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Blood Safety Transcripts


Nineteenth Meeting

"The Economics of Blood and Where Blood Fits in the Overall Cost of Health Care"

8:37 a.m. a.m.
Thursday, May 1, 2003

Hyatt Regency Hotel on Capitol Hill
400 New Jersey Avenue, N.W.
Washington, D.C. 20001


Committee Members

  • Mark Brecher, M.D., Chairman
  • Celso Bianco, M.D.
  • Rajen K. Dalal, MBA
  • Richard Davey, M.D.
  • Ronald Gilcher, M.D.
  • Edward D. Gomperts, M.D.
  • Paul F. Haas, Ph.D.
  • W. Keith Hoots, M.D.
  • Dana Kuhn, Ph.D.
  • Jeanne Linden, M.D.
  • Karen Shoos Lipton, J.D.
  • Lola Lopes, Ph.D.
  • John Penner, M.D.
  • Mark Skinner, J.D.
  • John Walsh

Non-Voting Government Representatives

  • Mary E. Chamberland, M.D.
  • Jay Epstein, M.D.
  • Colonel G. Michael Fitzpatrick
  • Harvey Klein, M.D.

Consultants to the Committee

  • Captain Lawrence McMurtry, Acting Assistant Secretary



  • Call to Order 4
  • Roll Call 4
  • Conflict of Interest - Karen Kucik 5
  • Review of the Lewin Report - Stephen Hull 21
  • Hospital Outpatient Prospective Payment System
    • Julie Birkofer - Overview 57
    • Miriam O'Day - Immune Deficiency Foundation 82
    • Shannon Penberthy - National Hemophilia
    • Foundation 63
  • Break
  • How CMS Works - Chris Mancill 106
  • How Other Countries Pay for Blood - Stuart Penny 160
  • Lunch
  • MedPac Study on Reimbursement - Timothy F. Greene 201
  • Academic Hospital Fiscal Overview - Ed Snyder 248
  • Break
  • Is Anybody Managing Their Budget Based on the Cost of Blood? - Dennis Fallen 305
  • Committee Discussion 326
  • Adjournment 346


DR. BRECHER: This meeting, the 19th Meeting of the Advisory Committee on Blood Safety and Availability is now called to order. We will start with the roll call.

CAPT. McMURTRY: Mark Brecher is here.

Larry Allen?

[No response.]

CAPT. McMURTRY: Celso Bianco?

[No response.]

CAPT. McMURTRY: Rajen Dalal?

[No response.]

CAPT. McMURTRY: Richard Davey?

DR. DAVEY: Here.

CAPT. McMURTRY: Ron Gilcher?


CAPT. McMURTRY: Edward Gomperts called me. He's going to be late.

CAPT. McMURTRY: Paul Haas?

DR. HAAS: Here.

CAPT. McMURTRY: Keith Hoots?

DR. HOOTS: Here.

CAPT. McMURTRY: Dana Kuhn?

DR. KUHN: Here.

CAPT. McMURTRY: Jean Linden?


CAPT. McMURTRY: Karen Lipton.


CAPT. McMURTRY: Lola Lopes?

DR. LOPES: Here.

CAPT. McMURTRY: Gargi is taking exams, and she won't be here today or tomorrow. John Penner?


CAPT. McMURTRY: Mark Skinner?


CAPT. McMURTRY: John Walsh?

MR. WALSH: Here.

CAPT. McMURTRY: And Jerry Winklestein is absent.

DR. BRECHER: We'll next move to the conflict of interest. Karen?

MS. KUCIK: Good morning. My name is Karen Kucik, and I'm an attorney in the Office of the General Counsel for HHS. I was asked to come this morning to quickly review with you the conflict of interest rules and statutes that apply to you as special government employees serving on this Advisory Committee.

The other thing that I'm going to mention very briefly is that in the last year there has been a lot of discussion about how to appoint members of the Advisory Committee and, in fact, many Scientific Advisory Committees within the Department, where there is a feeling that, in fact, instead of all of the members serving as special government employees who are to give their best judgment to decisions and try to divorce themselves, both in their judgment and also because of the legal procedures that are available from their conflicting financial interests, we are now going to include in this Advisory Committee representative members who will not be special government employees, but who will, instead, represent a particular industry or sector.

So that I'm not familiar with the actual specific details of this charter, but there will be someone perhaps who will represent blood centers, rather than someone who is employed at a blood center and is a member of the committee with all of the legal regulatory waivers and specific 208(b)(3) waivers that we provide to deal with the fact that they are giving advice on matters where they have a conflicting financial interest.

That's a pretty broad-brush stroke, but I'm telling you that because right now the entire Executive Branch, but particularly HHS, is receiving a lot of attention with regard to the way that members are appointed to the Advisory Committees and what exactly they are to be doing when they advise, when they vote on issues that are before the committee.

Let me just quickly go over the rules, and then if you have any quick questions that I am familiar with to be able to answer, I'll try to answer them.

The statutes that apply to all federal employees are very old. They were enacted after the Civil War, and they came out of a concern that people who are working for the government should not benefit financially because of what they do as government employees.

18 USC 208 is a criminal statute. It says that no government employee, and that includes special government employees who only meet perhaps once every three months for a day or maybe even hours of a day, and work on matters that are going to have an effect in the course of this agency's work.

The statute says that you shall not participate in a matter where you have a financial interest, and then it lists your own personal financial interests and interests that are imputed to you. The interests that are imputed to a government employee are those of his or her spouse, his or her dependent children, his or her employer--that's a big one--and any interests of an organization where an employee serves as an officer, has a fiduciary relationship with that organization. That would include partnerships, that would include professional organizations where you serve as an officer. It doesn't matter that you're not compensated. The interests, the financial interests of that organization are imputed to you.

Now, the way the government has dealt with this very big, huge statute, criminal statute, with all its implications is--well, there are many ways. One way is when someone becomes a government employee to say you're going to be working in this area. Therefore, you can own nothing that would have a financial effect in this area. So that for full-time government employees, beginning with the Secretary and all the way down, we will advise law enforcement to divest of financial holdings, stocks. We have never advised anyone to get a divorce, but--


MS. KUCIK: --but there are problems, and people have often, not frequently, but have had to refuse a job because of a spouse's employment. Another way is by recusal so that--and, again, this is the bread and butter of my kind of attorneys, where we tease out whether or not there will be a direct and predictable financial effect if the employee participates, but we will sometimes ask for a waiver, and the waiver provision is written into the statute.

The one that has to do with full-time government employees has one standard, and beginning in 1989, after the first President Bush had his own Advisory Committee look at what the problems were with the conflict of interest statutes and the reality of working for the government, that Advisory Committee recommended, and Congress enacted, a provision in the statute that allows for what we now call a 208(b)(3) waiver, where the member of an Advisory Committee--it's limited to members of Advisory Committees--do have a financial conflict of interest, but also have qualifications that are so significant and so important to the government that it is more important that the individual serve, even with this conflict of interest, than that he not be allowed to serve--he or she be allowed to serve because of the conflict of interest.

Are you following all of this?

Some of the granting of the waivers has gotten to the point where people have said, yeah, but this is ridiculous. This is just huge. This is going to have such an effect on this particular individual's financial interests or his employer's financial interests that it just doesn't feel right.

In fact, the bigger problem is that the public often doesn't understand and wonders how someone who is an officer at the Red Cross can be sitting on an Advisory Committee. That's an uninformed reaction, but that is a real reaction.

What was decided with regard to the Blood Safety and Availability Advisory Committee was that perhaps the composition of the committee should be changed slightly so that some people would serve as representatives. That means that there is a possibility, and I don't know the details, but some of you may be learning that you're not going to be serving on the committee any more, and instead there may be a representative of blood banks who is going to come, fully conflicted, and serve on the committee to voice the position of blood banks.

You're following this?

Again, I don't know the details, but this is just another way of trying to deal with the reality of the need for services, of individuals and representatives of different sectors in order to get the best possible advice to serve this Secretary, this department with regard to the issues that are part of the mission, the charter, the stated goals of this committee.

Now, having said that, there is 208, there is 208(b)(3), which allows waivers. Many of you have now a written waiver that permits you to participate in matters that will have a possible effect on your conflicting financial interests. With regard to employment, there is a regulatory waiver. So the fact that you are employed by an entity that has a potential financial interest is taken care of. However, if you, as part of your pension plan, own stock in that entity that requires a waiver.

And so we have tried to look at your financial disclosure reports, which, by the way, I encourage you to be as open and complete in disclosing all your potential and your spouse's financial interests so that we can, if there is a conflict, then grant a waiver and make sure you're protected from possible either accusations, rightly or wrongly, or a violation of the criminal conflict of interest statute.

There are other statutes that apply. There are what we call the anti-representational criminal statutes at 18 USC 203 and 205. Those provisions say that an ordinary federal employee, like me, that a federal employee cannot represent another to the federal government, and this is with regard to any matter that the government has an interest in.

This statute has been so widely construed that I can't go with someone who wants a green card to INS and argue on behalf of that person because I'm a federal employee and I would be representing that person. That's pretty onerous, and that's pretty unrealistic, but it is the law, and it isn't going to change right now.

With regard to special government employees, there is a very narrow application of that statute. You are prohibited from representing another to the government only with regard to particular specific party matters that you work on here in this committee--I have to add--and with regard to any other committees for the federal government that you serve on the matters of that committee, because I know there are some people who serve on more than one scientific advisory committee.

That means that if you work for, I don't know, Chiron, and there is a matter before this committee that has to do with a test that might be used on blood, and there could be a financial impact on Chiron with regard to a test, you cannot go to HHS or any other part of the federal Executive Branch to argue on behalf of Chiron or any other entity with regard to that specific matter that you're dealing with here as a committee.

Does that make sense?

The other rules have to do with the post-employment effect. There is for most of us who are full-time federal employees pretty stringent rules with regard to coming back--you know, the revolving door--coming back before the government on behalf of another entity after you leave government service with regard to any particular matter that you worked on while you were a federal employee.

This is another statute that is widely misunderstood. The statute doesn't mean you can't go to work for a company that you had an effect on while you were with the government. It doesn't even mean that you can't work on the same specific matter that you worked on personally and substantially. It means you can't represent. You can't come back and speak for.

For special government employees, and that means the people who serve on Advisory Committees, again, that rule is very limited. That rule, that criminal statute, though, I would remind you it's a criminal statute, has to do with what you do here specifically as a committee. So it doesn't keep you from doing anything broader than or totally unrelated to the work that you're doing here as a committee.

The other rules have to do with obvious things such as bribery and accepting gifts from--most of the time special government employees can accept gifts from the outside entities, and none of the rules that apply to full-time employees really come into effect. There are regulations--this is not a criminal statute--on misuse of position. I'm not sure that a lot of people fall over in awe at government employment, but the fact of the matter is that you are not use your membership on this committee with regard to outside activities or to try to change the effect of something, to go to the Fairfax County Zoning Board to talk about maybe your company's wish to relocate to Fairfax County and to say, "Well, I'm on the Secretary's Advisory Committee on Blood Safety." I think Fairfax County would yawn, but that is a misuse of position, and that is prohibited by regulation.

The last thing is a little bit of a surprise to people, but we have been trying to make sure that all of our Advisory Committee members know that there is something in the Constitution of the United States that is called the Emoluments Clause, and it applies to special government employees, as well as full-time government employees.

Basically, the effect of the Emoluments Clause on all of you, as members of this committee, is that you cannot compensated or receive any honorarium from a foreign government. That's very important, and right now it is going to be given more scrutiny because of the fact that we are a nation that has been at war. We have all kinds of concerns about foreign governments now that were less prominent.

My office will answer questions. Mac would be your first point of contact. If you are asked to come and give a speech in Thailand and the University that is asking you to speak is part of the Government of Thailand, that's a problem. So keep that in mind.

There should have been actually a form that you were given to fill out, along with your Financial Disclosure Report, that would have brought that to your attention.

Would that have been given out, Mac? Yes, okay.

That's it. If you have questions, I'll try to answer them.


MS. LIPTON: Just one question. How do we know whether we're serving as a fully conflicted SGE or a member with waivers?

MS. KUCIK: I think you're going to--well, that's a good question. And if you are sitting here now, and if there is a waiver in place for you, if you don't have a copy of it, you should be given a copy of it, and you will know then.

For those of you who are here today, you all just took the oath of office, so you are all government employees who are sitting here right now, as opposed to representatives. That means that you have filed a financial disclosure report and someone has reviewed it. And if you don't have a waiver, that means that the only conflict you have is your employment, which is taken care of by a regulatory waiver.

So the question really should be whether I have a waiver, a regulatory waiver or a written waiver, what can't I work on, even with the waiver, is any matter that would be effective with regard to your employer or your stock holdings.

So that, again, using the Chiron example, if all you have is an employment interest in Chiron, that has been taken care of by either the regulatory waiver or the written waiver. But if Chiron comes here and says you all should be recommending our company's test. You can't be part of the discussion, deliberation, anything else. You're out of the room for that particular, specific party matter.

Does that make sense?


DR. HOOTS: If you work for a state government, is there any potential conflict of interest? Does the interest of the state come head on against the conflict of the federal government?

MS. KUCIK: Sure. And what has been addressed, surely, is your state--the interest of states in the work of this committee, generally, has been addressed in either the regulatory or the specific written waiver. However, should your state have such an interest, I don't know, perhaps New York has a greater interest in issues of availability of blood than any other state in the country--I mean, maybe.

So if a representative from the Health Department of the State of New York came to argue on behalf of New York and wanted this committee to recommend with regard to that particular situation, and you worked for New York, you couldn't participate.

DR. BRECHER: Thank you, Karen.

MS. KUCIK: Thank you.

DR. BRECHER: That was very helpful.

MS. KUCIK: I hope so.

DR. BRECHER: I think that was probably the best conflict of interest review that we've had.

MS. KUCIK: Thank you.

DR. BRECHER: We're going to begin this meeting on the Economics of Blood and Where Bloods Fits in the Overall Cost of Health Care.

We're going to strive to stay on time. We will get out relatively early tomorrow, as opposed to our last two meetings, I promise. We're going to begin with a review of the Lewin Report, and Stephen Hull will present that.

MR. HULL: Good morning. The committee should have a copy of my presentation in their handouts, and momentarily we'll have a version on our screen. There are also copies of this presentation on the table outside.

My name is Stephen Hull. I'm a Vice President at the Advanced Medical Technology Association, formerly known as HEMA. Our association represents most of the major medical technology, medical device manufacturers, as well as in vitro diagnostics manufacturers. I'll just give a brief overview of the presentation today. I'll go through the commitment of our membership to blood reimbursement and the activities of a blood sector that we formed especially to address issues such as this a couple of years ago, talk about the ongoing need for technology investment to address blood safety, the importance of Medicare reimbursement. I understand there is a presentation a little bit later today on Medicare issues, so I won't go in too much detail about the basics of Medicare. Medicare reimbursements barriers that we found through a report commissioned for the Lewin Group to conduct. Talk about some solutions that our members have recommended and approached various partners to implement with respect to blood reimbursement. And we will not talk about FDA reform. That's not something that I will be covering today.

Two years ago a number of our companies approached us within our membership and expressed a sense of frustration over the situation with respect to reimbursement, and what they described to us was, one could say, a circular dilemma. There was not clear data to show indeed that there was a problem on the part of Medicare in terms of under reimbursement for blood products and services. The data in the Medicare databases related to their inpatient prospective payment system suggested that blood accounted for less than 1 percent of total costs. There did not seem to be, based on the data people had mined to date, a problem with under reimbursement. There had been a debate, I understand, about this for a number of years.

These companies approached us and asked us to help put together an active agenda to identify the barriers first of all as a baseline, understand what the issues were, outreach to the blood collection community, understand all of their perspectives, and from that, they decided we needed to commission a comprehensive report that established a baseline.

Let's look at the entire system. Let's look at the technology inputs. Let's understand what the foundational data from MedPAR, the database that is used by Medicare to update its system, what does that tell us, and try to identify the issues. And then from those first two things, we later identified issues with respect to hospital billing practices and approached the AABB, American Association of Blood Banks, to support an effort that was already ongoing on their part with respect to hospital education for billing.

These are the 10 supporting AdvaMed companies. They have been very dedicated and involved in working with us and also working with the blood collection community.

And this is just a brief overview of the findings of the Lewin Report, which I'll spend the bulk of the time today discussing. The Lewin Group documented over 30 significant products and systems in the product development pipeline, looking first at the technology inputs that relate partly to the cost of blood products in the marketplace. What they found is a very full spectrum of blood collection processing storage and transfusion issues are being addressed by technologies in the pipeline. They found a very robust technology pipeline, constant innovation by the companies who are in this sector to address the problems that exist in the blood collection community. They also found that a number of current screening and other technologies already in development have the potential to address new threats, and an example that I will spend a moment on is West Nile virus.

Pathogen inactivation and NAT testing, I understand, were technologies on the shelf being already developed or used for other indications. Very luckily, they were available to be adapted to address this new threat. So a point that the Lewin Group concluded is that both known and unknown risks are an ongoing challenge, that it's very important to have a technology pipeline such that you have solutions that are ready to go as these threats emerge. Obviously, some of them demand an immediate response, and I know that there are members of this panel that are quite expert on West Nile. But the incidence of this disease I think certainly speaks to that point.

The last point that they raise is if a solution is developed, if we're lucky enough to have a technology solution, will our payment systems even be able to address this cost?

So why is Medicare important to this paradigm? They found that Medicare accounts for 46 percent of spending on blood intensive DRGs. And it is also a benchmark for private payers in terms of setting trends for the practices of coverage and payment. This is for hospital inpatient services, and I should mention that they also found that inpatient blood transfusions account for at least 90 percent of the transfusions in this country. There are varying estimates on that. I've seen up to 95 percent. So it seemed to us that Medicare inpatient reimbursement was the primary focus of the analysis. Outpatient reimbursement has also been important, but it comprises a far smaller portion of the marketplace.

So just a bit of an overview of the basics in terms of how Medicare pays for services in a hospital setting. Inpatient payments are paid using the diagnosis-related group system. Outpatient is paid using APCs, the Ambulatory Payment Classification System. These systems have a few things in common. Both of them are updated each year with a standardized amount, that is, a dollar figure used to capture inflation year to year, and a relative weight. There is a relative weight assigned to each payment group in each of these systems. In the DRG system there are about 525 of these payment groups. So the payment amounts are predetermined for care before the care is provided. In terms of specific services, regardless of the intensity of any one service, the DRG payment amount will be the same.

The bundles are structured according to major diagnoses and major procedures, and many ancillary services, including blood, are bundled and do not affect the specific payment for that discharge. So billing of blood codes does not literally lead to any difference in payment for a particular patient discharge in a given year. That does not mean that billing for blood is unimportant, however, because the system is calibrated the next year based on the prior year's charge data. So if there is an absence of billing for blood in terms of accuracy or completeness, the charges for the next year's revision will not reflect that, and in turn you will have lower payment levels for the DRGs that rely heavily on blood transfusions.

The APC system is a little bit more granular in terms of its payment levels. It resembles a bit more of a fee schedule. The bundles used rely on procedures and technologies only. They include a much smaller group of services. Blood, some blood products and services are paid separately thanks to the extensive efforts of folks at this meeting and other blood collection organizations. And of course there the billing of specific codes is far more important in terms of rendering a payment that addresses the cost of the service. There the hypothesis at least is that we have seen a bit more detailed billing on the part of hospitals.

So problems in capturing blood costs in hospital payment. First of all, we were aware that as of 1997 Medicare excluded blood costs in the annual inpatient market basket index. The market basket index is a list of factors that Medicare measures each year to understand inflationary impact on hospital cost, and they use this to derive the standardized amount change, and I believe you'll be hearing a bit more about this later this morning.

As of 1997 Medicare assumed that the chemicals index that they were using was adequate to capture the cost of blood. They just weighted it more heavily and did away with a separate factor for blood itself. Separate from that, the Lewin Group found that the Medicare inpatient data, the data that are captured with the discharges in the hospitals on a daily basis, do not capture either the volume or nature of blood transfusions, and this was really the guts of their analysis, and we found those findings rather provocative. And they also at the time found that some of the outpatient rates that were being used had not stayed current with the costs of blood products or procedures, and that they would underpay blood products and services. I understand that some of those problems still exist today.

So right off the bat, they found that fewer than half of hospitals that participate in this prospective payment system bill at all for blood, meaning that when they reviewed the cost reports of all the hospitals involved in the inpatient prospective payment system, 52 percent of them had no record of billing for blood products or administration procedures. 48 percent of them that did tended to include some of the larger hospitals in the country, so those translated to about 60 percent of the claims volume in the system. Nonetheless, one could argue there's a significant gap, very evident from this statistic.

So when you look at all of the claims submitted by all of the hospitals in the Medicare system in a given year, you find that 81 percent of them do not have any reference to billing for blood products or transfusions. Only 19 percent of them have any reference to either blood products or procedures, and this contrasts with other estimates we've seen in the marketplace. I believe ABC estimated that the number should be closer to 30 percent.

Practices vary widely in the coding used to bill for blood. Within the Medicare rules there is some ambiguity. And we found that the majority out of that 19 percent, capture only the administration charged. That in and of itself is not necessarily a problem. There are many reasons why a hospital would just bill administration and not for the product. In some cases state laws require them to do it that way.

But a key question that we really pressed on here is, when you look at the method used for billing, are the charging levels widely variant? Does that impact the ability of a hospital to recoup the costs of providing the transfusion? And what did the charge data look like?

As mentioned charges are used to update the PPS payment levels, the relative weight. They found that overall the markups for blood-related services are far lower than other supplies and services. 73 percent markup on average for the hospitals that do bill for blood product. This compared with markups of 182 percent for medical supplies, 167 percent for ancillary services.

They also found enormous variance among the states. In some cases states were charging at levels that were lower than what they actually paid for the product. On average in North Dakota that appeared to be the case. On the higher end, Pennsylvania, for example, they seem to be inflating charges at a more consistent level with other services, though I still note it is lower than what they would inflate for other types of medical supplies. And I think the bottom line of what we found is rather than a discernible trend in terms of the way in which they bill for their blood services, we found an enormous amount of what appear to be random error between the states and the charge levels.

So how does one make sense of this? If you multiply the charge levels by what they call the cost-to-charge ratio, you could come up with a proxy for what it costs a hospital to provide a blood transfusion. The Lewin Group looked at those cost-to-charge data from Medicare and compared it with the MedPAR charge data, and came up with these estimates. What they found--well, first off, my home state of Maryland is a leader, billing at over $1,700 for transfusion. That has to do with their exemption from the inpatient prospective payment system. If you put Maryland aside and look at the range for the other states, you see a range of about almost 400 percent. North Dakota comes in at just over $800. States like Arizona are on the other end, closer to 350. The lowest state among them is just over $200. And we think these statistics can be contrasted with anecdotal studies that have been done in individual hospitals, that show a much higher level of investment in blood transfusions. There was one hospital that was examined in 1995, and they found that total transfusion cost measured in the range of just over $980. Other anecdotal studies have affirmed a ballpark range of transfusion costs in that order.

So the thought is that when you put all of this together, there is a lot of confusion in the marketplace about how to bill for blood. There is enormous inconsistency among hospitals in recording the services they perform. There is enormous inconsistency among hospitals in inflating charges or applying charges at all with respect to their blood services. So from this study, AdvaMed companies spoke with a lot of the members of the community to come up with some possible solutions. The first one of course was the market basket revision that has already gone into effect, and we actually found that when approached, CNS was fairly receptive to this. They had some encouragement by the Congress, and of course the blood collection community was unified in asking that they reinstate a separate market basket index factor for blood. That factor's not perfect and it may require some fine tuning in the future as a longer term project. I understand that can take as long as five years, but certainly we are much better off today than we were a year ago with respect to that.

The Lewin report itself was launched in October, and since then our member companies have approached the various partners in the community, particularly AABB, to enter into partnership to support more accurate hospital billing. So there is a billing guide project that the AABB has undertaken with some sponsorship from some of our companies to go out and educate hospitals as to how to bill according to the Medicare rules as they exist today. And concurrent with that, there is a hospital education effort to actually go out and get the word out. I understand that the American Red Cross has a very effective program that is very similar to this. They are also partnering this effort, and we are looking forward to working with them as well.

So in terms of action areas or objectives, hospital education I just mentioned. Further refinement of the market basket index is also important, again, probably will not be something that is possible in the immediate term. It has to do with the Bureau of Labor Statistics and the foundational data that they compile.

And thirdly, perhaps most importantly, is a push for a CNS policy clarification and examination of all of the rules that they have in place with respect to blood billing. We find that not only are the rules confusing for billing for blood in the hospital inpatient setting, but they're diffuse. They don't exist in any one place. There are a myriad of questions and ambiguities about which codes to use and when to use them. We think that CNS ought to consider consolidating all of this into one place. They ought to open it up for public comment and receive feedback and suggestions as to how to clarify it. If only half of American hospitals are billing for blood at all, perhaps the codes on the inpatient side are too complicated. Perhaps we should resort to having fewer of them. This is a debate that we think needs to happen with CNS. AdvaMed has had a few discussions with various partners, and we're aware, by the way, that most of them are also pursuing similar efforts in parallel, so a suggestion that we have raised is perhaps we ought to work together and consolidate this effort so that we don't have another series of disparate program memos from Medicare, that each address one individual piece of the billing paradigm.

Hospital associations, the AHA, are obviously critical partners. They have disseminated, I understand, or at least made their members aware of the billing guide that AABB has just released, so we're very grateful for that. Clinician and pathologist associations are also very engaged in this effort. We're hoping to have the engagement of patient groups to underscore the importance of this. At present we do not have a lot of such groups engaged, but we would certainly welcome their participation. So the billing guide has been distributed to over 4,000 hospitals. There has been some targeted advertising. There will be further distribution of the billing guide at other conferences. A couple of educational seminars will be sponsored this year. There will also be, I understand, AABB will sponsor some audio conferences on reimbursement billing. At least one of those has already happened this year.

