Congressmen Criticize Centers for Medicare and Medicaid Services’ Closed-door Approach to Rate-setting for Certain Biotech Drugs

WASHINGTON, D.C. (May 7, 2003) — The Centers for Medicare and Medicaid Services (CMS) overstepped its statutory bounds when it implemented without notice or an opportunity for public input a “functionally equivalent” rule in determining payment amounts for erythropoietic products, according to several recent letters from Congress to CMS Administrator Thomas Scully.

“There is growing recognition from members of Congress that the heavy-handed approach by CMS in establishing this precedent-setting, functionally equivalent policy went beyond the agency’s legal authority and clearly flouted its legal obligation under the Administrative Procedure Act (APA) to provide notice and an opportunity to comment,” said Sharon Cohen, BIO’s vice president for federal government relations.

CMS introduced the functionally equivalent concept as part of an agency rule on the outpatient prospective payment system (OPPS) that became effective Jan. 1, 2003 (CMS-1206-FC and CMS-1179-F). Under the functionally equivalent standard, CMS treated one new biological as if it were the same as an older product for payment purposes because the agency found the therapies to be “functionally equivalent,” even though they differ significantly in important therapeutic respects. As a result of this precedent, CMS could deny patients access to innovative medicines with fewer side effects, more convenient dosing and modes of administration simply because an older, existing medicine costs less.

Several members of Congress, however, contend that the functionally equivalent standard runs counter to existing law and should not have been implemented in the first place, let alone without any opportunity for public discussion before its implementation.

In a Jan. 16 letter from Sens. Charles Grassley (R-Iowa), Orrin Hatch (R-Utah), Max Baucus (D-Mont.), Edward Kennedy (D-Mass.), and John Breaux (D-La.), the bipartisan group reminded CMS Administrator Scully that it is “incumbent upon CMS and Congress to ensure provision of the best possible health care for our nation’s seniors and disabled through Medicare, and it is critical that the agency provide an opportunity for public input when making significant policy changes.”

“Any authority Congress gave CMS to make equitable adjustments to payment rates in OPPS cannot be used to subvert the clear intention of the drafters to make additional pass-through payments for new drugs and biologicals,” said Rep. Dave Camp (R-Mich.) in a March 27 letter to the agency. “CMS’s decision to implement this policy is a divergence not only from the words and purpose of the pass-through statute, but also from past agency practice. Changes such as this must be made with ample opportunity for public comment, both to ensure that the factual and statutory bases of decisions are sound and to comply with the Administrative Procedure Act.”

Similarly, Rep. Phil English (R-Pa.) contended in a March 24 letter to Scully that, “By classifying new drugs or biologics as functionally equivalent to older treatments, CMS ignores its statutory obligation to implement the law as written and puts the proverbial cart before the horse by setting a payment rate before any claims or other relevant data are available.”

In an April 7 letter to CMS Administrator Scully, Sen. Blanche L. Lincoln (D-Ark.) said, “Irrespective of the arguments and rationale for or against functional equivalence, I believe that the CMS decision to implement this policy represents a change from past agency practice. Changes such as this should be made with the opportunity for ample public comment that, in this case, CMS did not provide.”

Rep. Charles Rangel (D-N.Y.) urged Scully in a March 24 letter to suspend the functional equivalence portion of the payment rule. The purpose of the “pass-though” payment system established by Congress was to grant Medicare patient access to new technologies while CMS collected sufficient data to determine appropriate payment rates for the new products. By not “providing an opportunity for the proponent of a technology or pharmaceutical to make its case creates an end-run around the purpose of the pass-through concept,” Rangel wrote.

In addition to criticizing CMS’ adoption of the functionally equivalent standard, some members of Congress have expressed concern that the rule may negatively affect Medicare patient access to innovative medical therapies. For example, Sen. Tom Daschle (D-S.D.), in an April 15 letter to Scully, noted that some of his constituents had contacted him with concerns that the “new standard will adversely affect the quality of care given to rural beneficiaries, who often travel many miles to reach medical facilities.”

“Those beneficiaries deserve access to the most technologically advanced pharmaceuticals and should have had the opportunity to voice their concerns to your office,” Daschle wrote.

Each of the letters is available on the BIO Web site at

The functionally equivalent standard is only one of several problems associated with the Medicare OPPS system as amended by CMS earlier this year. Specifically, the rule drastically reduced reimbursement levels — by 35 percent on average — for biotech drugs and biologics. CMS also arbitrarily redefined radiopharmaceuticals, including some cancer therapies, as non-drugs, making them ineligible for “pass through” payments designed to ensure patient access to them. Additionally, the agency arbitrarily exempted only three FDA-designated orphan drugs from the OPPS system. Although CMS later exempted one additional product in a correction, several other therapies qualify for the exemption under the agency’s own criteria, yet have not been excluded.

BIO is working with Congress to develop legislative remedies to each of these problems within the OPPS system, including the following:
• Separate reimbursement for drugs and biologicals based on their average hospital price (taking into account discounts, rebates, and other reductions in cost to the purchaser) plus amounts to cover administration, pharmacy service costs and overhead.
• Permanent separate reimbursement for all innovative drugs and biologics as soon as the products have received FDA approval.
• Exclusion of orphan drugs from OPPS, so they will be reimbursed more appropriately.
• Elimination of the functionally equivalent standard for setting payment rates and requiring CMS to adhere to FDA-established definitions of drugs, biologics, orphan drugs and medical devices.

BIO represents more than 1,000 biotechnology companies, academic institutions, state biotechnology centers and related organizations in all 50 U.S. states and 33 other nations. BIO members are involved in the research and development of health-care, agricultural, industrial and environmental biotechnology products.