GAO report examines how pass-through status affects Medicare payments for drugs used in outpatient care

• The Government Accountability Office found that Medicare pays more to cover drugs used in hospital outpatient settings when pass-through payment status is in effect.
• Hospital utilization of drugs increased when pass-through status applied relative to when drugs were package-priced with the related procedure.
• However, the removal of pass-through status might raise the APC payment rate for a drug’s related procedure.

The Medicare pass-through payment policy that applies to certain drugs drives higher spending and utilization in the outpatient setting, according to a new report from a U.S. government agency.

The 2018 federal budget included a provision for the Government Accountability Office (GAO) to review the impact of Medicare’s policy of packaging payment for high-cost drugs with related procedures after their pass-through payment eligibility expires. The resulting report was delivered in recent days to three congressional committees for consideration in future budgetary legislation.

The authors examined payments and utilization of specific high-cost drugs when they are eligible for pass-through payments compared with when payments are packaged with the associated procedure. To be eligible for pass-through payments, a drug’s estimated cost must:

• Exceed 10% of the ambulatory payment classification (APC) rate
• Exceed the portion of the APC rate associated with packaged drugs by at least 25%

In addition, the difference between the estimated cost of the drug and the portion of the APC rate associated with the packaged drug must exceed 10% of the APC rate. Pass-through payment status generally lasts for two to three years after the drug hits the market.

Pass-through status leads to cost increases in most cases

GAO reviewed federal regulations on pass-through payments and Medicare payment files for the seven drugs for which pass-through payments expired in 2017 or 2018 and for which package pricing subsequently took effect.

Of the seven drugs reviewed, six had higher payments during their pass-through status. The pass-through payment rate is a drug’s average sales price plus 6%, minus the portion of the APC rate that’s associated with packaged drugs.

The report cites the example of Omidria, which is used in cataract removal procedures and was eligible for pass-through payments in 2017. Medicare payment rates that year were $1,824 for the procedure (based on the APC) and $463 for the pass-through drug, for a total of $2,287.

The following year, when the drug payment was packaged with the procedure payment, Medicare paid $366 less ($1,921) per procedure regardless of whether the hospital used the drug.

The biggest difference in payments was seen for the drug Choline C11, a diagnostic radiopharmaceutical, which had a pass-through payment of $5,452 for a total cost of $6,829, compared with a packaged price of $1,376.

APC rates tend to increase after pass-through payments expire

The end of a drug’s pass-through status actually may lead to higher payments in some situations. Namely, associated APC rates tend to go up, in which case Medicare pays more for the procedure when the drug is not used compared with what it paid in that scenario when the pass-through status applied.

“Although there were decreases in the total payment associated with six of the seven selected drugs in our review and their related procedures,” the report states, “there were generally increases in the payment rates for the APC groups most commonly connected to the seven drugs.”

With respect to Omidria, for example, the APC rate increased by $97 from 2017 to 2018.

“Part of this increase was due to an increase in the portion of the APC payment associated with policy-packaged drugs … which may be related, in part, to the expiration of Omidria’s pass-through payments.”

Pass-through payments generally trigger higher utilization

GAO also reviewed four of the drugs (Choline C11, Omidria, the contrast agent Lumason and the skin substitute PuraPly) to discern patterns in utilization based on pass-through status. For three of the four drugs, hospital use decreased when payment was packaged.

“This was consistent with the financial incentives created by the payment system,” the report states. “In particular, given the lower total payment for the drug and procedure when the drug is packaged, hospitals may have a greater incentive to use a lower-cost alternative for the procedure.”

Although use of Lumason increased when payment was packaged, “The financial incentives for that drug appeared minimal because the total payment for it and its related procedure was about the same when it was eligible for pass-through payments and when packaged.”

The report notes that factors other than payment structure may affect utilization. Examples include:

• Hospital formulary processes, especially for new drugs
• Specific benefits of the drug for certain populations
• Specific challenges of the drug that limit use
• Payment factors not related to pass-through status, such as those stemming from quality-program incentives