And that is all that I have to present. Full copies of our Lewin Report are available on our website, Thank you.

DR. BRECHER: Thank you, Stephen. We'll open for questions. The actual report summary was distributed to the members of the committee. Jay?

DR. EPSTEIN: Thank you, MR. Hull. That was in fact very enlightening. I have a question on the graph that shows the average blood and blood administration cost per discharge. Can that graph be adjusted for the per unit blood cost? In other words, this is the aggregated blood cost divided by the number of hospital discharges. But can you not adjust that for the percent of discharges that involve transfusion, the average number of units to get an estimated average unit cost?

MR. HULL: I wish that we could. It may be possible among the hospitals that do bill with that level of accuracy to come up with a figure, but it's very unlikely it would be representative of the entire hospital system. The numbers that comprise this graph--this is the fourth to last slide I believe--basically stem from the revenue codes, and there are only two of those that are used to bill for either blood products or transfusions in the hospital setting, so in that sense it's a fairly macro examination. Even that though has proved to be very difficult in terms of getting accurate levels of detail, just those two revenue codes.

DR. EPSTEIN: You know, the problem with these figures is that they don't let you understand how far off the reimbursement is from the cost of a unit which is the thing you need to figure out.

MR. HULL: Understandably. So the best that we can do is point to anecdotal studies. As it records the cost of transfusion and the charges of transfusion, I think the best we conclude is the Medicare data are severely flawed. We don't know however what the right answer is. It's because there is no separate database that we have found that accurately records this. But I appreciate the comment.

DR. BRECHER: Harvey.

DR. KLEIN: Two questions. Could some of the variability in the differences reflect differences in the mix of blood components? For example, small hospitals will use primarily red cells. Larger hospitals will use aphoresis platelets which are significantly more expensive. The other question is, could you define what you mean by inflating charges? What goes into that?

MR. HULL: Well, hospitals, because their payment levels are derived from certain primary diagnoses and procedures, there's a whole range of things that they must do to provide care that are not literally billed. They don't appear on the claim form. So they're obligated to inflate their charges at essentially a markup to what they provide to the patient in order to recoup those overhead costs and other supplies. So essentially that's the way it works. Hospitals recoup what they believe they need to in order to remain solvent. And they have the liberty to apply different markups to different types of things that they provide. So some have observed that perhaps this is a matter of hospitals just needing to amend their own practices. For antitrust reasons, we're probably not in a position to advise them on that, but I think one inference here is there may just not be awareness on the part of hospitals as to what is going on in their own billing systems and how they ought to look at this.

One rumor we have heard is that some hospitals believe that it is illegal for them to mark up at all on blood products and services. That is not the fact, to the extent at least that we have uncovered any legal barriers.

DR. KLEIN: Could you answer the question on mix of components?

MR. HULL: Yes, thank you. We thought about that. When you look at the mix of states though, we're not sure that it would reinforce that. I suppose one could argue that if a given state was heavily weighted towards small rural hospitals, that you might see a different component mix. Why then though would you see a state like North Dakota on the extreme end of expense and other states, Virginia, for example, on the lower end? There didn't seem to be any rhyme or reason to the numbers that came up after we did the analysis.

DR. DAVEY: Are coagulation factors included in your analysis? Sometimes they're handled by the blood bank, sometimes by the pharmacy. They're very expensive, like Factor VIII, Activated VII?

MR. HULL: I believe not. Those are billed under a separate revenue code. They also are one of the very few products that has a separate reimbursement from the inpatient system, so they would be excluded from this analysis.

DR. BIANCO: Steve, this was excellent, I think extremely helpful in all your efforts. But there is something that is unclear to me. Most of the reimbursement to hospitals comes through the DRG system. The DRG system is a fixed payment for a procedure, a disease, a diagnosis. What difference does it make if the hospital bills or does not bill for blood if they are going to get the same thing for that procedure?

MR. HULL: Thank you for raising the most important and perhaps most difficult question. On the data they bill in that billing cycle, none since the DRG payment will not change, but the system is designed to work on accurate data, and thorough reporting of costs of services provided. If the hospital did not bill for anything other than those things that were primary diagnoses and procedures, our system would be in dire difficulty. There would be a real problem. We would not in any way accurately capture the cost of providing care.

So it's true, what we're asking of hospitals is in essence good citizenship, that they start to record more accurately so that future payment levels can calibrate to address this problem. But indeed, the system would break down if hospitals didn't bill any of those things at all, if they followed that logic to the extreme.

So it's a good point. It is one of the reasons that this has been slow to change, but we understand that hospital billing departments and blood banks understand this message when we share it with them, and they understand the need to look at the way in which they're billing for blood.

DR. BRECHER: Jeanne?

DR. LINDEN: In order for us to better understand the report, can you tell me who the Lewin Group is, what their area of expertise and background is--I mean, clearly it's not blood banking--and how they did this analysis?

MR. HULL: Certainly. The Lewin Group is an independent consulting firm. They're a subsidiary of Quintiles. They have an extensive consulting practice for the hospital sector as well as product manufacturers. They do a lot of work with the various databases that Medicare uses. And that was really the core expertise that we needed for this. If half of hospitals are not billing at all for blood, the nuances in terms of which products are used in the science of blood transfusion became a little bit less important to the analysis then an understanding of how Medicare records its cost and charge data. We have used them previously for similar reports, and we have found them to do a very thorough job.


MS. LIPTON: I hope I'm not conflicted in saying this, but I just want to thank AdvaMed, and particularly Stephen, who really delved into the detail on this. And I know that this is an imperfect report, but it really does give us a lot of information, and one of the things that we have to remember is any time we want to try to reform the system, if you're not even using the system in the first place, you're not going to get a very good reaction. So I think it's very important for all of us to take this seriously. When Celso asked the question, I mean, I think the answer is that we all need to bill accurately and then we need to take a look in a year or two to see if it actually made a difference in terms of what we think we're getting back from the system, and then we would have a basis in which to challenge the system. But when you have 50 percent that essentially aren't participating, it makes it very difficult to make your case. So I just want to thank you.


MR. SKINNER: One of the pieces which you really didn't touch on in your report talked about just the increasing costs of blood products, partly because of the advances in safety as new technologies are developed, new tests are developed and new requirements are on the system. I guess I'm interested in your conclusion. As we attempt to keep the reimbursement system with the advances in technology, should that reimbursement system be purely based on an economic decision? Should it be based on safety or what--how should the final analysis be made when the payers are making the decision on what products to reimburse for?

MR. HULL: Thank you. That's a question certainly relevant to all medical technologies. In the area of blood, however, I think we have the added advantage of having the sage advice of groups such as this, in terms of what blood safety measures are appropriate. So there's an extra layer of my perception at least in the blood safety community of guidelines in terms of the clinical practice that ought to be implemented. So that helps, I think is something that could help to steer those who are managing the reimbursement systems in terms of targeting what should be reimbursed at what levels.

There is a constant tension between reimbursement systems and new technologies that evolve. It's something our system deals with every day. In some ways the DRG system is intended to promote provider selection of the technologies that they think most appropriate by having that slowed calibration process. We think in the blood area--well, we think there's a difficulty with breakthrough technologies across the board at AdvaMed, but we think in the blood area there's a particularly acute problem because of the billing practice problem that we've described in the system's ability to even capture 5 years later the cost of the new blood safety technology.

So it may at some point be appropriate for a groups such as this to consider recommendations about a new payment mechanism for blood products in the hospital inpatient setting that is different from the DRG system. That is not something we have proposed yet. We think that we need to have a foundational understanding in the data of what the reality is before that discussion occurs. But I think we have a few steps before we get to that point. And in the interim we ought to get the DRG system to work the way in which it was designed to work.


DR. HOOTS: Is there any potential, since underreporting and for whom the underreporting--or of whom it represents is such an issue here, to look at CPT codes or something to see if there's an institutional relationship between, say, large cardiovascular surgery units, large trauma units which us a lot of blood versus smaller hospitals that may not even have emergency centers and, therefore, don't use as much blood, to see if this is reflective, and kind of getting at what Jay was talking about, trying to refine it down to the cost per unit, which seems to be an integer that we need to have, you know, to be able to really assess what it ought to be?

We know from the other side what it costs to produce it, but if it's only being reversed at X percent of that actual cost and we don't even know what we're starting from.

MR. HULL: To come up with that number--I agree that there would be great value in having an average cost per unit figure that one could cite to contrast with what is going on in the marketplace. You would need to do a very detailed on-site survey. You would literally need to go and survey hospitals and look at their charge data in order to compile those data since obviously they're not appearing in the annual MedPAR data set.

We considered something of that nature and found that it was a little bit beyond our reach. I do think, though, that the findings we have on the table today show that there is a grave problem in the system.


DR. EPSTEIN: This question may go beyond the scope of what was studied, but I think it's important to ask. Is blood unique in having this type of reimbursement problem where it's embedded in myriad deregulations, has, you know, no independent market index, and is underrepresented in hospital billing? Because one of the arguments that has come back on previous occasions from CMS is, well, we can't start making exceptions. And so I think it comes down to the question of whether there's a special problem here or there isn't a special problem here above and beyond the particular difficulties of getting accurate reimbursement.

MR. HULL: Thanks for the question. The answer is yes and no. It is not unique in the sense that other ancillary--what they call ancillary supplies that do not drive a specific DRG assignment are billed in a similar fashion. It is unique, and I think we should argue in a compelling way that it is unique, because of its importance to safety in the hospital and safe medical care. And, secondly, it appears to be unique in terms of the practices of hospitals in what they charge for the products and transfusions, their charging levels, their consistency in doing that, and their ability to capture those in the data.

I think there is a premise here that could be built upon that blood is not like any other disposable supply. It has unique properties and unique value, and there is a reason to support blood safety measures through appropriate reimbursement.


DR. CHAMBERLAND: I just had a question. Were you able to do any more detailed analysis to look at--to compare hospitals that billed versus those that didn't? In one of your charts here, it's basically a 50/50 split that showed any--so were there any particular characteristics of hospitals in general that made them more likely to be a biller than a non-biller? And I guess the same--a similar question in the analysis of looking at the claim data, you know, just again looking for some indicators of what might make an institution or an individual claim be more likely to include blood versus not.

MR. HULL: We requested a long-range follow-up analysis to try to understand what the correlations were in the marketplace. Most importantly, I wanted to understand, for example, if charge levels corresponded to the way in which they billed, whether they billed for product or service, transfusion service. There unfortunately was not a discernible trend. It's essentially chaos in the marketplace across the various states without rhyme or reason.

The one trend that they did pick up on in terms of whether or not a hospital bills at all or records at all in their cost reports is simply volume. The larger hospitals tended to do so; the smaller ones tended not to.

COLONEL FITZPATRICK: Another problem is that even though the hospital may bill, the administration passes those charges to the services differently within the hospital. So it may not be a direct correlation from the billing to what the transfusion service gets paid to buy the blood. Was there any fidelity--in your discussions with hospitals, were you able to look at or see how the actual funding of the transfusion service and purchase of blood related to how the hospital billed?

MR. HULL: That was a bit outside of our scope, and for antitrust reasons it's probably not something that we could explore in detail. Our thought, though, is that as the Lewin findings become better known and the problem becomes better understood, hospitals at all levels within their institutions will take a look at this and, you know, perhaps there will be additional measures to address the added costs of blood safety.


DR. GILCHER: In support that blood may be different than other disposables, if you compare organs and blood, there's obviously similarities in terms of them both being derived from humans, and yet they're billed very differently. Can you comment on that? We bill separately for the organs in the organ-sharing networks, and yet we don't for blood.

MR. HULL: It has to do with Medicare rules and the way that the system is structured. I would also note that there are probably some big institutional differences between the types of hospitals that do organ transplants and those that--and the more broad practice of blood transfusions.

Perhaps there should be suggestions made to CMS that they look at the way in which they pay for blood and consider something similar. Perhaps that's where the future is. As manufacturers, we are really viewing ourselves as a support team. We want to see the blood collection community identify its solutions and support behind them. We do not think that we should be proposing ideas and leading any such effort. But I think it's a great suggestion.


DR. PENNER: Did you examine the costs of blood at all in this survey?

MR. HULL: The true costs in terms of sales--

DR. PENNER: The billing, the charge for the product.

MR. HULL: From the collector to the hospital?

DR. PENNER: That's right.

MR. HULL: We only were able to access published numbers. And, indeed, the ones that we saw, I think America's Blood Centers had issued an estimate of the trend among its membership. That came up with the market basket index debate. We did not have access to pricing information by blood collectors other than reviewing the published literature. And, again, for antitrust reasons we decided that that was not something we could explore.

DR. BRECHER: Stephen, is there a plan to go back in a year or two and relook at these numbers to see if hospitals are in better compliance in their billing?

MR. HULL: I think there certainly will be a point in time where we need to re-examine whether our efforts have prompted a change. The efforts are just beginning, though, in terms of educating hospitals, and we think simultaneously that CMS should be prompted to examine its own rules so that--the rules should also become simpler at some point.

So several years from now, I think that that is something that we could certainly think about.

DR. BRECHER: Any further comments or questions? If not, thank you very much.

MR. HULL: Thank you.

DR. BRECHER: Okay. We're now going to move to the Hospital Outpatient Prospective Payment System. We have three speakers. First is Julie Birkofer.

MS. BIRKOFER: Okay. Now that the hard part is over, my presentation is up, I'm ready to begin. My name is Julie Birkofer. I'm with the Plasma and Protein Therapeutics Association, and we appreciate the opportunity to present to you this morning.

I'm joined by two of my colleagues: Shannon Penberthy with the National Hemophilia Foundation, on behalf of them; and Miriam O'Day with the Alpha One Foundation, the Alpha One Association, and she's also an expert on IgIV reimbursement. So my overview is intended to be very broad brush, and then I'm going to turn it over to the real experts, the people in the trenches, the folks in the community.

The goal of PPTA is to ensure access to critical life-saving therapies for a broad cohort of patients with congenital diseases and chronic conditions across all sites of service in Medicare, and we're going to focus this morning's presentation on inpatient, outpatient, physician office, and homecare.

Primarily, these are the therapies that we will be highlighting this morning. This is not an inclusive list of all plasma therapies. Obviously, albumin, there are other hyper and specialty immunes. However, for the purposes of Medicare and our focus, again, on life-threatening, chronic conditions, these three--blood-clotting factors for individuals with hemophilia, IgIV, which treats primary immune deficiency diseases, and the alpha 1 proteinase inhibitor, which was exempted from the HOPPS system in the final rule last year--this is the primary focus of the plasma-using and recombinant community that we're going to be drilling down into for you this morning.

Blood-clotting factors. I'm trying to point out to you the variations in reimbursement, the gaps that exist, and the confusion it creates for all of us trying to be more effective in Medicare choice and access. For example, blood-clotting factors, inpatient, the reimbursement structure is based on DRGs. They've had an add-on payment since 1990. There was some playback back and forth on that in terms of permanency, but Shannon will discuss it in more detail. It is permanent now.

On the outpatient side, the payment structure is based on APCs, physician office and homecare, the least expensive AWP within the therapeutic class, 95 percent AWP for allowable, 80 percent actual.

IgIV, to run through the different categories, again, you see there's a gap under inpatient. The services are bundled. There's no separate payment. This has an impact on access. Under the hospital outpatient, the gap is that the services, again, are bundled. There's no separate payment. This, we believe, is reflective of the lack of robust claims data. These therapies typically don't have large numbers, don't pop up in the CMS claims data, and we've seen that to be a problem.

In addition, the definition of blood and blood products is a disconnect that appeared in the '03 HOPPS final rule. This definition has an impact not only on the ability to get a separate APC but also on accessing the dampening provision.

Physician office, IgIV is, again, based on AWP. Homecare is a GAP, and that is something that we have a few Members of Congress interested in, and we are doing some scientific studies to assess the appropriateness of that.

Alpha 1 proteinase inhibitor, inpatient, again, DRGS. The GAP, the services are bundled. Hospital outpatient, they were exempted from HOPPS. It's paid at a reasonable cost, quote-unquote. Physician office, 95 percent of AWP. Again, GAP, no coverage in the home setting.

Basically my conclusions are pretty rudimentary. Patient access is dependent upon the adequacy of reimbursement rates. Under the hospital outpatient prospective payment system, specifically plasma therapies and their recombinant analogs to treat chronic diseases should receive permanent APCs and be packaged separately. We've communicated this to CMS. We have had meetings with their outpatient staff and their medical officers. They have been very receptive to our meetings. However, I guess the proof will be in the proposed rule when it is released sometime in the next few months.

CMS, in addition, we are recommending should amend the definition of blood and blood products to reflect the need to provide continuing access to plasma therapies used to treat chronic, life-threatening conditions and diseases. This definition is really a problem. When we went in and met with CMS, we said you've defined blood and blood products, including hemophilia clotting factors. What about IVIg? And they said, well, that doesn't treat chronic diseases. And we said, well, yeah, it does. And they said, well, no, it doesn't. And, finally, we convinced them that it does, that primary immune deficiency diseases are chronic, life-threatening diseases, and they expressed to us a desire on the Secretary to try to ratchet down the numbers, the budget, and really focus on chronic diseases. So we hope they'll be receptive to the information we provided them, and I appreciate this opportunity, and next up is Shannon.

DR. BRECHER: Maybe we could have a question, if there are any questions.

MS. BIRKOFER: Do you want to do them separately or--

DR. BRECHER: Do you want to do it as a panel?

MS. BIRKOFER: We'll do it as a panel.

DR. BRECHER: Whichever you prefer.

MS. BIRKOFER: As a panel.

DR. BRECHER: Okay. We'll hold questions until all three of them have spoken.

MS. PENBERTHY: Good morning. My name is Shannon Penberthy, and I am representing the National Hemophilia Foundation. Thank you for this opportunity to provide you with this overview of reimbursement on the--we call them blood products. We know there's a lot of other blood products. That terms gets thrown around a lot and means different things to different people.

Our community has come to you many times in the past and asked for resolutions reflecting or commenting on reimbursement, access to recombinant therapies, you know, prophylaxis treatment, and so we've always appreciated the support. And what occurred to me is that we've probably never provided the committee with a full overview about how these products are reimbursed across payment systems, so I will expand on my presentation a bit this morning and go beyond HOPPS but try to give you that overview of how they are paid for. We thought that that would be helpful, given the context of the discussions that will occur later today.

It was interesting. I read the agenda this morning, "The Economics of Blood." My presentation actually comes from a previous presentation I did, and the title used to be "Economics of Factor." So we're on the same wavelength in that regard, and I will build from what Julie has said.

I think some of this will be general information, at least in the beginning, that most of you know. Coverage and payment for clotting factor products depends on the payer and the setting. The average wholesale price, AWP, remains the basis of most of our reimbursement systems, and that is a number that's reported by the manufacturers to various reporting entities, including CMS.

In the United States, there are an estimated 17,000 people with hemophilia. About 65 percent of those are Factor VIII deficient, about 35 percent Factor IX.

We are a relatively young population. Because of the impact of HIV and hepatitis in our community, we literally lost a generation. Fifty-seven percent of our population is under the age of 20, and nearly 80 percent are under the age of 40. We do have people on Medicare who are age-eligible but, by and large, they're disability-eligible, and I'll talk about that in just a few more minutes. About 50 percent of our population has the severe form of hemophilia.

And all of these numbers, I should say, for these initial slides have come from surveillance data that we're able to gather through our Centers for Disease Control program with our hemophilia treatment center programs.

About 60 percent of our community relies on recombinant products. As you know from previous discussions in this committee, the National Hemophilia Foundation and this committee has a resolution on this, considers recombinant products state of the art and the standard, the gold standard of care at this time. But we do have patients who still rely on plasma. About 20 percent of our Factor VIII patients use the plasma-derived Factor VIII products. About 25 percent of our Factor IX patients continue to use those purified plasma-based products. And up to 25 percent of our community may not use any product during a given year, and these are predominantly, of course, your mild and moderate people with hemophilia. Clotting factor is mostly used in the home, though it is administered in our treatment centers, hospital clinics, in the inpatient and the outpatient settings. But by far, this is a drug that is home-infused.

These are sources of where people get the factor, this, again, from CDC data, kind of evenly split between treatment centers, blood banks, and then specialty homecare providers. We do have some states that have state programs the factor is obtained through, and then HMOs, and then you see where we get the number for persons who didn't use factor.

Insurance coverage. For a very high-cost disease, these numbers sometimes surprise people. About 60 percent of our community is covered under private health insurance, 30 to 35 percent dependent upon Medicaid and 5 to 7 percent dependent upon Medicare, again, usually under disability eligibility.

The General Accounting Office recently did a report related to AWP for clotting factor, but if the committee is at all interested, we'd be glad to provide you a copy. It provides a very comprehensive overview of what our Medicare hemophilia population looks like, and they determine the average age is 54. This person has HIV, hepatitis C, and probably severe--severe hemophilia and severe joint damage because they would have been born at a time before prophylaxis treatment and the recombinant and even clotting factors were necessarily available and considered, you know, to be the way to treat.

In the private setting, again, about 60 percent of our population is privately insured. Reimbursement and coverage varies depending on what kind of private insurance that is, whether it's a PPO, an HMO. Medicare payment is the bellwether, and savvy payers and consumers can negotiate rates with their providers, and they do that to make sure they can get access to the products that they and their physician have chosen.

This is a market that is largely served by our hemophilia treatment centers and our specialty homecare providers. We are starting to see some pharmacy benefit management companies trying to enter into this market, and we see that occurring particularly where they will go into health plans and negotiate large contracts for a large segment of their drugs needs, with clotting factor as part of that package.

Issues for our community and the private insurance side, maintaining coverage, number one. These are employment-based coverage, and more and more we see that because of that it limits sometimes, particularly for our young children, you know, coming of age, their career opportunities because insurance is vital for them. So things like working for a small employer might not be something that's feasible because that employer either can't absorb the cost of having that high-cost person in their group or, you know, isn't willing to take on that risk.

But we're also very fortunate that, you know, we do find employers who are willing to go to bat, and they change--you know, you reach your lifetime cap, which is our second issue, and these are all interrelated. Lifetime caps are a huge anxiety for this community. We are fortunate that we have systems in place where you generally don't have someone going without factor because they've reached their cap. Our manufacturers, our homecare communities, we have programs that are in place they can turn to for assistance during those periods. But it's still an anxiety, particularly with a cap of a million dollars. If you've got a child with hemophilia, they're going to exhaust that cap by the time they're 8, 9. And we, you know, legislatively would like to address this at some point. We have struggled somewhat with how--what's the best way to do that. There was an effort in '95, '96 to raise the caps. But, again, this is all interrelated, and people become very savvy. Small employers will change insurance plans when that person gets ready to hit their cap. Or if you're lucky to work for an employer who offers multiple plans, well, that's the year you switch to a different plan and you start on your cap again.

Copayments is also an issue. Access to recombinant and prophylaxis treatment is something that particularly parents, I think, and adults have to fight for, but particularly the parents with young children, because of the expense. And then also access to our hemophilia specialists. We see this particularly in the HMO market where sometimes they want to refer you to the hematologist who was trained in oncology not coagulation.

Medicare, again, this says 5 to 10, we think it's actually probably 5 to 7 based on the GAO report. We're the only drug that has a pass-through payment for the hospital inpatient, and what that means is that when a person with hemophilia goes into the hospital inpatient for a service, the hospital bills for the DRG, and then there's a separate payment that they bill for for clotting factor.

We were able to gain that exemption primarily because the cost of the clotting factor generally will far exceed the DRG payment for any service and put hospitals at a distinct disadvantage in servicing that population.

It took a while to, I will say, and it required congressional action, it took about eight years to make it a permanent pass-through. And we had years when it was a pass-through and then years when the legislation expired and we'd have to get it re-enacted. It was made permanent effective October 1, 1997. We do not have a similar pass-through for Medicaid, which can be a problem.

We are also one of the few self-administered drugs covered under Part B of the program. The GAO report, which had access to data that I can't always get a hold of, estimates that $105 million was spent in 2001 on Part B clotting factor drugs, and these would be the drugs that people are infusing in their homes.

Under the hospital outpatient system, we were able to--I'm going to have a couple of slides about this in just a second, but we do have separate APCs, and hospitals are able to bill separately for clotting factor that's used in the outpatient setting. Similar, though, to the issues with blood, the data there is not very good, and that has not helped us as CMS has put the prospective payment system in place for HOPPS.

Quickly, Medicare, you don't have a lifetime cap. Copays are an issue. We're actually right now in the process of trying to get data. There's an assumption that copays probably are largely waived for the Medicare population. You know, I was asked this question by a Hill staffer recently who said, How do you collect $20,000 or $30,000 a year from someone on Medicare disability every year? You don't. But we are trying to get some data about what supplemental insurance might be in place that's currently helping. Also, we think that some of these individuals are probably dual-eligibles.

Ensuring adequate payment under the payment formulas and recognizing the impact that what Medicare does has on the rest of our marketplace continue to also be issues for us under Medicare.

Effective January 2003, CMS implemented a single drug pricer program. I mentioned that we're one of the few drugs that's covered--self-administered drugs--under Part B. Those drugs are reimbursed based on average wholesale price. It's been 95 percent of AWP or 80 percent of usual and customary, and people tend to forget that second part of that.

