price Index because that's an aggregate. The AAP is coming in drug by drug.

DR. MILLER: On the basis of some things you said earlier and what you just said just now, I want to see if I'm getting a sense of what you're saying.

At first when you were saying it, I thought that you were concerned that ASP might be a problem because it mixed channels. But then you just made the statement of, but on the other hand, if you wanted to pay neutrally across setting.

And so what I'm hearing are really two concerns, potentially. Is it possible -- this is you speaking -- that ASP might be complicated because you have this wholesaler intervention which you don't have on the average acquisition price, number one?

And number two, because of that and perhaps some other issues, how you backfit your discounts and so forth into the ASP, you're looking for sort of a periodic check on the provider side using the acquisition costs to figure out whether the ASP is actually tracking.

DR. SCANLON: Right. On the first part, the issue about how concerned I am about channels, it's really coming from the MMA itself, which is the MMA instruction of let's go check out whether the channels matter. It turns out if they don't, then we don't have to worry about that.

In terms of the consistency of our principle of paying the same, that may be different in terms of whether channels matter than if somebody came in and said I do want to pay dialysis centers different than I want to pay physicians offices.

DR. MILLER: We're going to eventually have to get to a recommendation and vote. What I view your comments as saying, and I don't want to lead too much here, that you could go along with this recommendation as long as there were a couple of things, potentially another recommendation -- we're already kind of into this the IG needs to do something anyway bailiwick, and I don't want to get too far out in front here.

But we could boost that a little bit and address your periodic issue. And then would that give you enough comfort with the recommendation on hand?

DR. SCANLON: I think given the IG instruction, but also making clear that we would like the Congress to make sure the IG has the authority to do this. One of the biggest difficulties we had in doing the Part B drug work was we were relying upon voluntary admissions of what they were paying for the drugs. That was very hard to get. I don't know how well the IG did, in terms of the survey, in terms of getting responses from providers. That was the issue that we had and they had in the past.

MS. RAY: I don't recall from the IG's report that they had a problem. Again, they went to the four largest chains. The four largest chains reported their information. And then they went to a sample of freestanding.

DR. SCANLON: We're no expanding this, in some respects this is a Part B drug issue as well as dialysis.

MS. RAY: That's right.

MR. HACKBARTH: Other questions, comments on this?

MS. DePARLE: What is the recommendation now?

MR. HACKBARTH: Mark is drafting as we speak. I know this is a bit arcane, but it's an important issue and we need to try to get it right.

Anybody know any stories?

DR. MILLER: What I might suggest is that you would like to start talking about the other recommendations. This is number three and maybe I'll have something by the time you get to it.

MR. HACKBARTH: Okay. Does everybody understand this issue, about leveling the playing field? We've got money flowing two directions and the net effect was, as described earlier, a slight reduction for the freestanding relative to pre-MMA.

MS. RAY: No, this is for composite rates it would actually increase freestanding total spend by about 0.2 percent because you're eliminating the $4 difference.

MR. HACKBARTH: I'm sort of packaging along with the regulatory change that spread the drug add-on.

MS. RAY: Yes, that's correct.

MR. HACKBARTH: I keep going back to that because I think that was very important from the industry's perspective.

MS. RAY: Yes.

MR. HACKBARTH: So at the end of the day, when you do the change in the $4, coupled with what the reg did last year in terms of spreading the drug add-on across both freestanding and hospital-based, we have a net effect of those two policies together of a slight reduction in the freestanding of like 0.5 percent, and the 3 percent increase in the hospital-based, all done on a budget neutral basis.

So any questions or comments about this recommendation? If not, are we prepared to vote on this?

All opposed to recommendation one?

All in favor?

Abstentions?

Okay, draft recommendation two. Any questions or comments about this?

MS. BURKE: Glenn, I just have one question and ill reminds me that I asked this question last time. And I just want to reassure myself once again. And that is the extent to which, either using the ASP or the acquisition price, has any demonstrable effect on holding the rate of increase in the costs down on drugs. Does the use of one versus the other have any appreciable impact on how quickly those costs increase? I think the answer to that is no, but I just want to �

MR. HACKBARTH: It would depend largely on the updating issue.

MS. RAY: If we take average acquisition payment and we just continue to update it using a PPI, there is �

MS. BURKE: No appreciable difference. That would have, but if we don't.

MS. RAY: Where as ASP should better reflect the actual negotiations between manufactures and providers. By using this PPI updated payment rate, it's not going �

DR. REISCHAUER: It's going to be less accurate but you don't know whether it's going to be higher or lower. And if you do, I want to hire you for my consulting company.

