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New Medicare Law Adds $150 Million to OPPS

Kate Traynor

The 2003 Medicare Prescription Drug, Improvement, and Modernization Act contains provisions that the Centers for Medicare & Medicaid Services (CMS) estimates will add $150 million in payments to the original rates set in November for the Hospital Outpatient Prospective Payment System (OPPS) for 2004.

Changes to OPPS resulting from the modernization act are described in an interim final rule published in the Jan. 6 Federal Register (PDF). In many cases, the new law eliminates reimbursement rates drawn from hospital charge data—a system that pharmacists have said results in payments from CMS that are below a drug's acquisition costs. Instead, drugs that were assigned transitional pass-through status on or before Dec. 31, 2002, and were not packaged into a procedural ambulatory payment classification (APC) group will be reimbursed at a rate based on the product's average wholesale price, or AWP.

CMS has interpreted AWP to mean the agency's single-drug pricer rate established from the price published in the Red Book on May 1, 2003.

Effective January 1, 2004, 121 products classified as single-source drugs will be reimbursed at 88–95 percent of AWP. The reimbursement rate for all but six products is higher—in many cases, substantially higher—than the rate published in the Nov. 7, 2003, Federal Register, which described CMS's original plans for OPPS in 2004.

An additional 52 products will be reimbursed at either 46 percent of AWP or the rate listed in the Nov. 7, 2003, Federal Register until CMS determines whether the items are "innovator multiple source" or "noninnovator multiple source" products. The new law requires that innovator multiple-source products be reimbursed at no more than 68 percent of AWP and noninnovator multiple-source products at 46 percent of AWP or less. CMS will allow hospitals to submit to the agency adjusted bills to recoup any amount owed after the products are classified.

CMS notes that the AWP structure, which generally reimburses hospital outpatient departments more for branded than generic drugs, could encourage the use of more expensive therapy.

Radiopharmaceuticals used for brachytherapy services are an exception to CMS's general pricing strategy. The new law requires that radioactive seeds or sources for such therapy be paid "based on the hospital's charge for each device adjusted to cost." In some cases, this change results in payments greater by more than an order of magnitude compared with the rates set last November.

By congressional mandate, new drugs that have not yet been assigned a Healthcare Common Procedure Coding System, or HCPCS, code are to be paid at 95 percent of AWP this year, as are blood and blood products. Also paid at 95 percent of AWP this year are pass-through drugs and biologicals that became available after the April 1, 2003, payment update was set and drugs and biologicals administered at renal dialysis facilities.

Most other pass-through drugs are paid at 85 percent of AWP unless they are also sole-source products, which are paid at 88 percent of AWP.

Other important changes related to OPPS include:

  • Transitional corridor payments are restored for small rural hospitals, and newly granted to sole community hospitals, through 2005. These payments, designed to ease the transition to OPPS, are based on the difference between what the provider is paid under the OPPS and an estimate of what would have been paid before OPPS was implemented. The Nov. 7, 2003, final rule had eliminated the payments. 
  • CMS is prohibited from applying a "functional equivalence" standard to set payment rates for drugs and biologicals. The agency had created this policy to disqualify darbepoetin alfa from transitional pass-through payments by declaring the product equivalent to epoetin alfa. The new law lets that determination stand but prohibits any new use of functional equivalence.

The new payments rates described in the interim final rule are effective retroactively to Jan. 1 of this year. CMS is accepting comments on the interim final rule through March 8.