Without congressional action on AWP, CMS has been struggling with how they can help rein in the cost of the drugs they do currently cover. One step that was taken was to establish uniform pricing across carriers. They found that the price for drugs could vary because carriers used different sources for determining what AWP was for any given quarter and updated those, actually, on different rates as well. So Palmetto, the carrier in South Carolina, now sets the rates for those drugs based on their analysis of what AWP is. That's published I believe quarterly. And I think the goal is uniform pricing. I think eventually the goal will be to try and lower prices through this mechanism, either through inherent reasonableness authority or other mechanisms that might be available to CMS. And, again, this is all in lieu of congressional action.

One thing that was interesting, I mentioned we're a separate payment in the hospital inpatient setting. Initially, CMS established a fee schedule for our products in the inpatient setting. They then eventually moved to a payment formula that was 85 percent of AWP, and then just two years ago to a set that was 95 percent of AWP. And so in taking this action for establishing a single drug pricer program, then they applied that to our hospital inpatient rates, so we now have--if you think of Medicare as having three payment systems--inpatient, the Part B drugs, and outpatient--we have two of our three systems that are having the rates set in a similar fashion, with the outpatient setting being the outlier.

Outpatient, you know, implemented in August of 2000 replaced the cost-based system. This year was the first year that we had true prospective payment for clotting factor. Initially, we were set aside into the transitional pass-through for three years to gather data about the cost of our products. The proposed rule that came out last year would have leveled reimbursement across products, regardless of whether plasma or recombinant, to 52 cents a unit. We scrambled. We surveyed our hemophilia treatment centers and got them to give us their hospital cost data, go to their hospitals and ask, What do you really pay for these things?, and were able to provide data to CMS that we'd like to think helped move us into the category of drugs that were--where that decrease was capped under what's been called dampening provisions. So they limited it so that no drug, clotting factor drug or any drug that was in that category, would be reduced less than 15 percent.

This resulted in, for us, at least right now, a much more reasonable reimbursement payment rates, actual rates for each of these drugs, though, you know, I anticipate what will happen in the proposed rule for 2004 , and so at this point, you know, we don't know what their current thinking is and how they might change that or how other revisions to the payment formula--you heard Stephen talk about the relative weights and all those things that play in. Certainly critical to us was the fact that the hospital data itself is quite poor. And under the hospital outpatient, they did a uniform cost-to-charge ratio rather than recognizing, for example, that hospitals charge lower markups on higher-cost drugs than they might for lower-cost drugs.

I literally had coefficients of variation in the 300,000 range, and this is what CMS was using for their rational process for establishing payment for these products.

I don't think that's scientific by anyone's measure, but I actually walked out in the hall and told Stephen we support helping hospitals learn how to better bill. Our manufacturers of clotting factor products try very hard to educate the billers, the coders, the people in the billing office, but obviously more can be done if that's the kind of cost data that you're seeing being reported.

Medicaid. As you know, states have flexibility in determining reimbursement. Most of them use AWP derived either from Red Book, First Data Bank or the Department of Justice also has some AWP rates that they set that came out of a whistleblower case. That was the one I think with TAP, and they set forth some AWP rates for all of the currently covered products. Those were later pulled back. Medicare actually at one point was going to implement these, and that was pulled back, but the data and the numbers are still out there and states do rely upon it.

We have 17 states that use alternative pricing mechanisms, including modified acquisition price, wholesale acquisition price, acquisition plus. The State of California, for example, reimburses clotting factor at acquisition plus 1 percent. We have some sole-source contracts that manufacturers have with states, and then again the state-based purchasing systems.

Issues under Medicaid. With the state budget situation, we are in crisis mode in our states right now. States are struggling with how to modify their Medicaid programs. In broad systems, it's sometimes hard for them to remember that they have unique situations like hemophilia to deal with.

Access to recombinant and treatment, access to our hemophilia specialists, a choice of provider and product and then co-pays and other limits that might be placed, these are all issues particularly focused on prior authorization which could, if fully implemented and carried out, could at least delay access to these products for our community which could be quite detrimental.

You have a slide called "What's next in the private payers," and I think it should just be the one right before. I apologize that those two got mixed up.

We're going to continue to see the rising drug costs. Private payers' health plans are going to become more and more diligent about managing costs. I mention the pharmacy benefit managers moving in and doing broad contracts with these plans, and when they do that, they can show bottom-line savings, but it's not always savings for clotting factor, and that's of some concern to us.

If you run the numbers and look at what a health plan pays for drugs, clotting factor probably doesn't usually hit the radar for total. But if you run it the other way and do it per patient, we're number one or two. And so we will have more focus I think from private payers about what they are paying.

In Medicare, we might have congressional action on AWP. We're monitoring that very closely. The National Hemophilia Foundation does not purport that this should be the price for any drug. What we've tried to do is serve as a resource for our congressional members and their staffs to say if you do this, these are things you need to be aware of and to provide them with some opportunities about how they might take care of some of those issues.

For example, the GAO Report recommends that Medicare reimburse for clotting factor at near acquisition plus a dispensing fee. Unlike oncology, drugs that are administered in a physician's office, we don't have a practice expense component to be able to pick up the extra costs of special refrigeration, special handling, the high inventory costs, the 24-hour nursing service, the ancillary supplies.

We have commented to them that if you do that, you need to be cognizant of this co-pay and the beneficiary responsibility. Currently, under payment, if a provider needs to waive that co-pay for a beneficiary that can't pay it, they're still able to make it. If you pay them near acquisition, they won't have the ability to do that any more.

Prescription drug benefit. If they can come to terms with that and get it passed, it might provide some opportunities. I believe that the single drug pricer will be used to eventually lower cost for Medicare-covered products, and then of course we're continuing to pay very much attention to further revisions in the hospital outpatient system.

Medicaid. The state budget squeeze is going to continue to be very problematic for us. We've seen some states already move to limit product and provider choices, and that's very troubling. In South Carolina, we had a proposal to no longer pay for recombinant products, even for the children. We want to maintain that choice and maintain that access for those products. And, you know, quite honestly, it shouldn't depend on where you live whether you can have access to it or not.

Unless someone has a dying question right now, we can--

DR. BRECHER: Why don't we hold the questions. Thank you, Shannon.

DR. BRECHER: We will now hear from Miriam O'Day from the Immune Deficiency Foundation.

MS. O'DAY: Good morning, and let me properly introduce myself. I'm Miriam O'Day, and I'm senior director of Public Policy for the Alpha One Foundation, the Alpha One Association, and I'm here on behalf of IGIV consumers today as well on Medicare reimbursement.

We want to thank you, and update you, and review some of the areas where we also have gaps, and I would say that Julie did a nice job from PPTA teeing up the overview, and Shannon gave you a very in-depth perspective for alphas and primary immunodeficient patients. We face some of the same concerns with AWP revision, Medicaid, but we don't necessarily discuss that in this presentation.

For alpha 1-antitrypsin-deficient individuals, patient access to care depends on adequate reimbursement rates, and the proposed rule for HOPPS that came out was recommending a reimbursement rate that was 45-percent below the hospital acquisition cost, and we were able to get a favorable ruling. We were removed from the transitional pass-through pull, we were removed from HOPPS and reimbursed at a reasonable cost basis.

I've provided you with a press release from the Alpha One Foundation stating our jubilation on that ruling, and let me just read to you the definition of reasonable cost basis.

CMS states that it's the calculation to determine the reasonable cost incurred by individual providers when furnishing covered services to beneficiaries. The reasonable cost is based on the actual cost of providing such services, including direct and indirect costs of providers and excluding any costs that are unnecessary in the efficient delivery of services covered by health insurance programs.

And so we want to raise to you, the only concern that we have about that is there are so few drugs that were given that special classification, that kind of a carve-out, we're not exactly sure how the implementation will be put into play. So we did want to raise that as an issue today. Why was alpha 1-antitrypsin deficiency, the treatment for alpha 1 carved out? We think that the impact of this committee's resolution really helped us. Also, we had direct communication with CMS. We were able to improve their understanding of our need for access to care, of the fact that alphas need to see a specialists, infusion nurses.

And the impact of reimbursing at 45 percent of the acquisition cost on rural communities was that some of these individuals do not have a choice. They have to go to an outpatient clinic.

So CMS said alpha 1 was carved out due to the unique nature of the product and the impact reimbursement has on the beneficiaries that need access to care, and I'd like you to remember that because we'd like to make the same point when it comes to IGIV reimbursement for chronic conditions such as primary immunodeficiency.

We still have gaps. We have the professional societies working on consensus documents and treatment guidelines. We'd like to see those implemented as national coverage guidelines. There is no home health care provision for alpha 1. If you are not able to get it in a physician's office or in a hospital outpatient setting, you basically have no other option.

We're also concerned about reimbursement for new therapies entering the marketplace and for new routes of administration such as an inhaled therapy.

Moving on to IGIV and primary immunodeficiencies. Again, patient access to care depends on adequate reimbursement rates, and the ruling that came out for implementation in January of '03, clearly shows that CMS has absolutely no understanding of the utilization and administration of IGIV, particularly for chronic disease populations like immunodeficient patients, that they really do not understand the source of IGIV because they have not classified it as a blood and blood product. They don't understand that there are no therapeutic alternatives for this patient population and that there's a clear need for patient access.

I would also like to state that in the long run, the other chronic user populations will be transitioning eventually off of plasma-derived products. Hemophiliacs and others bleeding disorders have options. The alphas are hoping for other sources like recombinant therapies. And for immune-deficient patients, they will be on plasma-derived product for quite some time.

The patient demographics, and I know most of you know this, but I just wanted to review it briefly with you. These individuals are born with a missing or compromised immune system. The regular infusions of IGIV are replacing that immune system. The majority of these disorders that are treated with IGIV are genetically determined.

It's gender balance, it affects an equal number of men and women. And like insulin-dependent diabetics, immune-deficient patients depend on IGIV, and they usually receive it every 21 days.

The population is about 5 percent 65 and older. About 11 percent of those individuals are Medicare recipients, as compared to 14 percent in the general population. Of course, this makes sense because there's a smaller aging pool than in the general population. I should have cited my source there which is the Immune Deficiency Foundation's National Survey on Patients.

One indication that we have, again, of access problems is that the Immune Deficiency Foundation does run an unadvertised--I guess it's advertised now that we've announced it here--but unadvertised compassionate care program. They receive about one call a week, and these individuals can seek up to six months of product if they have a gap in coverage and medical necessity has been determined.

They face the same issues as alphas and those with bleeding disorders. In terms of definition and reimbursement, the same provisions should be given. Again, these are life-sustaining and life-saving therapies.

Some of the concerns that exist are coverage of new products, coverage of new methods of administration, like subcutaneous, and there is also a gap in home health care reimbursement. We have provided for the committee a copy of the March 2003 SB magazine, which is a monthly publication from Louisiana that has an overview from Congressman Jim McCrery, who initiated in the 1997 Balanced Budget Act a study on whether or not home infusion would be safe and effective for immune-deficient patients. And the outcome, of course, is that it was a safe and affordable option.

Unfortunately, the study remains on the shelf, unless there is an act of Congress and Medicare reform. I love that Congressman McCrery states in the article that "common-sense modernization is not being implemented."

This is our specific problem, and the real reason that we're here today, besides being able to give you an overview, and that is that CMS, again, with the ruling that came out and the implementation in January of '03, there was a program memorandum that corrected the billing errors and inequities.

We provided that program memorandum for you. If you're not interested in reviewing the whole document, if you turn it over onto Page 10, under Article 13, I believe, it expresses the changes that they made in IGIV.

But the payment rates have to remain constant. IGIV was excluded from the definition of blood and blood products, which means that it does not have a permanent APC and it is not having the benefit of dampening that you heard Shannon describe to you. Again, if you'd like to know CMS's definition of dampening is it's a mechanism to reduce, by 50 percent, any reduction in median costs over 15 percent. CMS calculated the difference between 15 percent and the projected reduction and then halved it. So it means that we won't be subject to broad-based cuts.

The committee has jurisdiction to recommend a resolution in this area. Again, I think we previewed for you the impact of the resolutions that you've passed on alpha 1 and the way that that benefitted us in the final ruling.

The August 24, 2001, committee resolution basically addressed this issue. Let me read the resolution to you in its entirety. The DHHS Advisory Committee, on August 24, 2001, said:

"For purposes of the Medicare Outpatient Prospective Payment System, the Department of Health and Human Services Advisory Committee on Blood Safety and Availability recommends that all plasma-derived and recombinant analog therapies be placed in permanent, separate payment categories similar to blood and blood products.

Maintaining unique reimbursement will ensure that hospitals' current and future costs are recognized and safeguard patient access to these critical therapies."

We're asking you to take the next step today, and instead of saying "similar," define as "the same as."

So, if we could raise this to the Secretary's level and amend the definition, we feel that that will be the first step in helping this IGIV issue be resolved.

So, if the committee could recognize that IGIV is derived from pooled human plasma, that it's fractionated from the same source material that produces human-derived clotting factor for the treatment of hemophilia, which is defined in the rule, we'd like to recommend a resolution, and the resolution has--I've slightly amended the resolution since the printing of the slides.

The resolution should now read:

"The Advisory Committee recommends that CMS amend the definition of blood and blood products to include IGIV and reflect the need to provide continuing access to plasma-based therapies used to treat chronic diseases and life-threatening conditions."

Further, to go a step further, we're not here advocating for a specific dollar amount per gram, we just would like to see, as Mark Skinner had pointed out a little bit earlier this morning, that there be provisions that the cost of safety be recognized in reimbursement.

And so the second piece of the resolution that we're asking for is that the Advisory Committee recommends that CMS establish parity of payment rates across the different billing dosages, while at the same time assuring payment rates that adequately reflect the unique costs of safety associated with the production of plasma-based therapies.

Thank you very much.

DR. BRECHER: We'll now open the last three presentations for questions and comments from the committee. Harvey?

DR. KLEIN: Could you give me the median age of the severe hemophiliac in the United States.


DR. KLEIN: That's for the severes, 24.

DR. BRECHER: Shannon, just to give the committee a ballpark figure, what does it cost for let's say an average hemophiliac and severe hemophiliac per year in clotting factors?

MS. PENBERTHY: It's a good question. Thank you. Clotting factor is administered based on the weigh of the patient. So children will use less product, but as they get older and gain weight, they will use more. We estimate, and Keith can shake his head or not if I'm off base, but probably for a child, if they're using a recombinant product, which we hope they are if they're a child, it depends also on how active the child is--I should add that as well--probably $75- to $125,000 a year for a child. Keith can comment on this.

And then for an adult--

DR. HOOTS: Yes. Excuse me go ahead. I was going to say for a child, a 4-year-old who's on prophylaxis, it's close to the upper range. If they're not on prophylaxis, it's about a third of that.

MS. PENBERTHY: And then for an adult, we have always said that costs could be anywhere really from $100- to $200,000 a year. Again, that depends on are they treating prophylactically or on demand, how active the person is and whether or not they develop an inhibitor. About 30 percent of our Factor VIII population is susceptible to developing an inhibitor and probably will at some point.

Huge costs go into managing that because we currently have a few treatment options. You either flood the body with the Factor VIII recombinant product or you switch them to a treatment such as our recombinant VIIa, the NOVO VII, which is extremely expensive and also to manage.

The incidence of inhibitors in our Factor IX patients is much lower. It's probably around 9 or 10 percent, but you could, again, it depends there on the product. Practical experience tells us that those patients using a Factor IX recombinant product will require more of that product to get the same level of coagulation as the plasma products. So there you easily probably could have an adult using $250,000 a year. I'm sorry to give you a complicated answer, but it probably reflects on the complexity. There is no real--

On the Hill, I say, for an adult with severe hemophilia, between $100- and $200,000 a year.

To answer your question about the milds and moderates, a mild person may go for several years without requiring a product and then have an event that causes them to actually be a very acute user of it for a period time related to an injury or trauma, surgery. Again, they might not have needed product for some time and then end up using quite an abundance of it over just a matter of a couple of months, depending on how long it takes to correct the situation.

DR. BRECHER: Thank you. Maybe we could have a similar response for the immunoglobulin and the F1 as to what it costs a year to support a patient.

MS. O'DAY: It's between $25- and $30,000 for both of those populations.

DR. DAVEY: A question for

MS. Penberthy, and thanks for trying to get us through a very complex situation.

A question about I guess the PHS price, the Medicare price, that I need a little clarification on. You said the proposed rule would be 52 cents a unit. Is that for recombinant and plasma-derived both? Also, how does that price relate to the market price?

MS. PENBERTHY: I will speak in terms of what the AWPs for those products are. But we were able to somewhat fight that. The proposal that came out last August was 52 cents across-the-board for plasma and recombinant products. There were a couple of exceptions. I think recombinant Factor IX was higher.

Some of this was because of the relative weights. We were in that transitional pass-through pool where they continued to base payment off of average wholesale price. When they transitioned us out, and we're now in Class K, which is nonpass-through drugs and biologicals, we became subject to this relative weighting.

Clotting factor, the reimbursement is set per unit, so our relative weight was .0001, and when you multiplied that times what they considered the base of $52, that's how we got to 52 cents.

We supplied them with data that we collected. I actually have this whole chart that showed and demonstrated what the loss to the hospital per infusion would be based on those rates, and they redid their calculations. And when they put the dampening provisions into effect, essentially, for 2003, reimbursement is 51 cents per unit for our plasma products, and $1.02 for the recombinant products, which puts us in the range of our hospitals being able to cover the costs for those products.

We have actually more problems probably on the plasma side than on the recombinant, depending on even then which product you're talking about.

I don't know if I fully addressed your question. There's no easy answers. I'm sorry about that.


DR. BIANCO: Thank you very much for covering such a complex issue. I've learned a lot, but I want to learn a little bit more. Maybe you can educate us. There is a lot of variability in prices, depending very much on patient settings. There are hemophilia treatment centers that are federally funded that have access to Factor at different prices.


DR. BIANCO: There are home care services that will provide them, and there is actually an attempt by several manufacturers who are kind of enlisting patients and creating their mini home care systems, and there is competition between all of them.


DR. BIANCO: How does that affect price or the care that those patients get? Can you give us an idea?

MS. PENBERTHY: Because our reimbursement systems are largely driven based on the average wholesale price, which is a price that the manufacturers themselves report, we don't really see that kind of competition in terms of the reimbursement level.

There's a whole step here. The manufacturer makes the product and sells it to those providers or, in some cases, trying to go direct, and then that provider is the one who supplies it to the patient, to the consumer, and gets reimbursed through our payment, various payment systems for it.

So the competition really occurs in between what your provider is able to buy it and what they're able to sell it for, and that's where the competition really currently exists.

We are probably dawning I would say in the last nine months, maybe a year, to a bit of a new age in hemophilia care in that recombinant technologies have been on the market for 10 years, and it's really I would say in the last year where we've had any confidence that there would continue to be a full, adequate supply to meet demand for those products.

And so when you have a shortage year or every other year, that also convolutes anything that might--what you would expect to occur, for example, in the marketplace on a pricing competition basis. Up until this point, it's been fairly inelastic. I think we are moving to a period where we'll see some more elasticity in it.

DR. BIANCO: Thank you. I have a quick question for Miriam. We heard from

MS. Penberthy the number of hemophilia patients. Can you give us an idea of how many immunodeficiency and alpha 1 patients we have in the U.S.

MS. O'DAY: For the alphas, it's estimated that there are about 100,000, based on population statistics. Six thousand of those have been identified in the U.S. and currently about 50 percent of those are on therapy.

For immune-deficient patients, and again I would have to check the statistics, I believe it's somewhere, the population is estimated from data that's been collected by the Immune Deficiency Foundation at somewhere around 40,000. About 70 to 75 percent of those are frequent and regular IGIV consumers.


COLONEL FITZPATRICK: Miriam, I just had a question--and thanks for everything--on your last suggested resolution, I could interpret that a couple of ways, and I was just going to ask for some clarification. Are you referring primarily to the need for recombinant factor or are you referring to the need for advances in safety and new development there?

MS. O'DAY: Both. And we ask that it be recognized, that the cost of safety and the cost of advancing the technology be recognized as unique and plasma-derived therapies.


DR. PENNER: A question for Miriam or at least a comment. Our biggest problem with intravenous gamma globulin use is that the constriction for use, as third-party carriers have now employed it, that any acquired conditions that are rather unique and respond well to intravenous gamma globulin are not allowed to be reimbursed. Any comments on that? Particularly, I have several cases of Wegener's granulomatosis which re

spond well to intravenous gamma globulin. There is a refusal of third-party carriers to pay for that because it's not in the included group of reimbursements.

MS. O'DAY: Right. Currently, CMS pays for on-labeled indications and clinical indications. So they do pay for some off-label usage, but again it's up--the data has to be presented to CMS so that they appropriately recognize it instead of it being anecdotal, and that's an ongoing problem. There are ways that it is effective in its utilization outside of its labeled indication. Agreed.

DR. PENNER: Unfortunately, in many of these cases, there are not enough of them to provide much more than anecdotal data. And then maybe one case for Shannon, if I can, and that is with respect to some of the patients who require unique products in the hemophiliac population, those who are on inhibitors, could you comment on the cost situation and that relationship.

MS. PENBERTHY: Sure. I actually have something I could add to Miriam's answer.

We dealt with the acquired issue in our own community, where we had instances of people acquiring hemophilia, and it took a few very high-profile cases. There was one I think two years ago, maybe two years ago, at Duke a patient who ran up a bill of over a million dollars in like 54 days, you know, admitted to the hospital, and this was the only treatment. Unfortunately, that patient died.

Even perhaps more unfortunate, from Duke's perspective, is that he died two days before they enacted coverage for acquired hemophilia as a covered diagnoses in their manual. But it took us about a year-and-a-half to get them to do that, but we were eventually successful.

There's so few rare patients, and when it does happen, literally Duke Medical Center is calling me, "Okay, I've got this huge deficit because of this one patient."

I'm like, "I know," and a million dollars is a piece of equipment at Duke Medical Center. So they weren't going to get the upgraded MRI that year because of this one patient. So it is a real concern. Regarding patients who are on inhibitors, you know, treatment and their cost, it can skyrocket. Again, it depends on the link that you need to provide, that treatment to get the body-- Essentially, what happens with inhibitors, your body rejects the clotting factor. So therefore you're administering this product that's having no effect for the person, and it not only is wasteful of a very valuable product, but also potentially dangerous for the patient.

I've heard $300,000; $500,000, and this could be a treatment that's required over several months, in some cases. Keith is the clinician and has probably even more examples he's dealt with himself, but i--

DR. PENNER: Well, we've had several situations where hospitals had gone $7 million with one surgical procedure and are trying to bail themselves out. So I think there's a whole issue there that is separate, and it's going to require attention.

MS. PENBERTHY: And, again, we do have Medicare payment for the inpatient setting. So they should be able to recoup some of it that way. In Medicaid we do not. I'm not aware of any states that do provide it, but if you have a Medicaid patient getting a procedure in an inpatient setting, the system is just eating those costs right now.

DR. BRECHER: We're going to try to stay on time, reasonably. So we're going to take a break. We're going to restart at 10:50, exactly. [Recess.]

DR. BRECHER: We're going to move on to our discussion of how CMS works. Is our speaker, Chris Mancill, here? Chris, are you ready? Let's roll.

MR. MANCILL: All committee members have copies of these slides. We had a few of the slides that were left over, and we placed them on the table out there. I just looked, and it looks like we're all out now.

I have to preface this by saying that the other speakers who were invited today have come up to me privately and said that they really do not admire my task, having to be the one who explains how the Centers for Medicare and Medicaid Services actually works, and then even more of an unenviable task would be to explain their reimbursement policy for blood and blood products.

And I really have to say that I'm starting off on the first slide with an absolute inaccuracy because you cannot talk about a single global or all-encompassing reimbursement policy for blood products and plasma derivatives when you talk about the Medicare program. So we're going to really try to flush out some of the problems and also how the Medicare program actually goes about setting policies, what it can do, what it cannot do.

In your packets, you should have copies of the presentations with the same cover slide up here, and then also four handouts that are also in the same part of your packets that go through reimbursement specifically for blood components, IVIG, albumin and hemophilia clotting factor. So it goes through as a quick reference sheet for you. Just as we go through some of the more complicated issues in this presentation, it should help you as a guide.

I have to first start off by saying that the Centers for Medicare and Medicaid Services, a program that I think probably has quite a bad reputation as an agency within HHS. However, given the budget and the staffing that they currently have, it does a very admirable job of providing health care to the beneficiaries of its programs, and I'm not just saying that in case anybody from CMS is in the audience.

Today, I'm going to go over the programs that fall under the purview of the Centers for Medicare and Medicaid Services or CMS--the Agency's name since the new administration came into power-- the policy-setting process behind the Medicare program, but also talking or really focusing in on the importance of the Medicare program to reimbursement for blood products.

I'm going to go also very quickly through some Medicare payment systems--inpatient, outpatient and other settings. Obviously, when we speak specifically about the blood components, inpatient, as we've already spoken about today earlier with Stephen's presentation, is really the most important setting of care for blood delivery. Outpatient and other settings are more important when it comes to plasma derivatives.

I also really wanted to outline a blueprint for reimbursement changes. Unlike some of the other speakers here, my role, in the blood industry, is providing education directly to providers to help them deal with reimbursement changes and help them understand how products are reimbursed. So my blueprint for reimbursement changes doesn't really give you a recommendation to implement, but just really lays out a couple ideas that would significantly improve the reimbursement process.

As you've heard today, it does seem like hospitals have a lot of difficulty billing for these products appropriately. So education is really one of the key needs for reimbursement changes.

First of all, very quickly, CMS is a federal agency, obviously, and it's organized within HHS. It oversees three health insurance programs: the Medicare program, the Medicaid program, which is operated in a decentralized fashion by the states, and then also the State Children's Health Insurance Programs--again, another decentralized, state-administered program.

