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Executive Summary

Medicare expenditures for EPO (erythropoietin) are on the agenda for a hearing that House Ways and Means Health Subcommittee Chairman Stark (D-Calif.) plans to convene June 14 to discuss "waste and abuse" issues. Representatives from the HHS Office of the Inspector General (IG) and the congressional Office of Technology Assessment will testify. Epogen maker Amgen also has been invited. A draft IG report endorses a proposal Stark made last year to force Amgen to open its books to HHS for consideration in setting Medicare payment levels. HHS should develop a legislative proposal to obtain "discrete authority to access the books and records of Amgen for setting a reasonable payment level," the IG is recommending. The Epogen experience is atypical of most drug coverage both because of the initial generosity of the government reimbursement program and the subsequent threat of close price scrutiny. However, as a precedent for the government's reaction to drug pricing, the Epogen experience is potentially important. When Medicare approved coverage for erythropoietin last June for kidney dialysis-related anemia, payment was set at a flat rate of $40 per treatment. That price was equal to Amgen's target for EPO reimbursement. Another $30 is provided for patients requiring more than 10,000 units per dose. When the "interim rate" was developed, the IG says, "cost estimates were used because the availability of historical costs, cost allocations and sales were limited or did not exist. Now that the product has been on the market and in production, historical cost information should be available and made accessible..." Contending that biotech companies are not required to meet "uniform accounting and product cost allocation guidelines," the IG report asserts: "We believe the payment methodology should require, at least in instances where the government is primary payer, that Amgen's books and records be open for audit to the [HHS] secretary." Stark had floated a cost disclosure proposal during last year's debate on Medicare's budget; he withdrew that proposal after subcommittee members, including ranking Republican Gradison (Ohio), objected that it is inappropriate to require a company to reveal such information ("The Pink Sheet" June 19, T&G-1). Meanwhile, the IG is recommending that Medicare reimburse EPO by the number of units actually used, rather than a flat rate, up to a specified maximum. According to a memo to Health Care Financing Administration chief Wilensky summarizing the draft IG report, "the average dose of EPO dispensed is approximately 2,700 units as opposed to the 5,000 estimated...In addition, we noted that multiple withdrawls of EPO are being dispensed from single-use vials which enhances facility profits but is contrary to labeling instructions." The combination of these factors has led to an estimated average gross profit margin of 40% for dialysis facilities. The IG also points out that EPO market penetration has reached 50% in one year, outstripping the 20-25% anticipated. The Office of Technology Assessment (OTA) similarly found that dialysis facilities are using about $28 worth of Epogen per treatment, versus the $40 payment, based on claims processed up through February 1990 ("The Pink Sheet" May 28, T&G-2). Assuming that the dosage levels now being used are medically appropriate, basing payment on units administered would save Medicare about$80 mil. annually, the IG estimated. The IG also urges that HCFA work with FDA on legislation "to eliminate under the Orphan Drug Act the double benefit of tax credits and seven-year marketing exclusivity when the federal government is the primary payer and its payments are significant." The IG's office supports "the tax credits but recommend[s] the seven-year marketing provision be revoked. This should eliminate the barrier to competition and result in competitive pricing for EPO."

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