Medicare will no longer consider Amgen's Aranesp to be "functionally equivalent" to Johnson & Johnson's Procrit when reimbursing hospitals for outpatient use of the biological product.

Rather than use the current dose-based "equitable adjustment" to bring Aranesp (darbepoetin) payments in line with Procrit (epoetin) payments, the Centers for Medicare & Medicaid Services believes Aranesp costs will be kept down by basing reimbursement on the product's average sales price.

"The ASP data represents market prices for this biological; therefore, we believe it is appropriate to use the ASP methodology to establish payment rates for darbepoetin alfa because this will permit market forces to determine the appropriate payment for this biological," CMS says in its Hospital Outpatient Prospective Payment System proposed rule for 2006.

ASP is being based on data collected from manufacturers to determine Medicare Part B reimbursement of drugs administered by physicians.

The ^FDL-1 OPPS proposed rule says CMS will reimburse all hospital outpatient drugs - including Aranesp - at ASP plus 8%, which covers product acquisition costs and pharmacy overhead costs. Hospitals are currently reimbursed at 83% of average wholesale price for outpatient drugs.

CMS first applied the "functionally equivalent" policy to Aranesp in its 2003 OPPS rule, when the product was new to the market and eligible for a higher reimbursement rate than Procrit under the "pass-through" system. The policy was criticized by drug manufacturers, and the Medicare Modernization Act prohibited CMS from applying it to other drugs.

CMS stopped using the term "functional equivalence," but determined its reimbursement for Aranesp by applying an "equitable adjustment" under the premise that 330 units of Procrit are equivalent to 1 mcg of Aranesp (¹ [A#00660450015], p. 23).

Amgen's preliminary assessment of the reimbursement change for Aranesp "is positive....The rule does not propose an equitable adjustment, but rather favors a market-based approach," Exec VP-Global Commercial Operations George Morrow stated during the company's July 19 earnings call.

However, under the new reimbursement formula, the Aranesp payment rate will be lower in 2006 than in 2005. Aranesp is being reimbursed at $3.66 per microgram in 2005; the payment rate in the addendum to the proposed rule is $3.28 per mcg.

Actual Aranesp reimbursement in 2006 could be even lower, since the proposed rule's rate is based on fourth quarter 2004 pricing data.

The proposed rule notes that when the final rule is published, drug payment rates will be based on second quarter 2005 ASPs. In addition, CMS will adjust the amounts "on a quarterly basis on our website during CY 2006" as new ASP data are submitted.

The ASP for Aranesp has been dropping in recent quarters, as evidenced by CMS' most recent update for Part B payment rates for drugs administered in a physician's office.

Based on the payment rate, which is 106% of ASP, the ASP for Aranesp was $3.04/mcg in the fourth quarter of 2004 and $2.89/mcg in the first quarter of 2005 - a drop of more than 5% (² 'The Pink Sheet' June 27, 2005, p. 26).

The agency's new reimbursement methodology for the category of drugs known as specified covered outpatient drugs (SCODs) is being offered in response to the 2003 Medicare Modernization Act, which instructed CMS to propose a new payment system that more accurately reflects acquisition costs.

The reimbursement proposal is based on the belief that ASP plus 6% represents hospitals' acquisition costs for drugs and that 2% of ASP will adequately compensate hospitals for handling the products.

"We believe that payment for drugs and biologicals and overhead at a combined ASP+8% would serve as a proxy for representing both the acquisition cost and overhead cost of each of these products," the proposed rule states.

"Therefore, for calendar year 2006, we are proposing to pay an additional 2% of the ASP scaled for budget neutrality for overhead costs associated with separately payable drugs and biologicals, along with paying ASP+6% for the acquisition costs of the drugs and biologicals."

The rule's addenda list payment rates that represent the payment for the drug plus the payment for its overhead costs. CMS noted that the handling fee could in some cases be lower than 2%, because the fee is subject to a budget neutrality assessment.

The rule notes that because the payment rate is set using prices for both branded and generic forms of a drug, "we believe there is no longer a need to differentiate between the brand and generic forms of a drug" for coding and reimbursement. In 2006, hospitals will use the same health care product coding system (HCPCS) codes for both generics and brands.

Many drugs will have lower payment rates under the new methodology. Examples include paclitaxel (Bristol-Myers Squibb's Taxol and generics), which drops from a 2005 rate of $79.04 to $19.11 in 2006, pamidronate (Novartis' Aredia and generics), which falls from $128.74 to $58.41, and granisetron injection (Roche's Kytril ), which drops from $16.20 to $7.24.

Those drugs are among the ones with the highest discrepancies between the 2005 payment rate and hospitals' average purchase prices, as determined in a recent Government Accountability Office study covering July 1, 2003 to June 30, 2004. The report found payment rates for many drugs exceeded average purchase price (³ Also see "GAO Hospital Drug Price Report Hints At Hefty Reimbursement Cuts In 2006" - Pink Sheet, 18 July, 2005., p. 26).

CMS considered the GAO data along with two more sources of drug cost data in revising its reimbursement methodology: ASP data collected for Part B in the fourth quarter of 2004 and 2004 hospital claims data.

CMS determined that using GAO's mean purchase prices as the basis for paying for the 55 drugs studied would be equivalent to paying ASP+3%. Using mean unit cost from claims data to set payment rates would be equivalent to paying ASP+8%.

Because of limitations with the GAO and claims data, CMS said ASP+6% "is our best estimate of average acquisition costs for CY 2006."

The Medicare agency said GAO's data reflect acquisition costs from a less recent period of time than the ASP data. The data also did not account for rebates from manufacturers and group purchasing organizations to hospitals.

Because hospital charges represent acquisition costs as well as overhead costs (instead of acquisition costs alone), CMS also decided against basing payment on that data. For the few drugs where ASP data are unavailable, CMS will use the mean costs from 2004 claims data as the basis for reimbursement.

The agency will determine the packaging status of each drug only once during the year during the update process. However, "for the separately payable drugs and biologicals, we would update ASP-based payment rates on a quarterly basis."

The agency plans for the quarterly updates of the ASP-based payment rates to function as future surveys of hospital acquisition costs, since MMA directs CMS to conduct periodic surveys of those costs.

The 2004 claims data guided CMS' decision to add the 2% overhead fee until it can collect information on the costs hospitals incur for handling drugs.

The agency will collect information from hospitals for three drug handling categories, reflecting the varying complexity of administering different drugs. Overhead fees may eventually be based on those categories.

"We are proposing to instruct hospitals to charge the appropriate pharmacy overhead C-code for overhead costs associated with each administration of each separately payable drug and biological based on the code description which best reflects the service the hospital provides to prepare the product for administration to a patient," the rule states.

CMS will collect the charges for two years, "and consider basing payment for the corresponding drug handling [ambulatory payment classifications] on the charges reduced to costs in CY 2008, similar to the payment methodology for other procedural APCs."

The Medicare Payment Advisory Commission proposed paying hospitals a drug handling fee to compensate for the anticipated reduction in acquisition cost payments. CMS opted not to use the seven categories suggested by MedPAC (⁴ Also see "Hospitals Should Be Reimbursed For Outpatient Rx Handling, MedPAC Says" - Pink Sheet, 25 April, 2005., p. 21).

The OPPS proposed rule was issued July 18 and is scheduled to be published in the July 25 Federal Register. Comments will be accepted until Sept. 16; the final rule will be published by Nov. 1.

Medicare Aranesp Reimbursement Drops “Equitable Adjustment” To Procrit

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