When you add up all three of these health care programs, they account for or they cover more than 80 million Americans. So a very significant amount of American health care system falls under the purview of CMS. CMS, however, doesn't have a very large bureaucracy to administer these programs. They instead rely on the states to administer Medicaid and SCHIP, and then they rely on private-sector contractors to administer the Medicare program.

Tom Scully is the current CMS administrator. His background, he was formerly the president of the Federation of American Hospitals. So they have somebody who actually understand health care delivery in the lead position at CMS. They currently are spending about $360 billion per year on health care services--so obviously having a lot of influence in U.S. health care.

Focusing a bit on the Medicare program. It is a federally administered program for the elderly and disabled, primarily. This program is the largest within CMS, and it's also the largest single health care insurance program in the United States currently, with over 40 million beneficiaries.

The Medicare program has very strict eligibility requirements. The three tenets of those eligibility requirements is you typically have to be over the age of 65 and eligible for Social Security as one route to the Medicare program, be disabled or have endstage renal disease. Those are the three main ways to obtain Medicare, currently.

Then, the Medicare program is divided up into two main components. As the legislation was written back when the Medicare program was devised in the 1960s, it followed a very traditional insurance model where you had hospital benefits and physician office or other health care benefits. You'll notice one thing that you don't see up here is a prescription drug benefit because at the time Medicare was created that was not a significant need of the American population--quite different now, of course.

Hospital insurance is mostly called Medicare Part A. You've heard the terms thrown around today Medicare Part A and Medicare Part B. Medicare Part A primarily refers to hospital insurance coverage primarily for the inpatient population. It also provides some level of coverage for skilled nursing facility and some health care services--home health care services, excuse me. This program is financed through our taxes.

The other program or the companion program, known as Medicare Part B, is a supplementary medical insurance, and it is primarily the mechanism under which the Medicare program provides physician, some hospital outpatient care and then some home health care as well.

You'll notice that home health care goes between Part A and Part B. That's just to further complicate the matter. Not enough of a point to really pause and ponder that, but one thing to note, however, is that hospitals bill for Part A services and for Part B services because hospital outpatient care is considered Medicare Part B-- again, just an historical relic of the way the Medicare program was written into law.

A third program dimension is Medicare Part C or Medicare+Choice. This is the Medicare program's version of managed care. Enrollment is rather pitiful in the Medicare+Choice program, and it's really recognized throughout the industry as a failed experiment.

Let's look, first, for a moment at how Medicare reimbursement policies are set. Like most things in D.C. Congress has its say of how the Medicare program operates, mostly through existing laws and then authorizing laws that come out of Congress, as well as appropriations laws.

The authorizing laws, obviously, mostly, and I won't go into detail because I'm sure everybody is familiar with them, the congressional process, but really they define what is covered.

So you have a law that says that they will cover inpatient care or that they will pay for hemophilia clotting factor separately under a DRG system, but you also lack a law that says that the Medicare program covers prescription drug benefits. So the Congress, of course, being very significant here, and we all know that the Congress is currently debating or bantering about among themselves the creation of prescription drug benefit plan for Medicare.

They also mandate payment system changes. We've heard some presentations about HOPPS or the Medicare Hospital Outpatient Prospective Payment System. The Medicare program was directed by Congress to implement that new payment system. In typical fashion, the mandate from Congress came in 1997, and the Medicare program was finally able to get it all together in 2000.

Not every year, obviously, brings about authorizing laws or specific mandates for the Medicare program, even though a majority of the cases there are some authorizing laws out of every session.

Appropriations laws, these actually fund the programs that the Congress is telling the Medicare program to go enact, and these are funded or passed every year.

When the Medicare program receives a new law from Capitol Hill, there are two possibilities. They might have to go through a rulemaking process to actually implement the law, meaning that they have to publish a proposed rule, they have to seek input from the community and from other stakeholders, and they have to of course finalize that rule and get the implementation put into effect.

The other type of action could be a nonrulemaking process where the Medicare program essentially is given wide authority to implement the will of Congress. The Agency may or may not discuss any of the issues with shareholders, even though increasingly I believe they are, even for nonrulemaking types of implementation, and then they will publish some type of direct communication to providers about how they're implementing the law.

A payment system overhaul would be a measure that requires rulemaking I would say most typically and then no rulemaking would be required for a minor change to the Medicare program as covering a new service or not covering a service.

As I said in the preface to this presentation, the Medicare program doesn't really have a single Medicare policy for blood products. Reimbursement varies by setting of care and also by the type of product. In some of the earlier presentations, I remember Miriam's presentation where she talked about how the IGIV products have no coverage in the home setting or specialty pharmacy setting, however, hemophilia clotting factors do. So two plasma derivatives treated very differently because they're two different types of product.

In general, however, the Medicare program has been told by Congress that it must pay for blood products, the components, as part of the DRG system, but they've been told that they have to carve out hemophilia clotting factor. So pretty much every blood component or blood-derived substance is paid within a DRG payment, except clotting factor.

Blood products are paid in addition to ambulatory payment classification or outpatient service Medicare payments. However, the payment rates are woefully inadequate and the Medicare program has a peculiar determination on what a blood product is.

And then, finally, plasma derivatives in the physician office setting or the specialty pharmacy setting, when covered, are paid based on 95 percent of average wholesale price. Again, subject to a little bit of interpretation, as other speakers have said earlier today by CMS.

Within these guidelines, the Medicare program does have some authority to come up with specific payments for these products. For hospital inpatient services, they can choose the measure by which they track blood costs.

Currently, the Medicare program uses a market-basket system that tracks all of the costs of goods and services provided by a hospital, but it doesn't specifically track blood costs, as we'll talk about in just a second, and as Stephen mentioned earlier. They essentially look at the cost of some process derivatives and say that is a close enough proxy for blood costs. It's a whole heck of a lot better than what they used to use on the chemicals index.

So that's one step in a positive direction, but we will have to continue to monitor to see how well this is a measure for blood costs in the inpatient setting.

For hospital outpatient services, Congress told CMS that they have to pay for blood products separately in addition to the payments that they make for APCs, but Congress did not tell them the definition of blood products, giving CMS the authority to define blood products themselves.

Rather than look to the FDA for guidance, where there is existing federal documentation on what a blood product is, CMS defined blood products through its own medical advisers. An outside medical adviser supposedly is the one who created the definition of a blood product, and it now does include the blood components and hemophilia clotting factor, but as you heard before, it excludes the immunoglublins, albumin, plasma protein fraction, alpha 1 protease inhibitor.

All of these other products are not considered blood products or blood-derived products. As I said, however, the FDA does consider them, and being a sister agency within HHS, you would think that they would be using the same definition, but that is not necessarily the case.

Physician office and specialty services. Under the Medicare program, as I said before, does have the right to determine what it will define as AWP, using a class of products and not a particular product itself. So you can have a high-cost product that is not paid on its own AWP, but on the AWP of a lesser or a lower-cost product.

In a presentation like this, it's really good to at least focus in on what CMS cannot do. I know when I'm doing sessions and talking to people about the problems with Medicare payment, they often say, well, let's schedule a meeting and go up to CMS and let's get everything fixed.

It's not quite that simple. Very often the Medicare program folks will look across from you at the table and say, "You've made a very persuasive argument. However, we have no ability, within existing statute, to implement what you're asking for." Sometimes you actually have to go to Congress.

For that reason, the Medicare program cannot decide tomorrow to pay separately for IGIV alpha 1 products and all of these other products, in addition to DRG payments, because they have very specific regulations that instruct them to only pay for hemophilia clotting factor separately, in addition to the DRGs. That was a large enough change to implement. I can't imagine what a change would entail to get all of the derivatives carved out, even though it would be very favorable.

Due to budget neutrality requirements, the Medicare program cannot actually go in and substantially increase payments for blood products without lowering payments for all of the other products that it pays for under hospital outpatient PPS. So, as CMS has said, and also as the hospital associations have said before, if payments go up for blood products, it's only coming out of another part of the federal budget, and payments again will stay flat for blood products or for all hospital services.

It's good to point out that even under hospital outpatient PPS Medicare program, the way that the law was implemented, it only pays 83 cents on the dollar. So hospitals are starting out at a loss, so it's not just a loss for one specific product, it's a loss for products throughout the gamut. And also because states administer their own Medicaid programs, you can't go to CMS and ask them to pay for a specific plasma therapy at a higher rate in one state or to get it carved out of a payment mechanism in one state, as mentioned before.

The Medicare program does reimburse for clotting factor outside of the DRGs, but most of the Medicaid agencies, I can't think of any, they do not pay for clotting factor outside of the DRG payments or the payments that they use for inpatient services. So CMS would not be able to implement that type of change to the programs.

Talking a little bit about transitioning and continuing about the Medicare program and its importance and also talking about what CMS can do, it's good to look at who's actually paying for intensive blood use in the inpatient setting.

Now, and I'm sure it's going through people's minds, there was some data presented earlier showing the Medicare program paying about 46 percent. These data actually show it about 57 percent. It really centers around what you define as an intensive use of blood utilization.

For this particular measure, and I do not know what the measure was for the other one, but this measure uses three units or more per operation or per surgical procedure as the typical benchmark for high, intensive blood utilization. Obviously, you can have a patient who requires a lot more.

However, under this definition, the Medicare program pays nearly 60 percent of intensive blood utilization in the inpatient setting, Medicaid 10, private insurers around 26, self-pay about 3, and other mechanisms paying for about 4 percent, and this is based on American Red Cross analysis of existing databases.

I said before the majority of blood and blood components are provided in the inpatient setting. The Red Cross analysis again shows 92 percent used inpatient, 8 percent used outpatient, with a marginal fraction used in other settings, such as physician office--again, not a very common setting of care, but it is possible of course that a unit of blood could be transfused in such a setting, probably a larger oncology clinic that might be doing something like that, where essentially they are almost de facto hospital outpatient caliber of care.

Let's go through some Medicare payment systems. This is going to be a rather quick run-through because it has been discussed briefly before by the other presenters.

There are about 500 DRGs in the Medicare system. It's prospective payment system, meaning that they rely on data that was billed in the past to set payment rates for the future. So, of course, if hospitals are not billing appropriately for these products, the DRGs won't be set appropriately in the future.

A couple details about the DRG system is that it is set up to incentivize hospitals to reward them for using the lower-cost therapies. Hospitals obviously don't make decisions based on how much they're being paid; they make decisions on how best to treat the patient. However, there is an incentive built into the system to award efficiency.

DRG payments are updated on an annual basis. They review the costs that are billed under specific DRGs. If hospitals fail to report these charges accurately, there could be underpayment or less-than-adequate payment update for the following years.

There's about a two-year lag between when hospitals are actually reporting data and when CMS is looking at it. So, currently, the Medicare program payments are based on data that were billed in 2000 and 2001. The cost of a unit of blood has changed since then, obviously.

So what we're facing here is that any changes in inpatient blood reimbursement will take time to be reflected. Obviously, they are increasing safety measures, and part of the agenda tomorrow is looking at new tests and new screenings that need to be put in place for a safe blood supply. Eventually, those will need to be incorporated into increased reimbursement to reflect those costs. Obviously, it won't take place immediately under the current system.

Whenever a new test, a screening measure or processing improvement such as leukoreduction, any of that goes into effect, there is going to be a lag in an increase in payment. The Medicare program does not look at any current cost data from the blood community on how to set their payments. They really do rely exclusively on how hospitals are billing.

This is something that Stephen mentioned, and it's good just to bring up again one more time. In the past, the Medicare program was looking at the industrial chemicals index as a judge of blood and blood product costs. Now, they're looking at a blood derivative category, as Stephen said, but that's going to be something that needs to be intensely monitored to make sure that it is tracking appropriately with blood costs in the future.

In the current fiscal year, where we are right now, the Medicare program is anticipating spending $88 billion in inpatient care for Medicare alone. So, when you look at the total amount of Medicare spending that has been allotted for blood, it's about 1 percent, and you can see that graphically on the next slide, blood and blood products accounting for .875 percent of hospital operating costs, according to the Medicare program.

So hospitals are spending 1.3 percent on telephone and postage and .8 percent on blood and blood products. So, while a significant cost and obviously important to everyone in this room here today, it's not the most significant driver of costs in a hospital.

Transitioning to outpatient PPS for just a moment. Again, about 500 distinct ambulatory payment classifications--remember, there are about 500 DRGs--the number 500 just happens to be the magic number I guess when it comes to Medicare program. They can drill everything down to a payment and into 1 of 500 categories. APCs are assigned reimbursement amounts which pay for services such as blood transfusions, and infusions and injections of plasma derivatives. The blood components and hemophilia clotting factors are paid separately. However, the current costs or the current payment rates are up to 50 percent below the current acquisition costs. And then there are other categories for other plasma derivatives. The Medicare program pays for IGIV differently, it pays for albumin differently.

As with DRGs, the payments are also updated annually, based again on hospital-reported cost data.

This is a brief summary of how everything stands with the Medicare program in outpatient. Whole blood, red blood cells, platelets, plasma, all considered blood products, as well as the processed hemophilia clotting factor considered a blood product. All of these are paid in specific APCs that are permanent parts of the system.

Plasma protein fraction, albumin, IGIV are considered drugs and biologicals. They are currently put into their own separate APC because they're high cost, meaning that they cost more than $150 per episode of care. So while not being paid or considered as a blood product, they are at least separately paid in the outpatient setting.

And then you have one blood product that is pretty much in its own unique category. There are only four products that are considered this way by the Medicare program currently, and that's alpha 1 protease inhibitor, Prolastin, paid on a reasonable cost basis as of the beginning of this year. In Medicare fashion, they really haven't exactly said what they're going to pay for this product, but they do say that it will be paid on a reasonable cost basis.

All of your handouts have summaries of how the Medicare program does reimbursement, inpatient, outpatient and in other settings, as well as for the derivatives.

As I said before, the Medicare program really does rely on this unusual definition of a blood product, and that is what is driving the different types of APC payments in this setting.

The Medicare program really should define obviously all of the products similarly when they come from--when they're derived from plasma, obviously, or a recombinant analog to a plasma-based therapy. However, the Medicare program did say that it has come up with its definition of blood, because they realized that they need to ensure that hospitals have the access to the safest possible product, and they also put in a buffering provision to make sure that payments for blood products don't fall substantially from one year to the next. This buffering provision only applies to the products that the Medicare program has specified meet its definition of a blood product. Everything else, payments can fluctuate rather significantly.

Physician office reimbursement. Again, no single reimbursement policy for blood products. It changes inpatient, outpatient, and now we're in the physician office or a specialty pharmacy for hemophilia clotting factors.

These products are not subject to prospective payment, meaning that they do not base the payment rates on how providers have billed in the past. They again looked to a standard measure currently that's set at 95 percent of average wholesale price. Medicare program has been tinkering with this system and they've now set a national single drug price or payment for all products across the country, no matter which state they're derived or delivered in. In the past there have been significant fluctuations from California to Florida to New York. Obviously, the Medicare program is trying to clamp down in making sure that they use the lowest possible AWP whenever they have the statutory authority to do so.

Pretty soon we'll be able to say goodbye I imagine to average wholesale price reimbursement.

The Medicare program is looking at various different mechanisms. Currently the star is a system that is based on average selling price.

Something that hasn't come up today yet, the Medicare program has not said how it's going to reimburse for oxygen therapeutics or blood substitutes. There's no policy. Currently there's no product on the market. The Medicare program reacts reactively rather than proactively. There's some good reasons for that. So they have not stated how they will cover such products. However, at least in our review, it looks like some of these products are getting rather close to the market, so we might actually see them around. Soon the Medicare program will have to set some type of policy.

If they're treated as blood products in the outpatient setting they would have the special buffering provisions, obviously, a favor, but most of these products probably will be used inpatient in the beginning, so they'll be subject to a DRG payment. There's nothing before Congress to carve them out of the DRG, like hemophilia clotting factor. So what would happen if this product came onto the market today, it would be paid under a DRG. Being a high-cost product you would probably see some hospitals trying to come to grips on how they want to utilize it and how they want to restrict utilization and how they want to encourage appropriate utilization.

From some of the clinicians that I've spoken to, they do see that one of the first ways of using these products might be a cost-neutral alternative to autologous units. That's one possibility being thrown out.

Medicare's coverage guidelines really do pop up again in the private sector and also with Medicaid programs. The Medicaid program, being the largest of all the insurers in the country, obviously has a lot of sway with the other insurers. So you'll see Medicaid programs looking to national policy set by CMS. By no means are they obligated to do so. However, they can. The Medicare method of reimbursing for inpatient services, the DRG is widely used by private insurers, not exclusively, but again, rather common. Then also AWP-based reimbursement is still seen in the private sector as well.

Blueprint for reimbursement changes, as I draw this down--I didn't mean to presume too much, but I did put up a small role for the Advisory Committee, never wanting to give anybody work, but I at least said that what you do right now currently is exactly the role that I would see as being most appropriate. You're monitoring the reimbursement systems and you're bringing problems that would affect the blood safety and availability of the U.S. blood supply, or the safety and availability of the U.S. blood supply to the attention of the administrator of CMS and the HHS Secretary, obviously, the perfect role for an advisory committee.

CMS, they really do have a mandate to track blood costs. They interpret the mandate rather loosely from year to year it seems. However, they really are trying to do that. They also really should be looking, when it comes to blood products, given their unique nature, looking to pending FDA approvals and trying to come up with proactive stances to reimbursement, rather than reactive stances, and then also continuing to meet with stakeholders.

The agency is amazingly flexible in scheduling meetings with stakeholders. I know when I was at the American Red Cross, they would very commonly meet with us and talk about our issues. Obviously, they couldn't always implement them as the way that we wanted to see, but they were willing to do so.

Providers, hospitals, really can code correctly and they can update their charges appropriately. Stephen showed some providers in some states are actually billing much less than it actually had cost them to acquire a unit of blood, passing that on as a charge. That hurts everybody's reimbursement. Hospitals do an amazing job of actually providing care to patients. The fact that they actually have to figure out how to put an administrative system in place to bill for these products to get paid for that care is an onerous system, and it's unfortunate how we're--that's really what sets their reimbursement rates, and most of them are doing a very admirable job.

Collectors, manufacturers and associations, and patient groups really can educate providers on reimbursement changes. The AABB is doing an outstanding job of getting information out on reimbursement, obviously, as a respected organization in the community. I've seen the Red Cross's materials. They look amazingly good too. If these instructions are followed, significant reimbursement changes can take place. AdvaMed doing an admirable job as well in getting that information out. So I think everybody's doing a very good job, and I know America's Blood Centers has its own activities there. So it seems like the organization is doing a good--or the organizations involved in the blood supply are doing a good job there.

But also they can engage Congress when CMS cannot or will not address specific issues. Obviously, a good role to always be able to go to Congress to enact changes. And the goal of all of these organizations is really making sure that hospitals are paid appropriately for this life-saving and life-sustaining product.

Out of all of those possible actions, the one that will show the biggest result is the one that's based at the hospital level, by accurately billing for the products that they're providing. Inpatient and outpatient systems under Medicare are driven by how hospitals actually bill for their product. Now, if they bill for their products better in one year, it doesn't meant they're going to be paid better in that year. But hopefully it will derive more appropriate reimbursement for those services in the future because of the way that the Medicare program operates and due to their budget neutrality agreements or budget neutrality adjustments. It might not mean that they're getting $10 billion more the next year, but still, the products themselves would be paid at the more appropriate levels, and that would be the main driver of course for setting up appropriate reimbursement in this setting. However, of course, if this trend does not change, there is a concern, obviously, I think among the community. And one of the reasons why we're discussing this here today is that reimbursement will eventually become so horribly low that it could potentially start affecting blood safety and availability. We don't know what that point is. I don't think we're there yet. However, there is always the potential for that.

And that is all that I have here today. I had to apologize for a lot of minutia and details in there, but I hope it wasn't too much.

DR. BRECHER: Thank you very much. Karen?

MS. LIPTON: Chris, that was really excellent, and I very much appreciate I mean seeing it laid out like this. I have a specific question, I guess on our page 9, which is the slide where you're talking about the APC system, and how we--you know, blood components and AHF products are lumped together, and it says payment rates are up to 50 percent below current acquisition costs. Is there a reference point for other types of products that would let us know that this is atypical of what's going on in this arena? I mean are we wildly out of sync here, or does this always happen in this type of--

MR. MANCILL: I think that's a very good question. A lot of them, I would say the measure that was used there was a single blood supplier's actual selling cost really, the processing charge that was provided onto providers for blood products. All of the other details would come from manufacturers who have contractual arrangements with facilities as well. So I would say that there's the perception that there is a difference between how well or how much hospitals receive for blood product as opposed to a drug, but normally those data are really more nebulous. The Medicare program did its own survey and found out that hospitals are acquiring drugs for a whole lot less than 95 percent of average wholesale price. That's pretty much--I think most people in the industry would acknowledge that as well. So I would say the answer would at least be outside of the currently available public databases, but it should be something that could be fleshed out.

MS. LIPTON: Thank you.


DR. BIANCO: Chris, this was a superb presentation. Thank you. This helped a lot. But again, I'm going to repeat on the same point that I did with Stephen. What difference makes it for a hospital when they receive that chunk of money that comes from their DRG, they're going to reallocate it. They know that next year they are going to get 3 percent less or something like that. And they're allocating according to the pressures that they have there. Blood, as you said very nicely, is .825 percent or something like that. That's decimal dust within their budgets. How can we break that barrier and have the concerns about that? There are other obstacles. We can educate them and all that. The blood banks will certainly be very concerned. But how can we convince the administrator of a hospital that this is important? It's all allocation.

MR. MANCILL: Exactly. And that's one of the fundamental principles of the prospective payment system, that the payment is supposed to come out into a wash. It's not supposed to pay appropriately for every service provided by a hospital. It's supposed to pay for them appropriately or at least in the Medicare program's definition of appropriateness, pay for their services, and the aggregate appropriately.

I have to say that my answer to the specific question won't be all that much different from Stephen's. Will it make a difference today? Probably not. Next year? It could make a decimal point's difference for a specific product, but not to the overall hospital budget when you look in the entire United States.

For some major users of blood, the academic medical centers potentially could get them more appropriate reimbursement if they started billing more appropriately. And I have seen a lot of the larger facilities do a much better job of billing appropriately, where I've gone in and looked at how hospitals are doing this, and believe me, that is a truly unenviable task, but I have actually enjoyed it, to see how actually the processes actually take place behind the scenes, behind the scenes.

The one thing that I can say is when we've put on educational seminars for hospitals, you can really engage the blood bankers easily. They have a lot of concern for this issue. However, the coding and billing people, when they actually do come to the meetings and listen to the messages as well, they want to do the billing appropriately, and they do see their job as extremely important, and we all know it is, based on the presentations we've heard today.

So I would say that the educational campaigns, the hospitals do realize that it's not going to net them a dollars day, possibly a fraction of a cent tomorrow, but they are interested in doing it appropriately.


DR. EPSTEIN: I have to profess some ignorance here. Being a little too young and not disabled and not having chronic renal failure, I haven't had to deal with Medicare very much. I don't understand how the relationship exists between the bill the patient gets and how the hospital gets reimbursed from Medicare. The patient gets an itemized bill. The bill then gets submitted to Medicare. But Medicare ignores the itemization and reimburses according to a DRG. So how does it get reconciled back to the itemization against which the patient may owe a balance?

MR. MANCILL: Hospitals actually do bill the Medicare program in an itemized fashion, and you're correct, they ignore, I would say 99 percent of the information that is on the bill. The only time that they would actually look at a specific itemization is for inpatient use of hemophilia clotting factor where they do pay that product separately. So they have the ability to look at that level of detail, but for the vast majority of products and services they do not. Once the reimbursement amount has been received back into the hospital, they allocate that in their own internal fashions, back over the departments that are representative as cost centers. Every bill on a hospital has its own cost center, and then the payment comes back allocated over that bill, typically, with the way most hospitals do it, in a percentage fashion, according to higher charges equal higher dollar amount of allocation.

DR. EPSTEIN: I understand now what you said. But the implication then is if you go to a different hospital and have the same procedures and medications, you could end up with different residual balances for the different services, and then that could then play out differently with any secondary insurance.

MR. MANCILL: Oh, most definitely. The Medicare program--and that's a very good point because coinsurance is a significant problem with the Medicare program, obviously, for patients who use a lot of individual products. Most of the patients in the country do have a type of secondary insurance. The Medicare population is up to nearly 70 percent that are covered by secondary insurance, including the Medicaid program. So in the vast majority of cases it's not a substantial issue, but the Medicare program's payment rules limit what the patient is actually out of pocket per hospitalization. So if you go into a hospital, Hospital A versus Hospital B, they will probably have very different charges. Their payment rates will be the same if the services provided there are the same, and the patients will end up paying the same amount of out of pocket. As in deductibles, there's not coinsurance that's due for an inpatient stay. Where it does actually end up being different for some patients would be the outpatient setting, where they would have the potential for some services that are paid on a reasonable cost basis. They might actually have differences in how much that they actually end up owing.


MR. SKINNER: I want to again ask a similar question that I asked before. Your last statement up here on the board is particularly alarming and my sense is the trend is here as opposed to a trend. It's reality today. As you looked at the reimbursement systems and decisions that are made in terms of updating, what is your experience or where do you see safety factored into the decisions that are made, or is it purely an economic decision and just a dollars game?

MR. MANCILL: I would have to say that the clinical presence within a facility still seems to be the predominant decision-making factor. However, when hospitals look at the entire gamut of services that they have to provide, they might have to make decisions to scale back on certain services, cut out maybe a hemophilia treatment center that they're operating. They night have to divest a home health care company that provides home infusion services for hemophilia or for other products. So I have seen that level of service delivery becoming an issue. That is a good point to, of course, always make to congressional leaders, particularly in rural areas where you can see services being drawn back because hospitals are in crisis there. For blood products I have to say that I have seen it less. I've not seen any hospital saying that they're not going to perform transfusions any more, but of course it could get to that point at some point, where it's so much of a loss that the hospital has to choose, you know, what services it will provide. I really think it's a much harder argument to get to for transfusions than it is for some of the derivative products.