DR. SCANLON: The problem with the ASP potentially is the fact that if the manufacturer says to the purchaser don't worry about this price increase, next quarter we're going to submit the data and you'll be getting an increase from Medicare pretty soon.

The problem with the PPI, I think, that you identified is that it's an aggregate number across a whole series of drugs, whereas you were talking about what's happening with some individual drugs which are not necessarily going up at the same rate.

If we can find a way, maybe using ASP that way, combined with acquisition costs will give us a better track on these individual drugs. But there is that potential through the update. Freezing a base and moving forward with a trend if the trend is restrictive is more of an incentive to control costs.

DR. MILLER: I want you guys to stay with me. I think the answer to this is you can't be sure because there will be negotiations that are taking drugs up and down and there's aggregate versus individual drug affects. But just for the moment, if you took AAP and just inflated it, then basically you have an artificial price. And if that price for any given drug is above the price of what a purchaser's getting, you're right back into the AWP situation where it sort of saying I'll give you a lower price and you can play the spread.

I think that's a risk that we wanted to get away from and some of the reason that we're trying -- whether it's AAP or ASP, trying to track what truly people are picking off as prices.

DR. SCANLON: You're right, it's not quite as bad as AWP because AWP was totally fictional. The problem here, the reality here is how frequently you update matters because if you can tell somebody -- how frequently you update with real data.

If you would tell somebody don't worry, you're going to get your update based upon what we're charging you now, they're going to be less resistant than if the update is independent. Our PPS systems always make the changes independent.

MR. HACKBARTH: Although even with frequent updates, you still win. You do better if you get a lower price. There's still a reason to resist that. You're always better off bargaining hard.

DR. SCANLON: But your resistance is weakened when you know that you're going to get an increase in the future. You need to keep continuously revisit on some periodic basis what acquisition costs are because that keeps everybody more honest.

MR. HACKBARTH: So to get back to Sheila's question, what I think the answer is based on all of this is that since both are based on average, you still have the inherent incentives and so there's no basis to choose there. One could be better than the other based on the frequency of updating issue, but which is better is actually indeterminate. You don't know. So it's not a clear basis for choosing one or the other right now. Is that a fair summary?

DR. SCANLON: One last thing. The compromise that happens in states sometimes, when they're trying to deal with this, is they will set a base, trend for a while and then reset the base, using the length of the trend to try and encourage some discipline during that period. The key, of course, is what you pick as your update factor during the trend period.

MR. HACKBARTH: Other questions or comments on this, on number two?

All opposed to number two?

All in favor?

Abstentions?

Mark?

DR. MILLER: We're up to three and I'm assuming that the sentence that I'm going to read to you would continue to just be part of this, as opposed to two separate because we're doing roughly the same thing.

But I think what we would do is we would say the Secretary should be given authority to periodically collect average acquisition price data from dialysis providers to compare with average sales price data.

I went to the Secretary because I'm granting an authority as opposed to asking the inspector general to do an analysis, but presumably the Secretary delegates this to the IG.

One more time slowly, the Secretary should be given the authority to periodically collect average acquisition price data from dialysis providers to compare with average sales price data.

Or some better construction of that sentence.

DR. CROSSON: Just one question. Based on what we heard, would you want to be more specific in terms of the time frame? Because it sounded like, from what we heard, even within a period of a year or two, given the renegotiation, you can get a fairly large deviation between the acquisition price and the sales price. And if you wanted to use this mechanism to get accuracy, maybe something more specific than periodically would be important.

DR. MILLER: I don't know, Bill, if you have an opinion in this, not less than two years, three years?

DR. SCANLON: I'd worry somewhat about the burden on this. There's going to be resistance to this.

DR. REISCHAUER: Put it in the text.

DR. SCANLON: I think stay with periodically.

The one issue I would ask to think about, and maybe it's not today, but is the idea of for all Part B drugs should we be looking at this in the future? This same clarification of the IG's responsibility and authority.

DR. MILLER: Joan and I were actually discussing that and we weren't sure whether you reaching to just dialysis or reaching beyond that.

DR. SCANLON: I think it's a question of Part B drugs. We are trying to do administered prices for Part B drugs. And the question is we'd like data to make those prices as efficient and as rational as possible.

DR. SOKOLOVSKY: Who wouldn't want more data? You're talking to a researcher. It sounds great to me. I just thought, since we haven't really discussed it, whether this was the right time to put it. And given that we will begin with the oncology report.

MR. HACKBARTH: What I would suggest we do is make the recommendation specific to dialysis and we can say in the text that similar issues are raised across the board with Part B.

Okay, are we ready to vote on recommendation three as amended?

All opposed?

All in favor?

Abstentions?

Okay, thank you very much.

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