WASHINGTON WIRE

In this issue, you'll find:

• Senate Finance Leaders Send Letter to CMS on Hospital Payments
• Federal Medicaid Costs Decline, While Medicare Costs Continue to Rise
• Ways & Means Hearing on Part B Drug Pricing
• Senate Votes to Allow Drug Imports from Canada
• Hearings

Top Story

Senate Finance Leaders Send Letter to CMS on Hospital Payments

On Friday, July 7, 2006, Senate Finance Committee Chairman Charles Grassley (R-IA) and Ranking Member Max Baucus (D-MT) sent a letter to Centers for Medicare and Medicaid Services (CMS) Administrator Mark McClellan, M.D., Ph.D. stating the need for a transition period while switching to the new Medicare diagnosis-related group (DRG) inpatient prospective payment system. On Thursday, July 13, 2006, a bipartisan group of fifty-three Senators and 136 House members also sent a letter to CMS supporting a delay in the implementation of the proposed system.

Currently, the Medicare hospital payment system is largely based on what hospitals charge for procedures. However, in an April 2006 proposed rule, CMS outlined proposed changes that would base payment on "cost-based payment weights" (the actual costs to treat a patient rather than what the hospital charges) and "severity-adjusted payments" (payments based on the patient's severity of illness).

The recent Senate letter concurred with one sent last month by House Ways and Means Health Subcommittee Chairwoman Nancy Johnson (R-CT), which asked for a one-year delay in implementation. However, House Ways and Means Committee Chairman Bill Thomas (R-CA) would like to see the two components implemented in October.

CMS's proposal would implement the cost-based component first in October 2006, followed by the severity component in October 2007. Senators Grassley and Baucus expressed concern with the "whipsaw" effect of phasing in the new payment system. According to the Senators, implementing the cost-based payment weight in fiscal year (FY) 2007 and then severity-adjusted payment in FY 2008 would cause fluctuations in hospital payments from year to year.

The DRG revisions were included in the fiscal year 2007 Hospital Inpatient Prospective Payment System proposed rule. The final rule is due August 1, 2006.

Health Care News

Federal Medicaid Costs Decline, While Medicare Costs Continue to Rise

On Tuesday, July 11, 2006, the Bush Administration released its mid-session budget review for FY 2007. The Centers for Medicare and Medicaid Services (CMS) Administrator, Mark McClellan, M.D., Ph.D., stated that federal Medicaid expenditures will increase 1.8 percent in FY 2006. This percentage reflects relatively small growth given that between FY 2000 and FY 2002, Medicaid outlays rose approximately 12 percent and CMS projects that Medicaid spending will rise 4.6 percent in FY 2007.

CMS contended that federal Medicaid spending has dropped for many reasons: prescription drugs, formally covered under Medicaid, are now covered under the Medicare Part D prescription drug plan; state Medicaid plans that do continue to cover prescription drugs are using generic medications; and states are implementing waivers that place Medicaid beneficiaries in private plans or offer varying benefit packages.

However, unlike Medicaid, Medicare costs are rising rapidly. According to the Administration's report, although the Part D drug plan is estimated to be $34 billion less from FY 2006 to FY 2010, five-year estimates for Medicare Part A (hospital coverage) are set to increase by $17 billion and Part B estimates (physician visits) will increase by $30 billion. An increase in the utilization and intensity of services, such as physician visits and minor procedures are the main cause for the projected increase in costs.

In response to the report, the Administration reiterated its call to revise the Medicare payment system to focus on quality and efficiency.

Ways & Means Hearing on Part B Drug Pricing

Chairman Nancy Johnson (R-CT) of the House Ways & Means Health Subcommittee Johnson chaired a hearing to review how well a new payment system based on average sales prices (ASP) system is working, not only for cancer drugs but also for other products reimbursed under Part B, including intravenous immune globulin supply (IVIG), a treatment for immune disorders. Part of the Medicare changes passed in 2003, the ASP system replaced payment based on average wholesale prices, which was widely viewed by analysts as resulting in billions of dollars in overpayments for cancer and other drugs.

Generally, the government officials and analysts credited the new system for ending overpayments for drugs without affecting access. However, Chairwoman Johnson and industry witnesses disputed such optimism citing strong anecdotal evidence regarding access problems including those due to the size of an oncology practice and a beneficiaries lack of supplemental insurance. In addition, Johnson said Medicare beneficiaries are now being held responsible for thousands of dollars in co-insurance costs in addition to losing access to certain treatment sites. It’s unclear how to address these issues, she said, adding that she intends to work with CMS to evaluate policy remedies. For their part, oncologists said the Medicare overhaul law is cutting their reimbursement far more deeply than analysts predicted.

CMS was also questioned about reported shortages in the availability of IVIG and about the adequacy of Medicare payment for the product. CMS acknowledged that IVIG is a remarkable product useful in treating many conditions and that while supplies as a whole appear to be adequate, there are distribution and allocation problems within the system leading to intermittent access problems not related to supply. CMS has commissioned an independent study of these "access and reimbursement concerns."

Senate Votes to Allow Drug Imports from Canada

On Thursday, July 13, 2006, the Senate passed its FY 2007 Homeland Security appropriations bill, which includes a controversial amendment that would allow individuals to import medications from Canada.

The amendment, proposed by Senator David Vitter (R-LA) and Senator Bill Nelson (D-FL), would prohibit the U.S. Customs and Border Patrol from confiscating Food and Drug Administration (FDA)-approved prescription medications for an individual's personal use. The original amendment protected medications imported from any country, but due to national security concerns raised during the debate, Senator Vitter agreed to narrow the scope of the amendment, allowing individuals to import medications across the Canadian border only.

In recent years, the House has passed several bills to allow drug importation from other countries. However, Thursday marked the first time the Senate has been able to pass such legislation. Currently, the amendment is included in both the House and the Senate Homeland Security appropriations bills. However, given that the Administration has historically opposed drug importation legislation, it is possible that the conference the committee will remove the provision from the final bill.

Upcoming Events

Hearings

Tuesday, July 18, 2006

Medical Imaging
House Energy and Commerce - Subcommittee on Health
Subcommittee Hearing
10 a.m., 2123 Rayburn Bldg.

Price Transparency in Health Care Sector
House Ways and Means - Subcommittee on Health
Subcommittee Hearing
10 a.m., 1100 Longworth Bldg.

Wednesday, July 19, 2006

Pandemic Preparedness; Autism; Nominations Vote
Senate Health, Education, Labor and Pensions Committee
Full Committee Markup
10:30 a.m., 430 Dirksen Bldg.

Thursday, July 20, 2006

Generic Drugs
Senate Special Aging Committee
Full Committee Hearing
10 a.m., 106 Dirksen Bldg

Fiscal 2007 Appropriations: Labor-HHS-Education
Senate Appropriations Committee
Full Committee Markup
2 p.m., 106 Dirksen Bldg.

For More Information

For further information on any topics discussed or publications listed, or to get copies of anything mentioned in this alert, please call (202) 466-6550 and ask for the Legislative Practice Group.

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