DR. HOOTS: That's exactly the point I want to make in regards to Celso's question. At this point in time the differential may not be great enough to really make choices based on blood, but your point about hemophilia is certainly a good one because that's at the far end of the spectrum and institutions do make those kinds of decisions. But as it gets more and more of a cost loser, if it continues not being accounted for, then hospitals who are in a survival mode have to make tough decisions. So they may decide that having the trauma service is not such a good thing to do because not only are they--particularly if they're serving a largely Medicaid, Medicare population, both of which are using the same rules, because they'll say, well, we're barely breaking even on the surgical side, we're losing money on the blood banking side. hey, we can probably go out and do constructive plastic surgery and come out well ahead. And before long the entire community suffers, and in fact, these kinds of scenarios are playing out, at least in our part of metropolitan Texas. As more and more of major Level 3 trauma centers are being threatened just by sheer cost, and because other institutions don't want to do it, so they're dumping all their Level 3 in very narrow places, and those places are really getting killed on reimbursement.

MR. MANCILL: I think it's an alarming trend that if it's not already starting to see effects, it definitely could very shortly.

DR. BRECHER: Harvey?

DR. KLEIN: I'm not sure I quite understand why CMS considers IGIV different from the others. Is this legislative or is it rule making or what is the reason for this?

MR. MANCILL: That was a decision that was implemented within their own authority. The supposed reason or the reason offered to the community is that they did not view IGIV products as treating a chronic illness, which we know is incorrect. So I think if there is an argument for getting IGIV products back into the classification of a blood product in this year, it's a very reachable goal.

DR. KLEIN: So this does not require any rule making or legislative actions.

MR. MANCILL: Correct. They can--for outpatient services they can do that within their own authority.


COL. FITZPATRICK: Similar question on the separate APC decisions. The threshold for drugs is listed as $150 per treatment episode.

MR. MANCILL: Correct.

COL. FITZPATRICK: We know that transfusion far exceeds $150 per unit or per transfusion episode. Is there a way to--could you apply that to blood without congressional law making or is that within CMS's purview to be able to do that?

MR. MANCILL: Technically it would be within their purview. They currently do pay for the transfusion--I believe it's about $110 to $120 that their transfusion is being paid, and then they will pay for the blood product in addition. It does come out over $150. They've just decided to consider blood in its own separate category as a blood product and pay for that slightly differently than the high-cost drugs and biologicals. So there's kind of two ways of skinning the cat. They're giving blood products their own special type of preferential reimbursement in their opinion, and these high-cost or high-episodic cases special reimbursement as well.

Could they change it on their own authority? Yes, because it would still fall within the broad definition or broad mandate that the Congress gave to the Medicare program.


MR. DALAL: Where within the internal organization of CMS would you look to find the expertise and knowledge related to blood products and services?

MR. MANCILL: I would say that the agency is cultivating that knowledge. They do have an analyst who primarily is a contact for the blood banking and plasma derivative industries, very knowledgeable, very helpful staff at the agency, but you almost have to look at it as that they are really a silo agency as well. If you wanted to talk to somebody about inpatient services, that's one person. There's another person for outpatient services. There's another person for home infusion, and home infusion really doesn't apply except to the hemophilia clotting factors due to the way the legislation is currently written, and then another person for physician office and all the other settings of care. So it's very decentralized decision-making process.

Currently the blood organizations have a specific single point of contact for outpatient services because there have been so many issues related to outpatient care, even though it's only a small slice of that pie since this new payment system went into effect.

So the best place actually to start is, rather than working your way out through all of these departments and trying to get a single blood policy created uniformly is it's really best for the industry, as Stephen said, to partner, everybody go in at the same time, asking for essentially to come up with something that everybody can agree to, so there's a single message to CMS, and then work from the top down, starting at the administrator and secretary levels.


DR. DAVEY: Chris, thank you. Again, kind of a basic question. Going back to your pie chart where you show that .8 percent of hospital operating costs for blood, there's another section of that chart that said all other, 23 percent. Now, I imagine there are a lot of little slices in there, half of a percent for this and a percent for that. Overall, maybe some of those aren't being billed properly either. Can you give an estimate of how much underbilling there is in aggregate in these DRGs, and plug in 1 percent?

MR. MANCILL: I'm not sure that would be within--all I can say is it definitely would not be within my realm of capability. I would love to see someone who could actually go in and figure it out. I have seen, rather than looking from the entire aggregate, working on specific products, and even products that are separately payable under the hospital system, specifically looking at those hemophilia clotting factors. Did an analysis of I believe it was 43 facilities to see how they were billing the Medicare program to get that add-on payment for clotting factor. The majority of the facilities that were even being paid separately for that product were not billing for it appropriately. So even when there's an opportunity for a hospital to get substantially improved reimbursement under the DRG system, there are facilities that, because of the administrative burdens to getting that reimbursement, are not doing it. Done it for other products in the physical office setting and also in the hospital outpatient setting, and there are some other problems. It seems to be something that is pervasive to the system, that billing and coding, because there are so few instructions on doing it, and so very few people understand exactly how to do it properly, that it's not something that's isolated to blood, but there are some unique problem areas to blood that further exacerbate the problem.

DR. BRECHER: I'll ask a quick question. To get back to Jay's basic question about billing. If a patient gets an itemized bill for $1,000 and the DRG comes out to $800 or something like that, the other $200? Does the patient have to pay that or do they have to have supplemental insurance? How does that usually work?

MR. MANCILL: The Medicare program for the inpatient services has a flat payment that's due from the patient. I believe it's in the range of $750 to $800 currently. It goes up on a yearly basis. So once they've paid that amount, they have no further expenses. Most patients do have some type of secondary insurance, either a MediGap, Medicaid program that will cover that for them. so there are about 30 percent of patients that would actually have to pay that out of pocket. Those patients probably would go to the hospital and say that they would not be able to afford it and try to seek a special case exception, a waiver, which hospitals would be able to do, but of course would put them further at risk.

DR. BRECHER: So they are responsible for the remaining 15 or 20 percent.

MR. MANCILL: It's not on a percentage basis, per se, but it's a flat dollar amount per hospital inpatient admission.

DR. BRECHER: Oh, a flat dollar amount, okay.

DR. HAAS: You spent some time talking about underbilling. May I assume there is also overbilling that goes on?

MR. MANCILL: I would say there's the potential for overbilling. The Medicare program, however, strictly polices overbilling, considering it fraud and abuse. So hospitals have a substantial disincentive to overbill, so much to the point where if a hospital is put in a situation where they question the validity of billing for a certain service or validity of billing a certain amount, and this definitely does impact blood products, that they choose not to pass along a charge, or they choose to pass along a law charge. There are hospitals in the United States that actually, I believe, they cannot bill any more for a unit of blood or the processing of a unit of blood than what the blood center supplies it to them for. So what would happen is that since there is no inflation there, the Medicare program says, well, you know, generally hospitals inflate everything by at least 100 percent, so we're only going to incorporate 50 percent of this product's costs into the system.

The problem with that is that it's the unique nature of blood in that most of the times you're not billing for the actual unit because it's freely given. It's a donated product. You're actually billing for the processing of it, and so hospitals view that very differently from passing along a cost, a fixed cost from a drug manufacturer or medical device manufacturer.

DR. HAAS: I guess a reason for my asking the question--because I expected that response--would be that it appears that while we're trying to correct the underbilling, the system is actually trying to depress the reimbursement and that wherever institutions could shift monies around to try and cover high cost centers, that's becoming increasingly difficult to do, so in this very problem we're talking about, the blood sector's getting squeezed rather substantially.

MR. MANCILL: You led me very well to the answer I think, so thank you.

DR. BRECHER: Yes, Lola.

DR. LOPES: When this group heard the presentations on universal leukoreduction, a representative from one hospital came to us that had decided on its own to go ahead and only use leukoreduced blood because they believed that it would eventually lower costs due to fewer infections and post transfusion problems. If a technological improvement actually does wind up reducing costs, would that have the impact of having reimbursements actually go down, that in the next cycle the costs would be lower, reimbursements would go down, even though there had been no increased payment for the more expensive blood?

MR. MANCILL: I would say, as we were saying, that costs will derive increased reimbursement. If there was something that came along, a technological advantage that made hospitals build less for a unit of blood, that would lower reimbursement over time and lower health care cost in the aggregate, but it would have to be based on hospitals billing less for the product.

DR. LOPES: This wouldn't be based on their billing for blood, but just rather that the entire bill for the hospital stay would be less because a person might go home two days earlier.

MR. MANCILL: If they were charging less for the services provided under that DRG, it would have that effect, but it wouldn't be so much tied to the actual blood components themselves.


DR. BIANCO: Just a quick follow up, and that's another issue that maybe you can comment with the system, is that the system is based on single admissions. There is no follow up. That is if you did something terrible that makes that person return 10 times and much more, it's irrelevant because you are trying to save the money only on that admission.

MR. MANCILL: And it's very true. It's part of the reason that we speak so much about Medicare reform these days, is that there are so many kind of tragic flaws with the system that it's set up to sometimes disincentivize providing the most appropriate care, particularly if you do have this patient who is a train wreck case and who comes in for 10 follow-up visits. The hospital is still receiving the 10 inpatient visits, you know, receives the DRG or the DRGs that are assigned for that care multiple times. There's no system that pays them on any other basis than that episodic care, rather than the entire treatment that the patient receives over a course of time, and some of the proposals are to move to a system that some of the managed care plans would be using, and capitation and things like that.

DR. BRECHER: Okay. I think we'll conclude. Thank you very much. That was very helpful.

MR. MANCILL: Thank you.

DR. BRECHER: Now we'll stop concentrating on the U.S. for a few minutes, and let's see what the rest of the world does. We have Stuart Penny.

MR. PENNY: Thank you very much. My name is Stuart Penny. I'm head of hospital liaison for the National Blood Service in England and North Wales, and what I'd like to do is give you some detail on how blood is funded in my patch and a brief overview also of how blood is funded in a couple of other European countries.

However, I thought, first of all, it might be helpful if we tried to put this in a bit of context if I highlighted a couple of cultural differences between the U.K. and the U.S.

First of all, I'd like--


MR. PENNY: This isn't related to someone getting blood payment. We don't do any of this. And, frankly, we don't understand it.


MR. PENNY: And, predominantly, that's because we--you know, our national religion is this, which is soccer. And I was quite interested to see that the front page of the Washington Post sports section has David Beckham, this guy, No. 7 here, on its front page this morning, which is quite a revelation to me.

The other major cultural difference, I think, is that we tend to be fairly uncomfortable with a revolutionary approach to problem solving.


MR. PENNY: So, anyway, what I'd like to do is talk to you a little bit about funding the health service in England, talk a bit about the structure of our National Blood Service, tell you a bit about how we fund NBS--that's National Blood Service--products and services, and then talk a little bit about funding in other countries in Europe.

I'd just like to tell you who I am, I think, before I go any further. I joined the National Blood Service in 1984 as a biochemist, and I've concentrated on operations ever since, operations being production and dispatch and so on of blood to hospitals. I got involved in cord blood banking a few years ago, and for my sins, involved in millennium and emergency planning generally up to about three years ago.

For the last three years, I've been head of hospital liaison, which is a new function in the service, and we'll have about 40 members of staff shortly. And our role is to manage the relationship between us and the National Health Service, which we're there to serve. And that's on an operational, financial, technical, and nursing front.

I'm also responsible for commissioning, which is why I'm here today, commissioning being the buying and selling of services. And I'm also a member of the Chief Medical Officers National Blood Transfusion Committee.

So the National Health Service is a government-run organization in the U.K. It's financed through direct taxation, and it's free at the point of delivery in most cases. There are some instances where it isn't. Dentistry, for example, is one. Optician services are another. And citizens have to pay a contribution towards prescription charges.

Now, one of the major planks of the current Blair government in the U.K. is to improve the delivery of public services, the Health Service being one of them. And so there's about to be a huge increase in spending planned over the next five years. We're currently spending around about 64 billion pounds a year, and a pound is about one and a half dollars, and that's going to go up to 109.4 billion in 2007 and 2008, so quite a significant increase. And that will take the U.K. to above the European average for gross domestic product in terms of health spending, up to 9.4. So, in fact, it's going to be a fairly linear increase from 60 billion up to over 100 billion over the next five or six years, and that's being funded by a 1-percent increase in one of our taxation systems, which is called national insurance.

The structure of the Health Service, as you can see on the slide there, it's managed by a fairly small Department of Health, supported by four organizations called Directorates of Health and Social Care, which cover both the health system and some of the social service systems. They in turn are supported by 28 regional strategic health authorities, which have a strategic role for local planning and capacity management, and also performance management of the whole health system.

There are 302 primary care trusts within those strategic health authorities, and those trusts are organizations which provide general practitioner and community health services. They're linked into around about 300 blood-receiving hospitals. There are more hospitals than that in NHS, but that's the number that receive blood from us. Some of those, about 70 of those, are private hospitals. The rest of them are state-run. And this whole structure is very new. It's only come in a year ago, and it's working so well that the Directorates of Health and Social Care are going to disappear at the end of this year. So they'll have a shelf life of two years, and it represents, I think, the flux, the strategic and organizational flux in which the National Health Service currently is in. And there's a big debate in the U.K. at the moment about how effectively the extra 40 billion pounds is going to be spent.

So within that system, the financial flows are fairly straightforward. Three-quarters of the money is going to go to these primary care trusts, and they purchase activity from hospital trusts. And the cost of that activity varies around the country at the moment, so if you were to have a hip replacement in the north of England, it would cost you a different price--or cost the primary care trust a different price to that in the south of England. So if you needed a hip replacement, you'd go to your general practitioner, and he would be funded effectively by the primary care trust who would buy that service from the hospital.

Now, by 2008, we'll have introduced health care resource groups, which are very similar, I believe, to the DRG system we've heard quite a lot about this morning. And the idea there is that there will be a single price for every treatment, and that will incentivize hospitals to become more effective and more efficient, and it will introduce some competition between hospitals for the activity bought by those primary care trusts.

Now, the National Blood Service was founded in 1946 as 14 local transfusion services, and these have been--were at that time centrally funded from regional health authorities, and they were given a sum of money every year and told to provide transfusion services to hospitals in their patch.

That changed in the early 1990s when, in the Thatcher government in the U.K., an internal market was introduced into the health care system so that services were bought and sold around the health care system. And those transfusion centers, as they were then called, would sell their services to local hospitals for fees, and those fees were different around the country. So there would be 14 different prices of blood around England.

In 1994, the National Blood Service was formed, pulling those 14 areas together into one national service. So we now have one single National Blood Service covering England and North Wales.

We have 4,000 staff covering 60 properties across England and North Wales. We serve, as I said, just over 300 hospitals, and we're collecting around about 10,000 units every day. Sorry, that's a very poor slide, but the yellow dots show you roughly the distribution of the blood centers, and all the other dots show you where we have collection sites and distribution points.

Now, the Blood Service is a monopoly supplier for blood and for platelets, and we issued 2,186,000 units of red cells in '02-03, and around about 216,000 adult doses of platelets. About 40 percent of those were apheresis. We also supplied around 400,000 frozen components, and there was a bit more of a market for--an open market for frozen components. Hospitals can purchase frozen products from other suppliers, commercial suppliers.

We also supply other services such as diagnostic services, including red cell immunohematology services, which includes antenatal screening and reference work. We cover about a third of the country's antenatal requirements; histocompatibility and immunogenetics including a bone marrow bank, the British bone marrow bank; platelet and granulocyte immunology and stem cells and immunotherapy, and including cord blood, which we started five or six years ago.

For these services, we have to deal with some marketplace issues because there are other suppliers of all those services. So we're actually dealing with those in a marketplace. We also supply tissue services, which we've been running for about ten years, and we do a very small amount of therapeutic apheresis.

Now, our service provision to hospitals is defined by a service agreement, and those agreement types are a cost per item agreement for blood and blood components, quite straightforward, single cost for each item. But for some of our diagnostic services, we run cost and volume contracts where effectively we agree on activity and a price per activity with the user. And if we go above or below that activity, then they're treated on a marginal cost basis.

We monitor these service agreements through user groups, where we get groups of hospitals together so they can tell us how great our service is. We undertake customer satisfaction surveys. We provide them with activity data, and also we have a close relationship using our team of hospital liaison managers who look after about 30 hospitals each and make sure we're providing the right service.

So, effectively, the National Blood Service is supplying services mainly to hospitals, for which we receive payment, and we also do supply some services to primary care trusts, though not very many. And our accountability jumps over all those organizations right up to the Department of Health. We're considered to be a special health authority.

Our income is around about 300 million pounds a year, 92 percent of which comes through blood and blood components, 14 percent--sorry, 5 percent comes through diagnostic services and a bit through bone marrow.

Now, we need to note that nearly all our income comes through prices. The NBS doesn't have access to general NHS funds. There's a big modernization program going on in the Health Service in the U.K. We don't have access to those funds. We have to get that money through prices.

This is what the price of blood looks like, so going from 1998 to '99 on the left-hand side up to 2003-04, the price of blood in '88-'89 was just over 40 pounds for a unit of red cells. It then jumped up quite significantly, and that's because the whole of the U.K. then went for universal leukodepletion of all blood of blood components. So that put quite an additional cost on a unit of red cells. It stabilized for two or three years, and then it's jumped again in the last couple of years, and that's mainly through modernization programs around the donor side, collecting blood more effectively and efficiently, and also safety issues as well, introduction of NAT testing for hepatitis C, for example. So now we're charging around about 110 pounds for a leukodepleted unit of red cells, so about $165.

Now, we define those prices nationally through a group called the National Commissioning Group for Blood, and this is a group that's managed by the Department of Health. And the role of that group is to agree a single national price of blood and blood services, and also to define the service provision that comes from the National Blood Service.

It's got participants from the Department of Health. It's got a team from the National Blood Service. It's got some hospital medical and technical representation, and it's got some fearsome hospital finance people in it. It meets twice a year, in June and September. The process is fairly simple. It's as follows: The National Blood Service reviews all the factors which will impact on the price of blood for the following year, takes it to the first meeting. We talk about the impact of demand. We talk about cost pressures such as staff salary increases. We talk about any developments that we want to do. And then we also sometimes, but very rarely, talk about rebates back to hospitals where we've underspent.

We also try to present some initial costs at that first meeting in June and also present, therefore, some prices. And the idea is that price and cost should be the same. We use an ABC method of costing, so an activity-based costing methodology where the price of a particular blood component is driven, if you like, by--the cost of a particular component is based on why we're actually producing that component. So most of our costs go onto red cells because the reason we collect blood from donors is to produce red cells. That means the cost of our platelets and our plasma is fairly low because the majority of our costs are lumped onto our red cells, which is the primary driver for undertaking that activity.

We then have a second meeting with the National Commissioning Group which takes place around about September, and then we propose our final costed developments, our prices, and we itemize all the factors that go into them. And then there follows a considerable period of debate around whether the developments are appropriate and whether the pricing is appropriate.

At the end of that meeting, the National Commissioning Group for Blood then makes a recommendation to the Department of Health, and it's the Department of Health that actually decides what the price of blood and blood components will be for the following year.

That information is then passed from the Department of Health to all hospitals, and we provide them with some pre-inflationary prices around November time. In January time, we add in a government inflationary figure which comes to us from the Department of Health and notify our final prices to hospitals. And then we issue our service agreements to hospitals in March, ready for the new financial year which begins on the 6th of April.

Now, that's for blood and blood components. There are some other services that we provide that also have a national price. So the red cell immunohematology and the platelet and granulocyte immunology services also are charged now a national price. And, also, our transport services are charged a national price. So wherever a hospital is in terms of distance from a blood center, if it needs a delivery, it gets that delivery at a standard price whatever the distance.

Following the philosophy of that, we're moving towards all National Blood Service services becoming--attracting a single price right across the country. So histocompatibility and immunogenetics will go next year, followed by stem cell immunotherapy services the year after, and others such as tissue services may well follow on from that.

So in a few years' time, every service provided by the National Blood Service will have a single standard price across the country.

So looking at price changes for this year, which has just started, this is what we asked for and, in fact, what we got. We asked the National Commissioning Group to provide us with about 6.5 million pounds to improve blood safety, 4 million pounds for modernizing the donor side of our organization, and about 7 million for modernizing our infrastructure. So this is buildings and emergency delivery systems, that kind of thing.

Also, we spent, as I'm sure you have, a great deal of time in the last 18 months on emergency planning, and that attracted a small additional cost as well.

We also came up with 12 million pounds of cost pressures, so this is where we--this isn't related to developments. This is our current system and increased cost pressures on those systems. That came to 27.9 million pounds, or around about 11 pounds 15 for each unit of red cells, which for this year was an increase of just over 11 percent.

Now one of the key problems that we have in the U.K., surprisingly, is that the demand for red cells is falling. And it's fallen by 1.8 percent in the last three years, and this has caused us some significant headaches. Like most blood services around the world, we've got a tradition of struggling to keep up with demand, and in the 1990s, you can see that from '92 up to '98, we had about 25,000 units a year increase in demand. And it was very frequent for us to encounter national shortages of blood during that time, very frequent indeed. And hospital orders were frequently cut back by a significant percentage, up to 50, 60 percent in some cases.

And then around about '97, '98, they stopped, plateaued a bit, and now it's dropping again. And so as I say, we've seen about a 2-percent drop in the last two or three years.

Whilst that seems like a very nice thing in terms of supply, and we haven't had a blood shortage now since January 1999, the demand fall has increased the base price per unit because we haven't taken any fixed costs out of the system. So we haven't reduced the number of collection teams or the number of blood centers or laboratories across the country, so the fixed costs have effectively gone up, or the unit cost has gone up.

Now, the reason we haven't taken any of those out of the system is that we're not really sure what's going to be happening over the next few years with this new issue that's very relevant to us of variant CJD. There's a possibility that we might defer previously transfused donors from giving blood, and that would take between 10 and 15 percent of our donors out of the system. And some of the work we've done with donors suggests that if we implemented a test over the next couple of years and if the test becomes available, then we will have to implement it. Maybe 40 to 50 percent of our donors will decide that they don't really want to know that they're positive for vCJD when we can't really tell them what that means. So there's a possibility that we might be facing a severe prolonged shortage of blood in the future. So we haven't taken any fixed costs out of our system.

So we've agreed a fairly innovative approach with the National Commissioning Group for Blood, and what we did this year was we told them that our projected demand was 2,175,000 units, a further drop of about 10,000 units. But that's fairly unpredictable. And what we agreed with them was that we'd take another 50,000 units off that total and we'd base our unit cost on a much lower demand projection.

And what we've done--so, effectively, we're overcharging, if you like, for blood for this year, and we're creating what we call a demand reduction reserve. And what we'll do at the end of the year is if we're between 2,125,000 and 2,175,000, we'll rebate that money back to the hospitals. And in that way, up front the hospitals know what they're going to be paying at the beginning of the year, and we have security that we can maintain our fixed costs.

I mentioned that we haven't had blood shortages for some time, and the reason that we haven't had shortages is because demand has gone down. And demand has gone down for a couple of reasons. One is, I think, that as the price has gone up significantly, demand has gone down, which is quite interesting. And, secondly, there's a big drive in the U.K. around something called better blood transfusion, where we are working very hard to try and improve the appropriate and effective use of blood. There's a Health Service circular which came out from our Department of Health telling all hospital trust chief executives that they had to implement 23 different items around improving the appropriate use of blood.

Also, we've improved our marketing techniques, so we're making better use of our donor base and are not having a supply problem. But because our demand has gone down and we're collecting so well, the age of our blood--our stocks have gone up, so the age of our blood has increased our issue, and this has led some hospitals to say to us, well, we're getting blood that's older, so we're wasting more blood in the hospital, so what we want you to do, if you're giving us older blood, we want to pay less for older blood than fresher blood. And the principles on which we cost are that cost and price--cost should equal price. We don't make any difference between age. So we're faced with a bit of a problem there that we haven't quite resolved, and it may be that we need to change the way in which we distribute blood to hospitals. We currently use a first-in/first-out system, so the oldest blood goes out first. We may need to change that.

Just to illustrate that, this is information taken from our blood stocks management scheme, which is a voluntary scheme where hospitals and blood centers can input information on stock and wastage in an anonymized fashion onto a website, and they can see how they compare in terms of stock and wastage with everybody else in the scheme in real time. They can see it immediately, and they can benchmark against other hospitals.

The top graph shows what we call our issuable stock index in the National Blood Service, and the bottom shows the wastage in hospitals. And without going into too much detail, you can see the graph at the top, the age of blood--sorry, the stock of blood that we're holding has gone up significantly, and the time when that changed is around about a year ago. Also, you can see that wastage has gone up significantly on the bottom line in hospitals. So the older blood we hold in the Blood Service--or the more blood we hold, the older it gets to hospitals, and the more wastage there is in the system.

This also demonstrates--the red line on this graph shows the percentage of blood that was issued with at least 25 days left to expiring, and two years ago, in April 2001, about 60 percent of our blood had 25 days left to expiry, and now it's gone down to around about 20 percent of blood. So having enough blood does cause its own problems.

Now, when we add new services to national pricing, we've now got a kind of formulaic approach which we can use. And what we tend to do with the National Commissioning Group is we form an expert subgroup of that National Commissioning Group using people from the NBS, using users of our services, and we propose to them a number of options as to how we might nationally price particular services.

We then go through a consultation process with customers, which takes a couple of months, and make a final proposal to the National Commissioning Group. And then that group makes a proposal to the Department of Health which makes a decision.

What we try to do here is try not to make it look like the National Blood Service is imposing a national price by getting--making sure that it's done in a way which involves our customers. So the consultation with customers and getting customers onto our expert group is very important.

Now, in the last two or three years, we've seen some major new initiatives, and I thought I'd just illustrate to you how they were paid for. I mentioned earlier on that we introduced universal leukodepletion, and initially that money came from the government. It was ring-fenced money in the first year, about 18 million pounds. But after that, it was financed through prices, so hospitals had to find that money from their current budget.

We're just about to start importing plasma from the United States as a vCJD risk mitigation measure, and we're going to use that plasma predominantly for neonates. And, again, there's going to be an increasing cost to the blood community, and that money is going to be found solely through prices. We haven't had any central funding for that.

Also, we've recently expanded our bone marrow registry, but we did get some ring-fenced money for that. So it's never really quite clear when a major new initiative comes along whether it's going to be financed centrally or whether we're going to have to find that money solely through prices, or a mixture.

So just to review the system, where does the system work well for us? Having the National Commissioning Group for Blood means that for the National Blood Service we have a single body to agree prices with. And that means we have a consistent--we also have a consistent approach for introducing new national prices.

For hospitals, the advantage is that we don't have post code or zip code variability around the country, so the cost of blood in the south is the same as the cost of blood in the north.

The National Commissioning Group for Blood has customer representation, so there is some involvement from customers. There's also some scrutiny of our costings through that process. And there is some independent decisionmaking because we don't decide on the cost. It's the Department of Health that decides on how much a unit of blood will cost.

But I think it could be improved, and we're taking some steps to try and improve this process. The National Blood Service, as I said, we have to fund everything through prices. We have very little access to National Health Service central funds. Some of the developments are mandatory. We have to introduce them. But sometimes those funds are rarely ring-fenced, so, again, they have to come through prices.

And for us, from a customer relations point of view, if the system doesn't work very well--and there are times when it doesn't--then the NBS looks quite poor and that affects our relationship with our customers.

The problems with the system for hospitals are that they have very little individual control. There are 300 hospitals, and there's only about 20 people on the National Commissioning Group for Blood. So finding individuals who can represent the whole hospital community is really quite a problem. That representation sometimes may not be appropriate. And often, because it's quite a lengthy process, the output is often later than the hospitals would like it. And we had an issue this year where hospitals are trying to budget around about September or October for next April's financial year, and we didn't inform them of prices until around about February. And there were some delays in the system which I think will be ironed out this year, but that's quite late for finance directors in the hospitals to be able to manage their budget for the following year.

Just to finish, just a couple of other European countries. Denmark runs blood centers in hospitals in a county level within the country. The country is divided into counties. And that money is centrally funded through taxation, through the taxes managed through each county. And the cost of a leukodepleted red blood cell in Denmark varies from county to county, between 140 euros and 200 euros, where a euro is about the same as a dollar.

In Finland, which has a National Blood Service, funds are agreed at government level, and I think their system is fairly similar to ours. And the hospitals are cross-charged by transfusion services, and they get an excellent bargain in Finland by the looks of it because it's only 90 euros per unit of red cells.

In Ireland, which also has a national service, prices are invoiced, again, by the transfusion service, quite an expensive process, 223 euros for a unit of leukodepleted red cells.

And, finally, in Holland, where blood is supplied by an independent group called the Sanguin Blood Supply Foundation which invoices hospitals, the price is around 172 euros for a leukodepleted unit of red cells.

And I'll just leave you with a picture of Billy Blood Drop, who's the National Blood Service mascot.

Thank you.

DR. BRECHER: Thank you. Maybe you could entertain some questions, comments. Celso?

DR. BIANCO: You gave a fascinating presentation, and certainly this contrasts tremendously with what we have in the United States. But ultimately I liked your statement that increasing price reduced demand. And the second thing is that your funding is much more similar today than it was in the past.


DR. BIANCO: But a question that I have for you is--one of the issues that we're trying to deal with here in the States is the addition of new safety measures that could improve the safety or other characteristics of the products that we distribute. England or the whole U.K. had problems implementing, for instance, hepatitis C screening or implementing NAT for HIV, HCV, because exactly the funding wasn't there and the resistance of the system, is my impression. How do you deal with these increases, that is--obviously CJD, I would take aside the CJD because there is total hysteria about it, and anything that you say you are going to do to improve the safety will be, you know, certainly accepted. But how do you introduce, if you had to introduce, like we will on July 1st, West Nile virus screening or if we have to introduce SARS screening? How would you deal with it?

MR. PENNY: Well, the system isn't perfect. There is a bit of a disconnect between the funding system and the advisory bodies which advise our Department of Health around safety issues. We have a government body called the Microbiological Safety of Blood and Tissues Committee, and that committee undertakes the risk assessments and defines the blood safety measure initiatives that we should go forward with. And sometimes that committee tends to make its decisions in isolation, so we have had issues in the past where that committee has worked on a purely scientific basis and then has transferred the problem, if you like, over into the main body of the transfusion community in terms of funding.

I think those two are starting to come together a little bit more now, and as I mentioned, where we've had new initiatives which have been decided--and they're decided by that body--there is then a big debate around how on earth are we going to fund it and are we going to fund it centrally or are we going to fund it through prices, which effectively means through efficiency changes or increases in hospitals. And it's been a bit of a mixed bag. Sometimes it depends on, I think, how high profile it is. With leukodepletion, it was a government minister who said we're going to leukodeplete, stood up in the British parliament and said we're going to do leukodepletion and there was money for it. In some cases, perhaps with smaller issues, there isn't money for it.

It's a little bit mixed, but I do believe that it's starting to come together, and the expert body I think is beginning to recognize that it can't make scientific decisions in isolation because the more money you spend on blood, the less money you've got to spend on something else. And there is a recognition that blood is pretty safe in the U.K., and there are other areas we could be spending the money on.

Does that answer your question? There are lots of problems.

DR. BIANCO: It does, but you don't have, except for actions of the minister, a regulatory body, like we have our FDA, that will do its risk assessment and come with a guidance or a rule that will determine that that's what we are going to do, and we have to implement that measure in all the country, and that guidance or rule--and I'm commenting here not for you but for all of us--is not linked to reimbursement. It's what people like to call an unfunded mandate in a certain way.

MR. PENNY: I mean, the link for us is at government level. We do have regulatory bodies, but slightly different than the FDA. Our Medicines Control Agency is one of them. The link for us is at government level where the Microbiology Safety Committee will say we think we should do X, and it will go forward to--ultimately will go forward to a minister who will agree whether we should be doing it or not, and also whether we'll fund it centrally or what that money should come from local funds and effectively come out of efficiency savings.

DR. BIANCO: Our process is a little bit less democratic.


DR. EPSTEIN: Thank you very much for the very clear description of how pricing and costs are considered in the NBS. One point that confuses me, though, you seem to have explained that price to hospitals is being set in a manner trying to peg it to real costs and that it's then controlled. In other words, the hospital has no choice but to set price. That's what NBS gets paid.


DR. EPSTEIN: But what's less clear then is how does that cost to the hospital, in other words, the price paid to NBS, then get reimbursed to the hospital? Because what we've been trying to figure out is the difficulty caused in our system by a lack of a clear linkage between the cost of the blood product to the hospital and the reimbursement to the hospital.

So my question to you is: In the U.K. system, is there any effort to link the price of blood, i.e., its cost to the hospital, to the hospital reimbursement for care that utilizes blood? You hinted at the idea of health care resource groups, but what is it that's operating now and how has this been handled?

MR. PENNY: Well, the way that it happens now is that the primary care trusts, which are the primary community facing health organizations--that's where most people access the health organization. They commission activity from the hospitals. The hospital will charge them a set amount, and they will include in that the cost of blood and blood components, which is usually quite a small amount for most conditions.

So the money flows--effectively, it flows to us from the hospitals, and it should flow into the hospital from the primary care organization.

Now, what the hospitals will do when they're negotiating the price of activities with the primary care trust, they should then be included in the cost of blood. And so there's a cost pressure then on the primary care trust, and in some cases they'll--well, the additional--some of the additional money might flow into blood transfusion that's going to be coming into the NHS. But on a year-on-year basis, it may be that the primary care trust will effectively have to start doing something else.

But, I mean, that's at one extreme, but effectively the money goes into the primary care trust. They purchase the activity from the hospitals. The money flows into the hospital, and the hospital pays us for our services.


DR. GILCHER: Chris, very nice presentation, and you brought up a point that I think is important to make a comment on. You stated that with the reductio in demand, the average age of the red cell unit was increasing, which, in fact, then was correlated with an increasing outdate. I think that's important because one of the things that we can all do is to look at a way of extending the shelf life of products. We're facing that issue here in the U.S., especially with platelets. But as one of the, quote, older blood bankers--and I'll take you back 30 years when the shelf life of a red cell was 21 days--a comment had been made, not by myself but by other blood bankers, that for each week of extension of shelf life of a red cell unit, that we could reduce the outdate by about 25 percent. And in a sense, we are there to some degree with red cells now. We use six weeks currently, but, in fact, the data shows that if we were to go from a 75 to a 70 percent 24-hour post-transfusion survival, that we could, in fact, go out an additional week. It's something that we could look at because it will become then a safety issue and an availability issue.


DR. SKINNER: I wanted to follow up on your previous comment. In the U.S., at least from the consumer perspective, we've basically had a zero tolerance approach when it comes to safety of the products that are passed on to the end user, such that if there is the ability to increase the level of safety, albeit it marginally, we're not willing to accept the risk if that risk can be reduced or eliminated.

And so the traditional risk/benefit analysis in the U.S., as I've appreciated it, has been one between impact on supply versus the increase in safety, and the trade-off is there. It sounds like you were saying there's been a paradigm shift in the U.K. now where the decision is based on the increase in safety versus the cost to the economy where it's an economics decision.

MR. PENNY: No, sorry, I've misled you. There was a situation a couple of years ago in the U.K. where a number of patients who had contracted hepatitis C through blood transfusion took us to court because, in their view, we hadn't implemented HCV testing quickly enough. And the judge, a chap called Lord Justice Burton, said then that the public had a right to expect blood to be safe, completely safe, which took people in the transfusion industry by surprise. But that was his judgment.

And, effectively, if we can increase the safety of a unit of blood, then we ought to be taking that--we now feel we have to take that step. But if we take that step, it mustn't be at the expense of other risks in terms of supply.

So with variant CJD, for example, we have not yet decided that we should defer previously transfused donors because if we do, we think that will hit supply to the point where we can't supply to support some patients and so the risk to the patient will be higher, if you like.

Having said that, I do think there is a case where increases in safety of blood and blood components perhaps will be--well, will be decided to some extent on an economic basis. We could theoretically now start importing all plasma from the United States to mitigate against the possibility of plasma transmitting variant CJD, although, of course, there's no evidence to suggest that plasma would. We could do that if we felt the supply was there, and there are indications that it probably is. But we haven't made that case, and what we've tried to do is define a group of patients who we think will be most at risk, and in the U.K. population, patients born after January 1996 have not been exposed to BSE through the food chain. So we've taken a risk/benefit approach to making that decision, effectively.

DR. BRECHER: Harvey?

DR. KLEIN: It's certainly attractive to think that by raising the price of blood you could drive out the misuse. You didn't obviously suggest that or provide any data, but obviously since you've seen a flattening and even a decrease in utilization, you must have some data on where it's being used. Now, are there fewer cases of open heart surgery or transplants or fewer units used per case? Why is the use going down? What kind of data do you have?

MR. PENNY: Well, I have to say we don't have a great deal of real data to help us understand why demand is going down. So what we're trying to do is to get more information. But we believe it's a mixture of--well, it's a mixture of price, it's a mixture of improved techniques, but we also believe it's about improving practice, and there's this big drive in the U.K. about to try and improve practice at the bedside, try to ensure that we're not transfusing patients when we shouldn't be. There's a whole raft of guidelines that have come out looking at hemoglobin levels as triggers for transfusion, and there's a lot of focus on this in England, in the U.K.

So although we don't have any real data to say, well, yes, the number of hip replacements or knee replacements using transfusion has gone down, we believe that it's having an impact.

DR. KLEIN: I think that's a very important point. You're probably in a position to get that kind of information better than we are, where we don't really have a system to do that. And I think it would be very important to find out whether, in fact, you are decreasing misuse or whether there are a whole host of other factors that are affecting the decrease in utilization or demand, as you put it, because certainly there are a whole host of factors that could account for a flattening or a decrease that aren't necessarily better practice.

MR. PENNY: Yes, and this is against a background where the activity in the National Health Service is increasing as more money is poured into it. So, you know, it's counterintuitive; demand is going down as activity is going up. At the macro level, we're just trying to understand now whether hospitals have picked up on these initiatives around better blood transfusion, whether they've implemented these. And there's a national survey going on at this moment which is going to understand that. I think once we've got to that point, we'll want to drill down more and try and understand what's happening at the bedside.

DR. BRECHER: All right. Thank you.

We're going to take a break for lunch. We will start again at 1:30 promptly.

[Whereupon, at 12:35 p.m., the meeting was recessed, to reconvene at 1:30 p.m., this same day.]


[1:37 p.m.]

DR. BRECHER: Okay. Everyone take their seats. We're going to resume. The first speaker of the afternoon is Timothy Greene talking about the MedPAC study on reimbursement.

MR. GREENE: Good afternoon. I'll be speaking this afternoon on Medicare payment to acute care hospitals.

The Medicare Payment Advisory Commission is an independent federal advisory group that assists Congress in considering questions of Medicare policy, issues pertaining to the entire Medicare program. It consists of 17 independent, non-government health care experts--insurance executives, physicians, university professors who consider a wide range of issues and then make formal public recommendations that Congress can act on or at least consider.

I'll be discussing today first a report that we did a year and a half ago on blood safety and treatment of blood and blood products under Medicare inpatient payment. Then I'll be discussing the general outlines and the functioning of the Medicare inpatient prospective payment system, PPS, as I'll call it. And that's where I'll be spending most of my time because when I was asked to come here, I was told that you'd like to hear general background. I see on the agenda I'm listed as talking about the blood report, which I was going to do, but the focus is less on what we did and the findings on blood in particular than on the broader inpatient payment system.

And, third, though I'm not intending to make policy recommendations, I'm certainly not speaking for the Commission or even for myself in terms of recommendations, I'd like to raise a couple policy issues that are general in hospital payment and Medicare in particular and that may be of interest for people concerned with the supply of blood and hospitals, the treatment of technology in the inpatient PPS, the discussion--a lot of discussions now taking place of building incentives for quality care into the payment systems, and then the implications for those issues for blood.

Turning now to the report that we did in December 2001, the Benefits Improvement and Protection Act of 2000, BIPA, required that Centers for Medicare & Medicaid Services, CMS, which runs the Medicare program, give special attention to the adequacy of payment for blood, and it was required to give special care in considering blood when it next revised its hospital market basket, which is used in calculating PPS payments.

The same legislation required us, MedPAC, to conduct a study of safety technologies, their effect on cost of blood, and the treatment of blood costs under the inpatient PPS, in particular to make recommendations for changes to the system, the payment system, to better recognize those costs.

We were required to look at changes in price and cost over the entire history of the Medicare PPS, which was 1984 to 1999. So we did an extensive statistical analysis. We looked at Medicare cost reports, which are filed by every hospital in the country for--well, we looked at four selected years, 1986, '90, '95, and '99. We looked at cost report information for all hospitals in those years and information on individual Medicare patient bills for 20 percent of patients in those four years, about 7,500,000 hospital discharges total.

We used that information to calculate charges for blood and blood administration, as Medicare calls it, and ultimately to estimate costs per hospital discharge overall and cost per user looking at the patient bill records. And you've probably seen or seen at least reference to some of our findings, which were interesting, but I have to qualify them in ways that probably speak for themselves.

First, we looked at, as I said, cost per discharge from the cost report data and cost per user, the subset of about 15 percent of patients who received blood or used blood. And we found more rapid growth in blood costs per user than in the overall costs for those same users, those same patients, over the 1986 to 1999 period, and similarly looking at average blood costs per hospital discharge, we found the same relationship, higher blood cost growth than overall cost growth. But the magnitudes are modest and the difference is modest.

We found that over the 1986 to 1999 period, blood costs per user grew at 4.1 percent per year and overall costs by 3.5 percent. So that's a difference but it's not dramatic. It's probably less than many people would expect when they hear of differences and dramatic changes and so on, and essentially the same result for the entirely different data from the cost report.

And as you know, blood--well, stepping back, the Commission's responsibility is to consider Medicare policy with regard to the entire beneficiary population and for the entire spectrum of health care activity, not individual products or technologies. And so we look at it from the point of view of what's the overall impact of this differential. As you probably know, blood costs are about less than 1 percent of total hospital costs, so we calculate that if blood costs had increased at the same rate as overall costs, it would have been--total hospital costs would have been one-half percent less in 1999 compared to 1986. So the impact from our perspective of the overall health care system, hospital industry, and hospital care is modest. I understand that from the trenches it may look and feel differently, but you know, this is relative.

Actually, I'll be getting into later--I think it's useful to think of it from the perspective of the overall, of the hospital, because from the point of view of the hospital CFO or the hospital association director, it's the overall that matters. And, you know, if you're making an argument or presenting information on the transfusion service, whatever it looks like to you, it's going to look different to someone who's looking down and sees the small number rather than the large.

So as I indicated, that was our examination of blood costs, our estimates of costs by hospitals spent on blood and blood product and blood administration.

We did a separate and informative examination of price data which tells essentially very much the same story. The producer price index for blood and derivatives which was used by CMS in updating payments until a few years ago grows at about 3 percent a year over this period, which is modest but a measure of the price of red blood cells that we created. It's not a price index from America's Blood Centers data grows at almost 5 percent for the period, which is, again, rapid but it's--well, it's significant, you know, in the context but it's not massive. And it's more than the rate of increase in the market basket, which is the CMS measure of hospital costs--not hospital costs, of the prices hospitals pay for inputs, which grows at about 3.5 percent over the same--over 1984 to '99, essentially the same period, versus the 4.8 percent for the red blood cells.

I'll get it. By the time I'm done I'll be going in the right direction, I think. You may want me to get there sooner, too, in which case you would definitely want me to go that way.

Okay. Briefly, the Commission considered changes in Medicare payment policy before its recommendation and the evidence on cost and price growth that we presented and made a recommendation in December 2001 and recommended that when CMS next revises its market basket, its measure of hospital inflation, it should explicitly consider blood and introduce a new measure of blood price change into the market basket. There had been such a measure before 1997, and it had been dropped for technical data reasons. But we insisted it be done again. The following May, when CMS proposed its new inpatient PPS rule, it followed that recommendation and enacted--and introduced a component for blood into the market basket, which affects the update. But it's important to keep this in perspective. This is a small piece of the overall pie. The weight of all components in the market basket would sum to 100 percent. I'll be getting to it later. The share for blood in particular is less than 1 percent, 0.875 percent.

The impact from the simulation CMS presented of including this measure in the market basket is small. Over the 2002 to 2004 forecast period, the market basket, with or without a blood component, yields the same average growth rate. There's no difference. And if you look year by year, there's a one-tenth a percent higher growth in one year and less 1 percent--tenth of a percent lower in the next. So this was a major change, but the net impact, even on total hospital payments, is modest.

Now, a percent or a fraction of a percent on total hospital payments is a lot of money. It's more than you or I make in a year, so to speak, a $100 million program, but, still, you know, this is an indirect--in terms of actual impact, a modest one, a modest change.

Now I'll leave the MedPAC report on blood costs and payments and get to an overview of the inpatient PPS system.

By way of context, I present a little information on the hospital industry as seen from the point of view of the Medicare inpatient payment system. Forty-six hundred hospitals billed for services to 11 million Medicare beneficiaries or provide 11 million hospital stays in fiscal year 2001. Program spending in that year for inpatient hospital services was $94 billion, and that's rising. It will be about $100 billion next year and so on. And even this is not entirely a complete number. In addition, beneficiaries pay through cost sharing an additional $7 billion, so this is the magnitude of what we're talking about when we talk about Medicare inpatient PPS.

Payment growth has been relatively steady through most of the program until the late 1990s. At that point, for a variety of reasons, you saw slower payment growth. As you can see in the 0.1 percent growth rate in the 1998-2000 period, that reflects the impact of the Balanced Budget Act of 1997 with major cutbacks there as well as program integrity actions, fraud and abuse prosecutions and concerns that led to changes in hospital coding and billing practices in those years. We now see expenditure growth returning to historical levels in the 6.5 percent range, and that's accompanied by rapid cost growth, which is a change, again, from the late 1990s when lower lengths of stay--declines in length of stay for inpatients and managed care pressure led to cost declines. But that's the world in which we're living and the context we're talking about when we talk about the inpatient PPS.

By way of background, it's useful to remember how hospitals were paid before the inpatient PPS. This may be ancient history now, but it's still relevant. Before 1984, hospitals were paid on a reasonable cost basis. Essentially they were paid for the costs they incurred, which provides little incentive to reduce costs and shift resources around and contributed to significant inflation. And it was a burdensome system to maintain in terms of auditing and data collection, certainly in the context of the day.

In 1983, the Congress imposed limits, and as HCFA, now CMS, developed more sophisticated patient classification and case mix systems, it was able to implement a fully developed prospective payment system, which began in 1984 with a shift to payment on a per discharge predetermined payment basis. Hospitals are no longer being paid for what they spend, with some very narrow exceptions that I'll get to.

Also by way of overview, it's useful to remember what the system was and is intended to accomplish. The features of PPS are largely determined by the objectives that the Congress and the agency set for themselves at the start and continue to pursue. And the most important there certainly is--and we're serious about this. It may sound like boilerplate, but I think it's more, and, that is, ensuring quality care for Medicare elderly and disabled beneficiaries. We try continuously to keep the focus on the beneficiary, not on the provider, the supplier of services, partly because, especially in the Washington context, it's hard to keep the focus and keep your primary concern with the person rather than with the organization, given the relative influence of the two too much. And ensuring access to quality care is the principal goal. Secondary to that is reducing burden on taxpayers and on providers of care. And we do that by designing a system that seeks to set prices in a way that mimics the open market, that sets prices on a predetermined basis and that leaves it up to the individual institutions to determine where they spend their money, subject to really minimal federal direct oversight.

I'll skip past some of this, but basically though we're saying we seek to pay for care by what we estimate to be reasonably efficient providers or payments that are consistent with the costs of reasonably efficient providers, we have to take account of local and market circumstances to set payments that are adequate and appropriate. And a large part of what the program does is to refine the payment-setting, the rate-setting process.

Now, these are five questions that really provide a--lead us to consider and identify the structure of the system, guide policy designers when they're putting together a new payment system, and help you understand and will help me describe how the system works.

The first question is: What does the Federal Government seek to buy here? What is the product? What is it getting? I'll explain as I go along. And how much should it pay in a variety of senses? And as I indicated, how exactly do you go about reflecting local circumstances? What adjustments, other than cost-related adjustments, do you make to payments? And how do we change payments over time?

Turning to the first question of what do you buy, the question is how are you defining your product. What are your buying? And for the inpatient PPS, the unit of payment is the case or discharge, as we say. Medicare pays for bundles of service encompassed in an inpatient stay or discharge, and that's the way we describe it. But cases vary in clinical characteristics and the amounts and types of resources they use, so we need to go beyond a gross measure like stay. So that we define patient classifications, and in the case of the inpatient PPS, the diagnosis-related groups, or DRGs. CMS currently uses 508 DRG groups to classify patients and set payments. This is a system that has matured and been refined over time, but it has been the basis of the PPS since its establishment.

CMS, or the algorithms used in the DRG model, assign cases to individual DRGs based on diagnosis, procedure, age, and sex, and basic information but information that pertains to the patient, not to the institution or the services rendered.

Okay. Now that we've identified what the product is and refined that somewhat to identify 508 different types of hospital stays, how do we pay for them? And there we determine a relative weight for each classification, each DRG, which is then applied to individual cases in ways that I'll describe.

CMS each year calculates weights and uses them as measures. A DRG relative weight is simply a measure of the relative costliness of any individual case compared to the national average of all Medicare cases in the relevant data file, and it's taken--it's measure of relative costliness and actual data, and, in effect, as the expected costliness, what you expect a case to cost in the coming year based on our experience to date. So this is a simple relationship, a simple factor that can be then applied to determine actual payment. And every year, CMS in the rulemaking process goes back and re-examines the definitions of DRGs and in the sense of diagnoses, procedures, and how cases are classified, and sometimes other information, and then having changed things as necessary based on its own data analysis and based on public submissions, data from interest groups and hospitals and members of the public, it changes definitions as necessary. And I'll touch on that later in the blood context and analyze the most recent data to recalculate average costliness. And it's experienced in this. It uses strong data, but in this case patient--calculates relative weights for the coming year based on data that is two years old by the time the payment year arrives. So there's some issues there, but it's the best that can be done, and it's based on, in this case, 11 million patient experiences each year. And if done correctly, it's a combination of definition changes, and re-estimation of relative weights should make the system current, should reflect the current patterns of technology and technological changes in the hospital industry and practice patterns among the hospitals in the country.

As I say, it's based on data that's two years old, but it's the most current and most comprehensive data available.

Next, now we have both the definition, the product. We've refined that down to a type of case, and we need to go from this relative to how much is actually paid for a real person, a real case. In that case, CMS has to calculate in this case and in others a base rate, basically a payment that would apply to the average case in the average market area in the country, a simple dollar amount per discharge. This dollar amount is then applied to the relative weight, the relative costliness, and various local factors to get the actual PPS payment.

And this may seem too simple and too narrow, but it's basically the story we need to keep focused on. This is PPS payment. I'm not concealing complicate--very important subtleties behind the scenes.

Well, I'll digress for a moment to the question of blood costs in the context of payments and costliness because I think it's useful in this context to consider the role of blood in the hospital activity and in the payment system.

Cases that--based on our analysis of patient bills, cases that use blood are typically cases that have very high DRG relative weights, that are relatively costly. I don't have at hand systematic measures correlations there, but I've looked at it enough, and it's common sense, I suppose. But we can look at examples, heart transplant, for example. Well, start at the other end, actually. The pneumonias, simple and complex pneumonias are relatively low users but not non-users of blood. Simple pneumonia is a weight of 0.6, and simple pneumonia with complications at 1.04, so they're very close, a little less, and very close to the average costliness, and both of them have blood use that accounts for about 4 percent of the costs of those individual cases, which is modest, but a little bit more than average, counting all cases that use blood and don't, the overall average--or that use very large quantities--small quantities is about 3, 3.5 percent. So the blood costs are a very small share of overall hospital costs, even for those people, those cases.

And even if you look at the high end, heart transplant, which has a DRG weight of almost 20, 20 times the costliness of the average Medicare case in this year--that would be the weight applying this year--has a little less than 10 percent of costs accounted for by blood. So even cases that are extremely complicated have relatively high costliness, blood costs, are cases that are very, very costly overall. So the blood costs is going to be a small, a modest share of any total.

My other example would be extensive burns with graft procedures, and, again, you get a sort of relative weight of something like 15 and about 9 percent of costs are blood. So these are the high-end cases. If you look at the average and say they're low, even if you look up, this is a modest share of the overall.

Now we'll turn to one of the exceptions to what I was talking about in terms of the payment being based very strictly on relative weight times base amount calculated in the very strict ways that I've been describing. And one has to do with patient transfers. Under certain circumstances, Medicare gets a different product than the one that I've described, the average case. In some cases, patients have very short lengths of stay and are transferred to other acute hospitals or to post-acute settings of care, home health agencies, skilled nursing facilities and so on.

Under fixed-price payment, like DRG-based PPS, there's a very strong incentive for a hospital to have very short stays, to move people on very quickly, get paid the flat amount, and provide relatively little care. And we did see great declines in overall length of stay in the late 1990s.

CMS has adopted a policy--well, has always had a policy to adjust payments, lower payments for cases with extremely long stays that are transferred to other hospitals. It now has the same policy or modified policy for cases--a substantial number of cases transferred to post-acute care. So this is a case where you depart from that otherwise very straightforward payment system. The only other case, one that is one of only two that come to mind where the actual costs recorded by the hospital affect payment or can affect payment would be in the case of outliers.

The incentive to minimize cost is of concern from the point of view of the beneficiary and the Medicare program. You don't want to see hospitals avoiding or stinting on care to patients who would otherwise be very expensive to take care of.

We have a system to provide special higher payments for outliers, exceptionally costly cases to address that situation.

It's intended to reduce ythe financial risk facing hospitals to try and avoid inappropriate behavior with regard to the beneficiaries, which represents a significant part of the payments. Payments or estimated hospital costs are compared to a standard, a fixed-loss standard, and the average payment for that DRG, and hospitals are paid 80 percent of the excess of any estimated costs compared to the allowed fixed loss.

As I say, this is one of the few cases where actual costs, as you book them, could affect the actual Medicare reimbursement that the hospital receives for inpatient care. So at least, in principle, one could see the way in which you account and bill for blood costs can flow through this mechanism to effect payment, but when we're talking about 10 percent of costs, where you compare costly cases attributable to blood, the impact of how you book costs for blood on the actual payment you received is going to be marginal and not apply very frequently, not be a major concern.

Well, I'll go through this quickly because here I'm talking about the local market question. How do you adjust for differences between areas? It's an important piece of the payment system, but I think from the point of view of this group and the issues you're concerned with, it's not an important one. Adjustment is made for differences in local costs. Local costs mean mainly wage costs and 70 percent of a hospital's DRG payment is adjusted upward or downward for local wages or wage index, but as I say, I think that's not of crucial importance from the point of view of the issues you're concerned with.

Finally, in this basic overview, it's important to remember several elements of the system which, again, I think are of less interest from your point of view, but are very important from the point of view of the hospitals and the overall system.

Congresses, at various times, adopted a number of measures, and established several components of the payment system to address policy concerns that aren't directly related to the costs hospitals incur or the costs that patients could be expected to incur.

One is payment for the extra costs incurred by teaching hospitals. It's a formula indirect medical education adjustment, which increases payments by 5.5 percent for every 10-percent increase and a measure of hospital teaching activity. Though even there lengthy research by the Commission and others has found that that's almost twice the adjustment that should be made if you're to reflect teaching costs alone. So there's an element there of deliberate subsidy over and above costs incurred by teaching hospitals. So in that sense, it's an explicit adjustment, an additional payment for something that the federal government wishes.

Second, what we call disproportionate share adjustment is an add-on to payment for hospitals that treat a large number of low-income beneficiaries.

And, third, again, I think of less note for this group, there are a number of provisions that increase payment to rural hospitals and small rural hospitals. This is another one of the few parts of the system that base payment at least indirectly on the costs of facilities, but that's something that I don't think is central to the issues you're concerned with.

Finally, and this I think is closer to what the blood payment discussion has been focused on in the last several years. A final element of a PPS, the inpatient PPS, in particular, is how do you change payment rates over time? We define a product. We make refinements to that. We go from that to saying how many dollars are attached to each average national case. We vary that by area and by hospital characteristics, and then we say what do we do next year, essentially, what percentage increase do we apply?

And since at least the late 1980s, that decision has been made for the bulk of PPS payments by the Congress in annual or nearly annual enactments. The Congress will tend to legislate and update a fixed amount every year for the succeeding three years, and BIPA, the 2000 legislation, it established a payment rate equal to the difference between the forecasted increase and the hospital marketbasket, minus .55 percent, a very small number, but one that's significant in the context of market-basket increases in the 3 to 3.5-percent range.

So it's legislated by Congress, it's tied to the marketbasket, so the marketbasket growth will drive payments, even given the way Congress sets payments. Under current law, it would return to, in fiscal 2004 next year, the update would be exactly the market basket rate of increase. Though, historically, again, going back to 1988 through 2002, approximately, the combination of actions by Congress and the administrations at various times have led the average update to be 1.2/1.3 percent less than marketbasket, so realistically, based on experience, we don't see marketbasket increases.

It's framed in the public discussion. The policy discussion is of that as the cost measure for the hospital, and it sounds appropriate in some ways. Historically, it's not been the rate at which payment rates have been increased, and we should bear that in mind when we inform our expectations about what we may see in the congressional action in the future.

I can't avoid an aside there. This is an issue for the Commission, a continuing issue, because one of our major responsibilities is making recommendations for the annual update to hospital payment rates.

So the point we've made, and based on both logic and analysis, is that the marketbasket is a measure of hospital costs, but it's a measure of the prices that hospitals face in the market. The PPI for paper goods, the employment cost index for civilian hospital workers, all of those things, what a hospital has to pay for the products it brings in.

It's not a measure of the costs a hospital must incur to deliver care because that's a combination obviously of the costs you pay and the way you produce goods. And assuming that hospitals can increase their productivity, to some extent, as every other organization in the economy does, you naturally expect, and we estimate that required or our recommendations generally would reflect an update that's a combination of the costs of inputs, the marketbasket, the forecasted marketbasket increase, expectations of productivity change in hospitals, which we tie to overall industry productivity, and, thirdly, an estimate of the increase in costs that might be attributable to new technologies.

This is not how the payment system works. This is the way the discussion is often framed and the way the Commission in its advice to Congress approaches the question. But to clarify I think the perception of marketbasket as sort of the expected increase. It's not, historically, it's not been the actual year-to-year increase that's been seen, and it's not even appropriate that there be an increase, if you assume any degree of improvement in productivity by the hospital industry.

On a final, almost a footnote level I've been talking about the marketbasket, which is measure of hospital operating costs, and the congressional process for setting payment updates. For this small 10 percent of PPS payments that are accounted for by capital payments, the Secretary of HHS makes a judgment each year. That's set, with administrative discretion, it's basically tied to a different marketbasket and other factors, but I won't dwell on that. That's clearly a secondary thing.

I've been saying a good deal about the marketbasket already or update process and alluding to marketbasket issues. I'll now turn to some specifics.

I understood you were scheduled to have a presentation about the marketbasket this morning that didn't happen. You weren't able to get someone. At least it was something on, if not the final, at least on the tentative agenda that I saw. I'm not going to try and fill in for a full, in-depth discussion, but I'll say more than I might otherwise have said.

I apologize if I'm telling you things you already know. You may have been spending nights and days reading marketbasket details and discussions in various contexts. I assume not. But if I'm boring several people here, my apologies.

Medicare uses price indexes to measure year-to-year price change in all of its payment systems. It uses essentially five different price indexes for physician payment, for hospital payment, for rehab hospital payment and so on, but I'm focusing here entirely on the hospital marketbasket, which is the leading one, the most important, and the original, and they're all structurally very similar, in any case.

The hospital marketbasket index, and its a mathematical formula, nothing more, was developed by CMS researchers in the 1970s and has been maintained and continually updated and modified since then, but it's basically a combination of factors that account for 100 percent of hospital costs.

As I indicated a moment ago, we're talking about a measure that applies to operating costs, as opposed to capital costs, and it's currently structured consisting of 22 cost categories or essentially conceptual categories, wages or overall hospital wages, employee benefits. I think paper goods is still one of them, energy, and electricity, utility and oil--categories like that. And for each category we have a factor, a weight that reflects the relative importance of that category in hospital costs and what we call, perhaps with too much jargon, a price proxy, basically a price index, a Bureau of Labor and Statistics' measure of producer price index or employment cost index, several standard indexes that are appropriate to the particular cost category we're talking about that then sunk to account for all hospital costs.

The story there is both complicated and simple. Looking at the trees, you see many pieces.

It's labor costs. Fifty percent of the weights are labor costs, and they're applied to employment cost index, labor cost measures, 11 percent for benefits, so almost 60 percent of hospital costs and hospital marketbasket change, and the update is determined by what's happen in hospital labor markets.

Nonlabor, the whole range of nonlabor costs is 39 percent, and blood, as I indicated earlier, is less than 1 percent, nine-tenths of a percent. So any changes on the nonlabor side have a modest impact. Energy costs are going to be a small share of the total, and the costs of blood are going to be small, which is how you get to the result I cited earlier of, with or without a blood price proxy in the marketbasket, you get essentially the same results, which is illuminating for us and no surprise since we spend a lot of time considering the issue, analyzing data and looking at alternative price proxies, and not surprising we get the results like we've found.

Now, I'll turn to the two broad policy issues that I think are of interest and may be of interest to you, from your point of view, blood payment.

First BIPA, the legislation I described earlier, established a system for special payment for new technology in the inpatient PPS. I'll be brief. I'm running out of time so I'm not going to get into old mechanics here.

Basically, special payments are made for new technologies that are identified during the period during which CMS is still collecting data to allow it to identify the technologies for the purpose of finding groups, DRGs and so on, but as implemented, it's implemented with great conservatism. A product must show evidence that it's both new and leads to clinical improvement compared to existing technologies.

Costs must be relatively high compared to a statistically determined threshold, and payment is, for a new technology, even as this add-on, is limited to half a percent of the additional costs associated with the technology.

Finally, this year, 2003, the first of which this provision was used, one technology out of a half-dozen or so for which applications were received was approved by CMS for special payment. So this is a modification of the system, at least so far, and I'd anticipate it to be a small piece.

This, in addition to outliers, is the only case where actual costs of an individual hospital actually can affect payment, subject to the qualification that a technology needs to be new, has to show clinical improvement, be accepted as that one technology was, as eligible for a special payment, and then the actual costs for cases involving that technology can flow through to extra payment.

Where that's going, of course, is how blood costs can in this second manner affect payment. As I said, this is inpatient PPS. This is one of the two ways in which costs actually affect payment.

But, finally, at least in principle, if you were talking about ways of addressing the costs and payment for costs of blood, treating it as a new technology, making an argument for it, and so on would be one approach to take.

My understanding, I don't know the coding issues, is there are existing codes for leuko-reduced blood, and it's possible, in current billing practice, to identify those products.

If you were going this route, that would be a major advantage because one of the big issues in technology payment is how do you identify cases that use the new stent or something like that? It's not on the bill, you can't distinguish, and there's an elaborate system set up to provide those coding changes, but I think that's less of an issue in blood, and if you were pursuing this route, that would be one less hurdle to get past.

That was my second case of where actual costs matter, and my first case of how you might wish to look at issues in the light of your concern with blood payment.

Finally, the second issue would be not so much a component of the system or even a live policy process yet, but a new area of interest, both in the private and public sector. The Commission made recommendations on this last week, and you've probably seen some discussion in the health press about private-sector experience and interest in changing payments to reflect quality.

Recognizing payment systems, private and public, and in particular Medicare, doesn't make payment higher or lower if cases receive better or worse quality. In fact, many people point out that at least in some payment systems, poorer quality associated with more care readmission can lead to higher payment, and so there was a lot of effort and a lot of interest in making changes there. CMS, I gather has some proposals in the works to tie payment to quality.

The Commission recommended considering payment differentials between rehab facilities and other organizations to reflect quality and, as I said, we see a good deal of private activity. I think I saw something about I think it was Massachusetts Blue Cross proposing to tie physician payment to quality measures. You're seeing a lot of that coming up now, but the standards here are or should be high.

Any quality measures should be evidenced based. You should be able, especially if you're tying it to actual payment, if you are the physician, you want to make sure that what you're being held to makes sense, and if you're the agency you want to be responsible and, quite simply, your quality measure needs to be measurable in a meaningful way.

So this is something that a policy area is developing and one that is relevant, at least for the future.

Finally, and this will be the second area I'd raise from the point of view of blood payment policy, is there a case you can make that using a certain product has quality implications that should be reflected in payment; that is to say, the standards in general are high, and my layman's understanding is in leuko-reduction, and I suppose other areas, the evidence is mixed. So it's not an overwhelming case, but I think your data is probably better developed than in many other areas of home health care and so on, with people trying to tie payment to quality. You'd face challenging measurement data issues.

That's all I was going to say, and I'll take any questions.

DR. BRECHER: Thank you. We have time for one or two questions or comments. Jay?

DR. EPSTEIN: Well, first of all, thank you very much for this very comprehensive overview of the PPS. I think you've made a very clear case why increases in the cost of blood and blood products are not easily reflected in Medicare reimbursement, but that's really not the problem. The problem is whether the hospitals have any incentive to reimburse the blood providers for their real costs.

And one way of framing that question would be to ask whether any tracking is done, how the hospitals utilize their Medicare reimbursements or do they, in fact, allocate them according to the relative weights of the marketbasket or do they not.

And then a second point is that, although you've argued that adding an index for blood or, I forget what you called it, a proxy for blood in the marketbasket formula would not affect the outcome very much.

There may still be a value in having it there because then it's a trackable increase which could be a basis for arguing that the hospitals ought to be considering increasing their allocation of funds toward areas that show real increase, even if they're not affecting the total reimbursement.

So I just wonder what your thoughts are on that part of the problem. Given that the blood costs will not largely impact the hospital's revenue, how should the system be structured to ensure that the hospital, nevertheless, will pay for the real cost of blood because that's the survival issue for the blood collector is whether they can get reimbursed.

MR. GREENE: A couple of thoughts. First, how do they actually allocate their spending? The weights that are used in the marketbasket do reflect actual hospital costs, as reported in the Medicare cost reports. So the numbers you see are national average measures for across all households. Sixty percent is labor costs and so on.

Secondly, the logic of the PPS, as originally designed and as maintained, as I indicated, is market-based in the sense that the federal government sets prices, but it leaves allocation decisions, production decisions, expenditure choices up to individual providers, whether it be home health agencies or hospitals, and it seeks, at least in the context of payment, it seeks to do as little as possible to--it seeks to do little to reach in and seek to alter hospitals' choices between where they spend their money.

So we choose not to reach that issue, so to speak, you know, of how does the hospital spend its money, on two grounds:

First, the economic efficiency argument that the system works better if you leave local decisionmakers to make their choices based on what they know and see up close.

And, secondly, a more practical consideration, also, that we're concerned and we see in this system and others that the payment system becomes more complex and less transparent the more you try and fix individual problems through fixes in the payment system.

I mentioned the indirect medical question, disproportionate share and other adjustments. Those are small ones, but they're relatively prominent as the exceptions to the rule, what I was describing of set payments and set them in advance and then leave choices to decisionmakers. Technology payments may be the other exception, where there's a conscious decision by the Congress to make payments more liberal in a way that will foster the spread of new technologies.

And this is part of the reason I raised the incentives for quality issue, part of the reason for the interest and partly why I was raising it is, if you're seeking to reach the question of how does the facility actually spend its money, better to do that directly, in a sense, either through quality regulation or safety regulation or in this area that's trying now to tie the financial and the regulatory outcome together, the issues or the question of how do you tie payment to quality or other outcome measures.

So if you do want to reach the question of how does the hospital spend its money, I suggest pursuing it through this route.


DR. BIANCO: Thank you very much for this thorough review, and I want to follow a little bit on what DR. Epstein just asked you, more with a comment than a question, but maybe with a question, too.

You got me very depressed.MR. GREENE: That's the second time I've heard that for a speech of mine in the last week. This is getting depressing in its own right.


DR. BIANCO: Because I, from what I learned from you and from others today, I think that we are in a trap in the blood system; that is, we are having difficulty funding what is needed to preserve and increase the safety of the blood supply, to increase the availability.

We are confronting new issues almost every day, and the providers that are supposed to pay, the hospitals that pay us, they are squeezed. They don't have, that is, the only thing that they can do internally with all of those systems is maybe to reallocate--take from Peter to pay Paul.

And even if we go there and claim that each one of them, that this is very important, but they have a lot of important things. They don't have enough staffing in the emergency room, they don't have enough--so how do we get out of that? How can you help us think of ways by which we could fund activities that are very important to the public health and very important in the eyes of the public?

MR. GREENE: Well, let's see. It's depressing. You're right. Now you're putting me in reversing roles here.

It's difficult. Again, think of the--well, turn to what I was saying a moment ago about the marketbasket being the standard for increase. I think it's reasonable to expect a degree of improvement in productivity, in efficiency, in how much you can get done with the money you have from the hospital industry, as other industries, whether that means changing scale, changing your mix of employees, other choices.

I think that that, if anywhere, is where you've got to look, whether it be for more money for blood costs or for the costs of blood or new money for registered nurses. I think that's the first answer, I suppose.

The second--let me, also, this is relevant. It doesn't directly address. I may not have been clear enough in describing the DRGs to make clear that it's not the whole pie. It doesn't increase the total number of dollars, but the recalibration process, changing the weights year-to-year should reflect changes in the relative use of, let's say, blood.

If blood use goes up 10 percent for heart transplants, the weight for transplants and the amount paid for transplants to places that do more transplant surgery than pneumonia will go up. So there is a broad way in which the payment system does automatically, by virtue of the way it's structured, reflect increases in costliness. That's relative.

The other question, in terms of the update, is how much goes into the system, the whole hospital system, and that's the broader social question, I'm sure. So I suppose the answer has got to be in part the broad social question, where how much more than $94 billion will the society put into Medicare and patient payment and how can facilities adapt in terms of productivity to using it.

DR. BRECHER: Last question, Lola.

DR. LOPES: It seems that even though it's called a prospective payment system, it's really very retrospective, based on two-year-old data. I don't understand how the system could possibly be seen as keeping up with changes, that adjustments that tweak things are based on what happened two years ago.

It seemed that the system in the U.K. really was trying to be prospective in thinking of the things that are going to change the system next year, as might a new technology or a new regulation.

I understand that the blood part is very, very small, but I would think this retrospective aspect would hurt all sorts of areas of hospital operations.

MR. GREENE: It's retrospective, inevitably, because it's based on history. The data that's--it can never be current.

On the other hand, it's important to remember where older data is used and where it isn't. And what I was describing there, using two-year-old data to set the relative weights, the relative payments between classifications and cases describes changes that affect a measure, relative costs, it doesn't change very rapidly.

It doesn't matter whether you use two-year-old data or three-year-old data there. If you used a year-old data it wouldn't make much difference. It's not like predicting next year's inflation rate or having six months more information. That's relevant in some areas, but in many cases it's less relevant. There are cases that I won't get into elsewhere in the payment system, where the exact currency of data matters a lot, but this is not one.

And when we're talking about future payment rates--oh, maybe I didn't make that clear--the market basket numbers are 2004 and hence ultimately the update and how much additional money goes into the system, and 1 percent of market basket change is a billion dollars, don't forget. One percent increase in $100 billion program is noticeable. That's based on forecasts, econometric forecasts and the state of the economy. So that's definitely prospective. Based on what we know about the economy in general, where will GDP be in the fourth quarter of 2004? So in the important ways, how much the overall level of payments will be and updated, it's prospective.

DR. BRECHER: Okay. Thank you.

We're going to change pace here and look at one academic hospital, Ed Snyder from Yale, or his perspective anyway, unique perspective.

DR. SNYDER: First I want to thank the Committee very much for inviting me to present. My name is Ed Snyder. I'm with Yale University and Yale-New Haven Hospital, and I'd like to make it clear at the outset that I am really speaking about Yale-New Haven Hospital, not for the hospital, but I also would like to speak about other academic centers who are suffering under this economic system that we're in. What I would like to do in the time I have is to explain what it is that we do--what I do at the hospital, how we go about effecting the changes we want to bring, put them into little structure as to what we consider is required and what's not required, but what we feel we need to have, to show you how things are in 2003 and moving forward into 2004.

First, a conflict of interest statement. I do a very large amount of work with corporations, and as I talk about some of the programs we've brought in there related to these corporations, we do a lot of clinical trials work, and I'm on advisory boards and so forth. I do want to bring this out to the Committee's attention, but as is seen down at the bottom I have no equity in any company, own no stocks whatsoever except through TIAA which is our pension over which we have no control.

These are the initiatives that I will be discussing in various fashions. NAT testing, universal prestorage leukoreduction, frozen blood, West Nile, other pathogen testing which I have referred to generically as the bin Laden virus equivalent, BLVE, which is some unknown pathogen. It could have been SARS, could be something else coming up tomorrow. Pathogen reduction. The switch to aphoresis single-donor platelets which would be needed in order to put in pathogen reduction for platelets in that technology today if there were to be a license. Minipool NAT which is coming. Bacterial testing of platelets and automated blood screening. These are just some examples of some initiatives which seem to be an incredibly small percentage of various budgets.

This is Yale-New Haven Hospital. We are a tertiary care center, 950-bed in an inner city of New Haven, Connecticut, which has a fairly high indigent number of patients which we'll talk about. It's affiliated with the Yale School of Medicine as an independent corporate entity. I do not speak for Yale University either. And we have an operating budget, the hospital, of $500 million. The blood bank budget is in excess of 8 million.

These are the products that we use, to give you some idea of our attempts to conserve costs. In 2002 we were using about 50,000 blood products a year, as you can see. This is from 1988 and we will keep this in perpetuity. Total patients transfused, about 7,200. We transfuse about 600 patients a month. I do not have statistics on how many are repeat transfusions. There are probably not 600 separate patients, but there are probably some patients that have been transfused more than one time. As you can see, it's been fairly constant. Our red blood cell usage is about 20,000 units of red blood cells a year, and it's going up and down. The hump you see in the middle probably relates to the liver transplant program which was not well executed at Yale-New Haven Hospital and the program was stopped. But I have heard the good news, that a new liver transplant surgeon is about to sign on the dotted line. It is of note that they have yet to speak to me about this, however, so we'll see what happens with that. I'm sure we will meet on the field of battle.


DR. SNYDER: Random donor platelets are what we use exclusively. We have always used random donor platelets, and I'll show you one of my slides about that. We have decreased the usage--that is certainly there was a peak during the time of the transplant, the liver transplant group, but we have decreased, and we've decreased as part of nonsalary reductions, lowering pool size. I will explain all of that, but just shows you that we are trying a lot to cross cut. This is our single-donor platelet usage, and the spikes you see in the last two or three years were related to a clinical trial we were performing for a company that used random single-donor platelets. It was the Cirrus trial. It was a space research trial, and single-donor platelets were used during that part of the study.

I have no idea why this institution uses as much fresh frozen plasma as it does. We talk until we're yellow in the face about the need for it, and it still winds up being used, although we have made some inroads in lowering the amount of use. And we're using about 8,000, 7,000 units a year. For single-donor platelets the ordinate is in the hundreds, so we're now at about 100 units of single-donor platelets a year versus the random donor platelets which are somewhere up around 15,000 per year.

Looking at advances that I want to discuss in a little bit of detail as to how we implement them, because we still want to come to work and do things and save lives. Implementation of the Hemacare Computer System, which we felt was required; implementation of NAT which was required or will be required, we felt is something we had to do; prestorage universal leukoreduction is something we needed to do. I felt we needed to do it. Frozen strategic blood reserve was something I wanted to do. And automated typing and screening, something that we're planning on doing.

So how do we implement Hemacare at Yale? And I only mention Hemacare because that's the name of the system. We discussed it with our hospital administrators a year or two before we actually hope to get it. We then discussed it with risk management because the administration was not impressed with our need. At that time I asked one of our administrators if he knew what the ISO 9000 was, and this gentleman did not have an idea, did not know what ISO 9000 was. This was several years ago. Now I'm sure they do, but at that time, I realized it was a disconnect between what blood banks were doing and what some hospital administrators were aware of. So we went to risk management, feeling that they would have a better idea, and they were supportive. We discussed the need for new monies. We were asked if we would internally reallocate. At that time there was actually something to reallocate, so we considered the issue. We also agreed to a decrease in FTEs because we were not going to get a machine that costs lots of money just by saving paper towels. So we agreed to attrition for FTEs. We submitted it to the capital budget cycle and eventually we received it with some new monies that were put in. It was implemented and has been maintained. There's been continued angst over the increased cost of maintenance and updates and so forth. But it is now recognized as a major benefit to patient care. So that was a big instrument that was relatively easily brought in.

NAT testing, we knew it was going to be implemented. We discussed it with our blood supplier, discussed it with the hospital administration. Again, they were not very impressed. We discussed the need for new monies and we were asked to internally reallocate. We tried to internally reallocate and were not very successful, so we were told to internally reallocate.


DR. SNYDER: So some new monies were provided and it was implemented. Along with this goes each month we look forward to getting our budget sheets with varied colored highlighters marking where we're over budget, and we're over budget because we had to reallocate. We didn't have a choice. If we--we knew this implementation was required, it had to be done. Just do it.

Again, these administrators were not oblivious. They're very hard-working competent individuals who are all struggling together, so I'm putting some spin on this to keep your attention, but as you'll see as we get further down the road, that this is--it's an onerous task being in hospitals these days as the well side of the institution as well.

Leukoreduction I wanted to implement. I thought it was appropriate. I went to the Transfusion Committee and they approved it. The medical board considered the issue of quality of care continuum--and that's my quote--for all patients over time. One of the issues is, well, they don't need it today. I was concerned about whether they would need it in 5 years, 10 years, 20 years. They agreed with that. We discussed the cost and the legal liabilities, and it was approved. The Medical Board ratified it about a month later. I only went for what I call the big three: a decreased incidence of febrile reactions, decrease in transmissions of CMV, and a decrease incidence of HLA allo-immunization. I do not consider personally, with all my conflicts, et cetera withstanding, that all of the other indications that are being touted for leukoreduction really have been shown or proven or accepted. I don't care. I don't need them. These are enough for me to feel that I'm providing better medical care for Yale-New Haven Hospital. And I have data that I will show you in a second. I will leave the febrile reaction part.

The feeling was that this was a commitment to better patient care, and while we're all trying to save dollars, I was still focused on the need to help patients. So we felt the value added was it was CMV safe, it was a better product. By not having to test any more, we agreed, all of the oncologists agreed that we would consider CMV safe as blood that was leukoreduced under cGMP by our blood supplier, and I'm fully aware of the paper that had just come out in Blood that I have a lot of problem with.

The Bowden Study, which came out several years ago, when they thought it was equivalent. There was a lot of caveats associated with it. We have not seen any--knock on press board here--any cases of CMV in the surveillance cultures over the years of patients who received CMV safe blood. And the paper that just came in Blood I have a lot of problems with, but this is not the forum in which to discuss it, so that has not dissuaded me. I am aware of it. I do have a clue about that paper.

Lower febrile reaction rate is something I will show you, and our rate allo-immunization, we use 100 HLA-matched platelets a year, which is, in a hospital that treats that many patients with a large oncology program I think speaks to some degree the fact that we're not seeing a lot of allo-immunized patients. And the TRAP Study was a randomized control trial. We had better inventory control, less errors and wastage by only having one type of blood. We didn't have to save the CMV negative until they were ready to outdate, and then try to find someone to use it.

Along with this, however, it just wasn't in vacua. We had to lower our pool size. We lowered our random donor pool size down to 4 units for inpatients and 5 units to outpatients. This was wrapped up together with an improved patient care, better quality of care. It also saved us a lot of money, and it was this cost shifting, which is another key aspect of how we survive these days. We also lowered the platelet trigger to 10,000. Again, we were using dose management, inventory control, using less product. This was all part of a plan to bring this to the institution that we can do the following four or five things if we can implement leukoreduction. So I had to really believe this was useful for us, and the old saying is if you don't know your jewels, know your jeweler. The institution trusted my judgment and my knowledge of the field, and I in turn trusted speaking to people around the country, were we ready to do this? And I felt we were.

We also eliminated bedside leukoreduction which saved us on filtration and nurses were happier for that.

So for red cells the immediate cost savings were we stopped CMV testing, which was roughly equal to the cost of the filter at the time, decreased use of bedside filters tied to ongoing decrease in red blood cell utilization, which I'll talk about in a second. We now--I'll talk about it now. We actually use one-unit red cell transfusions. It used to be if you had a crit of 20 and you needed blood, they gave you 2 units. Now you get 1 unit, you have to repeat the crit, and if the hematocrit is higher than the audit criteria, you don't get the second unit. So how was that a savings?

Well, if we could save 3 units of blood a day, it would save us a quarter of a million dollars a year. I mentioned this to the chief of staff and almost before I got back to my office, our budget had been reduced by a quarter of a million dollars.


DR. SNYDER: The joy of electronics. And then I was given the mandate this year to roll it out to the rest of the hospital. Well, we don't order the blood. It's ordered and we supply it. So rolling it out, I mean, I don't know where I'm going to roll it to, but. That's a true story by the way, and I rue the day I went in there with that bright idea.

So we've decreased in outdating and wastage slightly by about .5 percent, and we are actually supposed to be showing some reduction. We are losing about 1 to 2 units a day. These are for non-hemorrhaging anemic patients that are being asked to reconsider the one unit. It's a good medical evaluation example, but we obviously do not just give everybody one unit regardless.

The cost for leukoreduction was $300,000. Leukoreduction for platelets, again, we stopped CMV testing. We decreased the size of the inpatient pool and the outpatient pool. We lowered the trigger. We decreased bedside filters. Our major benefit was a decrease in outdating and wastage from 13 down to 5 percent. That in and of itself was able to fund the cost of the filters for the red cells and for the platelets at that time. Decreased utilization--and you saw the drop in platelets, so it wasn't that we just lowered the pool size and they ordered more pools. That actually occurred. Cost savings were appreciable and we felt it was budget neutral to go to leukoreduced random donor platelets. So the overall cost to convert 100,000 to 100 percent was $300,000, which we--how did we get this? Primarily by internal reallocation and waiting for the highlighters to say that we were over budget here or there.

Was this beneficial? Well, we've been keeping records since 1995. The blue--and I've showed this slide at BPAC and at other places, but it's ongoing--this is the amount of leukoreduction, according to this ordinate, it's 30 percent. And then this was the transition period, so 100 percent. This is febrile reactions to red cells. And then this is the amount of febrile reactions since that time, and there is now a drop of 33 percent, which is by odds ratio statistically significant. Jim Aubuchon went over this with a fine tooth comb and agreed that this was a drop. And this magnitude drop of 33 percent is exactly what's reported by the French Hemovigilance Study and a half a dozen other studies. This magnitude, even

DR. Goodnow, who published a paper showing that there wasn't a benefit to leukoreduction, found the same level, 30 percent, but he had smaller numbers than we did so it wasn't significant. When I asked him, you know, we have the same magnitude. Mine's significant because I have like 50,000 units and he had 15,000 or 20,000. And he said, "Ed, if the numbers are high enough, anything can be significant." We collect 14 million units of blood in this country. I think the higher number wins.

But what also does it for me is platelets. As far as I am concerned at our institution we've almost eliminated febrile reactions to platelets, and it's a 94 percent drop in febrile reactions. Some people say that they still have--they lost the red cell fevers but they still have platelets. I don't know why there's differences among institutions. The point is this was an improvement in medical care. I don't feel that we wasted our $300,000. I think we're providing better medical care. And we needed to do it. We found a way by this internal reallocation to support this program. But it took a lot of time, a lot of effort, and it was combined with a decrease in hospital utilization. It was cost sharing, cost shifting.

This is the financial aspects of it. A roughly $498 million hospital budget was .06 percent. For the blood bank budget it was 3.8 percent, which was a fair chunk, and we have about 1.2 million, I was roughly calculating, dollars in salaries. So our blood budget is about $6 million, 6 point something million dollars, which I know is a drop in the basket, but it's important to us.

What about the frozen blood reserve? That's something I felt we needed. I was concerned about viral infections, disasters, natural earth disasters, instruments of mass destruction concerns, mass casualties, seasonal exacerbations; we have a sole source provider, terrorist threats. On September 12th we were told to consider sending the blood we had down to New York City. That would have left us with nothing. And what were we going to do? I decided that Yale being Yale needed to have something. I needed to light candles rather than curse the darkness.

So I went to the chief of staff and I asked him--I told him we could have this frozen reserve which I felt would be useful and asked him to give me a mandate for this. And his mandate was here: Never cancel elective surgery. Close the operating room or the emergency room. Well, there's now a Venn diagram pops into your head of good patient care and financial income, because if you close operating rooms and cancel elective surgery, and shut down ERs, you lose a large amount of reimbursement. So the best way for hospitals to do things is when good patient care is commensurate with reimbursement so that you have a chance to get income and patients do well. The problem is when they are diametrically opposed. So we discussed the various things we needed, and I took that and walked away and said thank you very much, and came up with this rather Byzantine chart, which I'm not going to go through.

What it is, it's a system of allowing us to have a frozen reserve of 200 units of red cells type O primarily, O negs and as well as O pos; 50 units of plasma, and I am currently working on a frozen platelet program which is fraught with all kind of difficulties, but we're working on them. The key thing to focus on is the part of it that's down to the bottom. When do you go to the frozen blood? When the blood center cannot provide us within 24 hours, such as when they shut down the airports for 3 days and there were no planes flying and we had no access to a hub. We do not draw our own blood at Yale except autologous, so we didn't have that capability of even providing a large amount of donor surge, although the Red Cross actually had a blood drive at Yale on the 12th just by chance. It had been scheduled. If there's not sufficient inventory to support elective transfusions; if the OR elective schedule cannot be supported, and if the emergency room and the trauma team cannot be supported. If all that's no, then we would go into this frozen reserve.

We felt that this was appropriate because the mandate was to save the hospital the cost as well as the marketing issues and embarrassment if you will of not being able to supply blood, primarily in times of seasonal shortages. So this is where I felt it was going to cost us. We had to buy a freezer. We had to get a closed system cell processor which at the time looked like it was going to be lovely, but now we know that this processor was fine for the Department of Defense, but because of various technical issues I don't need to go into, it was not appropriate for the kind of blood we were going to be using. That is being corrected now by the various companies to get a system that would be useful. Right now there is none because when you thaw red cells that are frozen there's a 24 hour outdate. This would have given us a 14-day outdate, and we could actually have thought in advance because it takes about an hour per unit. So if you have two cell washers, you can only do about 48 units a day if everyone's doing it around the clock. So having a 14-day closed system capability gives you the chance to manage an inventory.

So then we had to have supplies for freezing the units, the cost of the red cells, the cost of the FFP, and then the frozen platelet program would require DMSO, which would have to go under an IRB and we're in the process of looking at that. I felt having frozen platelets was better than nothing. It's going to be about $135,000. How are we supposed to do this?

Well, I'm going to show you what some of the effects that these examples have on how we do things. Most of this has already been gone over today, the increase in demand for blood, increased usage. This is from the National Blood Data Resource Center 2001 Report. The supply has not kept up with demand. There's been a 20 percent increase in the cost of red cells, and then manufacturing costs, labor costs, regulatory costs.

Hospital based blood programs seem to be a holy grail. Everyone, at least in Connecticut, wants to set one up. We have one hospital especially that loves this idea. This individual thinks that some group is going to come in here and collect 15 units of blood from a religious organization that is too small for our main supplier to go to, and they're going to collect this blood and it will be fine. Well, that's great if you only transfuse 10 units of blood a day, but if you need 100 units a day like we do, or if when the liver program gets going, orders of magnitude more potentially, it's impossible. It just does not fit. The fact is the supply is just not that plentiful for anyone. There is no $40 red cell available legally and pure and clean and FDA licensable in the world. So the start-up costs are huge. The donor improvement costs are huge. It's not something we would even consider. Keeping up with the new testing requirements and so forth is an onerous task. It's a problem, and everybody wants increased quality, but how are you going to wind up paying for it?

Utilization controls is one way. Dose management. Dose management is a major control mechanism. It has been found to be extremely useful for various companies that make yogurt. In case you haven't noticed, the cups have shrunk down to 6 fluid ounces from 8. Packages of gum have fewer sticks in them. We also lowered our platelet pool size. The bag now has 4 units in it instead of 5 or 6 or 7. What does that mean for the patient?

It means that instead of having a post platelet count of 80,000, it's 40,000, which is enough for most situations. Obviously, if you need more platelets they ask, we give. But patients, because that number was low and stayed low, it implies that we are actually getting a patient care benefit. We're giving less blood products even though they're as safe as they are. Giving less is better.

We shifted to the one-unit red cell. That's another way of dose management. Decreasing wasting and outdating. Cost shifting. We've also become gate keepers for new products. Somebody mentioned a product that was very, very expensive, and we are the gate keeper for that. When we went to the institution, we were getting requests for this particular clotting factor near end of life, and I mean like within an hour of end of life, as if this was a magical elixir that was going to stop bleeding. And we wound up saying no. We called the chief of staff and he said no, just do not give it to them. So what's happening is you're setting up gate keeping and eventually what's going to happen, I predict, is that you will--eventually the cost of blood will become so high that it will be worth it for the institution to hire someone who does nothing but say no, and go to the floor and give them other ways of getting around having to transfuse. If it's going to cost 2 or $3 million increase in the blood component, it's worth it to hire somebody for $160,000 salary and fringe to do that job. And this will come up when I talk a little bit about the future.

The platelet pooling history. We were 12 units. We're now down to 4. And next year we're going to a web-based virtual platelet transfusion--


DR. SNYDER: Where you can just log onto your computer and feel the platelets soaring into your blood vessels.


DR. SNYDER: I don't know what to tell you. We can't go lower than 4. We have to give something. Although when there's a shortage of 4, we go to 2. And that's just the way it is. We have a superb blood supplier. It's our sole source. It's the Red Cross in Connecticut. They are an excellent organization and are experienced, and I feel that--I've been accused of being their apologist, but frankly, they are there when we need them, and groups who want to bring in outside agencies in a desperate attempt to cut costs for blood are doing it on a fool's errand if it undermines the integrity of the system that's supplying the major hospitals in the state. So we have some issues about that. They certainly have areas where they need to improve and so forth, and it's not that we're all holding hands and throwing rose petals at each other. But I feel that they are a competent group and Yale would not be able to function without that.

Certainly some earlier thoughts of going to other cities like New York to get blood, our administrators had thought, would have been very difficult and this was before the drop in Euro blood. So it's a problem for everyone.

So how do we budget for blood? Yale's blood bank is a cost center. We see no revenue. All of the discussions I've heard about where does the money that's being brought on DRGs allocated to the blood bank? We do not get anything. We don't even get cookies any more.


DR. SNYDER: Seriously, the money goes to the hospital and what they do with it, it's the great and powerful Oz. We are not privy to that information. I cannot get that information. It doesn't matter. All we are is a cost center, and if the hospital is making $75 billion on the allo and auto transplant program, all we are is just ordering more supplies, and you're over budget because you're ordering more blood bags, you're ordering more DMSO, whatever you're doing. And that's the way administrations, not just Yale, keep tabs on costs by making you only a spender. We don't get any credits to expense. I have no idea what the institution is doing or reallocating. I trust the administration, but it's difficult dealing with them. I respect them highly. There's an excellent group of senior administrators, but it's very difficult. We have no concern about revenue. It's a completely different stream. Have I made myself clear?

Hospitals prepare budgets well in advance. We have an 18-month budget cycle. How am I going to predict what the cost of blood's going to be in 18 months when blood suppliers do not have pricing available that early. Our blood supplier used to tie--budgets used to be zero based or percent increase over previous years. Inflationary increases at Yale from our supplier was originally tied to the consumer price index. For the past couple of years it was tied to something else. It seemed like it was tied to a kite. It went up into double digits, and I can't explain exactly what the numbers are, but it was enormous. That did not sit well with our administration. This current year it is tied to something like the Medicare labor index of which Connecticut is right below Oakland, California and I believe some place in Puerto Rico. We are right at the top of the list. We have, as you will see when I show you numbers, we are struggling. It's a disaster for us at Yale in Connecticut. It's difficult or impossible to absorb large increases with an ever-increasing need to cut expenses. Mid year price increases, as will be happening with West Nile, are not budgeted, and it's in the contract that there could be things, acts of regulatory agencies if you will, that--


DR. SNYDER: Which are necessary for the public health, but the hospital wants you to just internally reallocate, but as I say, we don't have a million dollars in paper towels any more. Coding, again I wasn't sure what was going to be presented today so some of this, as been discussed, coding being too complex. We have people that just do coding. We have people--when I talk about a compliance officer, I have to explain it's regulatory compliance because the billing compliance people are outnumber the regulatory compliance by 3 to 1. We're the only department I think in the entire hospital that has its own regulatory compliance officer, which I got in again by saying this was coming. And they said, well, you better bet it in, Ed, before the monies rise up. So we hired someone and it's been a magnificent addition to the blood bank.

The reimbursement we've talked about. Most hospitals do not approach pricing structures correctly. These things were covered. At Yale, our costs that we're reimbursed for blood does not begin to cover what we pay for a unit of blood. We are so disadvantaged it's extremely difficult. And that's why putting the leukoreduction part was hard because we were already not getting reimbursed. And I haven't figured out how much we're saving by decreasing the fevers and preventing HLA allo-immunization and so forth, but all--I suppose we could add all this up, but I think it is appreciable.

Billing/reimbursement have been affected by under valuing again. The indigent population for care at Yale is a disaster for us. It is appropriate to provide indigent care. It's necessary. But it's the amount and burden of it that has become crushing. We provide $54 million a year of indigent, nonreimbursable, uncompensated care. 06504 is not equivalent to 90210. Our zip code does not have the same reimbursement that other zip codes do. I am sure that certain academic medical centers that are up in--for example,

DR. Aubuchon. I would venture to say his payer mix is far different at Mary Hitchcock than Yale's is. I didn't call Jim but I'm pretty sure when I went to visit his facility and saw the increase--and they were talking about hiring people and improving quality of services, building buildings. I mean I'm looking for cookies, and their reimbursement rates have to be higher. It comes down to that. If you have money coming in and you're taking care of patients, you can do more. So that's a big problem.

So I speak for the inner city academic medical center that has the kind of payer mix and problems that we have. We have a 40 to 45 percent outpatient rate for transfusions of platelets. They were talking about 10 percent outpatients. We have shifted as much as we can to outpatient, in part because it's better medical care. They don't get admitted. There's also a higher reimbursement rate for platelets as the outpatient, and 95 percent of our autologous stem cell program is outpatient. Very few get admitted for neutropenic fever. I heard a talk yesterday--we use Cytoxan primarily with GCSF for mobilization. I heard a talk yesterday from someone from someone from a hospital in New York that used Melfilan [ph] to mobilize the donors with myeloma, which is lovely, but they have about a 25 to 30 percent inpatient admission for febrile neutropenic fevers. We would never--even if that was a good idea, it would be very difficult to sell that because we're doing as well as we are because of the qualify of the oncologists we have with the Cytoxan, and we're not admitting those other 20 to 30 percent of patients. It would be very difficult. And it's not good for them.

I actually asked him if this was a deal breaker and he said basically that it was. It was just too high a rate. To say that--one of the other speakers coming up behind me is going to say, do people plan their medical care based on the cost of blood? And my presumption is that the answer might not be yes for them, but for us it is yes. We plan medical care based to some degree--as long as it's commensurate with ethics and good patient care. It's nice when they come together. And this would be a major issue for patient care and would also seem appropriate.

Inpatient reimbursement would be better if blood was--DRG--blood was taken out of DRGs and billed more like an outpatient setting. It would also be nicer if I was 6 foot 3, but that's not going to happen either. Reimbursement lags behind real time cost increases as we've heard multiple times, and you know, academic medical centers' liabilities at stake. We're not cutting fat any more. We're doing osteotomies. We're cutting bone. Ten years ago I got Hemacare in a little more easily. If I have to try to get it in today, I don't have much more to reallocate. I don't have much more to cut. I'm down to baseline. So where am I going to go?

What's the payer mix? At Yale-New Haven Hospital Medicare is 29 percent, Medicaid is 23. That's 53 percent Medicare/Medicaid, 3 percent other, and HMOs 23 and 22 percent for commercial Blue Cross/Blue Shield. That's a fair amount for the Medicare/Medicaid.

The hospital down the street, their payer mix is 63 percent for Medicare, 11 percent Medicaid. This is a community hospital, which is not doing very well as you might imagine, financially, with even less reimbursement. We get more because we're a teaching center and get some of the graduate medical education monies. And Greenwich Hospital--this is all available and in the public domain. I'm telling you nothing here that's private or secret or whatever, which is reasonable. They have 2 percent Medicaid and 31 percent Medicare. The rest of this is all self paid. This is the Gold Coast, Greenwich. Highest per capita income in the country. This hospital does well. They didn't have a problem getting 100 percent leukoreduction in the door or just about anything else. This is what I would imagine we might see at some of the other major centers that are in better areas where patients are better able to pay.

The problem is that I come to work in the morning and it says Yale-New Haven Hospital, and we have to care about patients. Just to look at cost alone, it might as well say Starbucks on the door, because if it does, then I don't have to worry about whether the cost of patient care enters into it. It's just financial. But if it was financial I wouldn't have suggested an improvement for leuko-reduction because I got enough people I can line up to say you don't need to leukoreduce. It doesn't do anything. Look, there's fever, it's fever, they're not going to die of a fever. I think it's better medical care. I will not allow myself to--as will a lot of people--to just sit back and curse the darkness. We've got to try to find some way to get some candles lit.

Budgetary issues. This I took from the budget report that was sent to the senior managers in the hospital dated a couple of days ago, and I went over this to make sure I wasn't telling anything that wasn't in the public domain. From 1998 to 2000 Yale's Medicare payments were reduced by $90 million per the Balanced Budget Act. Connecticut payments--Medicaid payments to hospitals are the 48th lowest in the United States. Yahoo. We get the least and we had a fairly high Medicaid part of that pie. The state fiscal crisis is providing negative synergies. We're the largest Medicaid provider and we receive 66 cents out of every dollar of cost. We provide $52 million in free uncompensated care, and with the current state budget projections, we're going to lose 7 to $22 million of reimbursements annually.

And you wonder if anyone knows about the blood bank? This was a quote in saying why we had to go for our next budget reduction. "Hospital costs for pharmaceuticals, new technologies including eludable stents and blood products, pensions, have grown well in excess of inflation." We're right up there with malpractice insurance, eluding stents, pharmaceutical, they know we're there. We have got their attention. They are fully aware that blood products are a problem, and they're nervous because they know we cannot get a cheap unit of blood anywhere. So I think major medical centers are ready to come together to work with whomever to try to get our voice heard, even though we're .9 percent and we're, what I was told, was rounding dust. I heard this word today from someone, that that's what--the blood cost was merely rounding dust, insignificant. Well, we live in insignificant land, so it's a problem.

Our operating margins have been 1 to 2 percent. Expense growth has been aggressively--so we're still in the black, but by 1 percent. It's a sliver. And you can see why some of the blood advances might actually destroy that, which doesn't earn me any kudos on the first floor, I assure you. Expense growth has been aggressively managed at Yale over the past six years to 1.2 percent. That's growth. Current estimates that we will increment by 5.8 percent our revenue this coming year and expenses will increment 12.8 with 50 million, 60 percent of that attributable to inflation and fixed costs including a 14 or $16 million increase in malpractice insurances, and the balance from new programs. In fiscal '04 we will need--this is our sixth budget reduction in the past 10 years--to reduce or reallocate 40 million. So it comes down to the blood bank of about $800,000. I don't know where it's coming from.

One of the ways we said we could do this is by rolling out the red cell one unit. So I said if I can save you 9 units a day, that actually covered a couple hundred thousand. I don't know whether I can do that. But we will try. It's getting to the point where you're--budget reductions, reallocations cannot--this was a mandate--cannot negatively impact patient safety, clinical quality or patient satisfaction. Well, it's lovely when said, and I think the administration believes that that's the case, but I can tell that there are times when things that might be done one way need to be done another way. Patients do well. We give extremely good care, but you just can't do everything you wanted to be able to do. Yet, that's the mandate and we have the stiff upper lip and so forth, but all projected budget increases must be absorbed by department or divisional reallocation, the usual mantra, and any incremental expenses to achieve higher revenue, new projects, require a 5-year P&L, profit and loss statement to show that it can hold its own or it will not be approved. And our budget cycle's remaining 18--over 18 months.

So in the last couple of slides, what are creative ways of funding? The prime directive--and again I reiterate that I believe that the senior management at Yale-New Haven Hospital, as well as the lower level management and certainly the blood bank director are excellent individuals. They're ethical. They're very concerned. They are trying as hard as they can against overwhelmingly depressing financial statistics. So any increase is considered beneficial however small. Decisions are made only for medical reasons to improve patient care, so the technologies that we use, the ways we fund them, we link in advance to state and federal regulatory requirement. He made me do it, the FDA, the Federal Government, the state government. If we have to do it, that's helpful.

We use an incremental and corporation strategy, and that's what we did sort of with leukoreduction. We were at 30 percent. Then we incremented to 100, so I was really talking about a 70 percent, not really 100 percent. We lowered the platelet dosing in increments, so you move slowly to try to get people used to it, because it requires a change in the corporate mentality in the institution because most physicians will listen to you if you talk loud enough and you can talk--if you don't know them like the lower level house staff, you can talk to the senior people and it dribbles down.

Internally reallocate. The "I Love Lucy" paradigm. The "I Love Lucy" paradigm is when--I think it was a Lucy episode, may not have been--where she came home with a mink coat and it was $10,000, and when Ricky was all upset she said, it was on sale from 40,000. I saved you 30. All right. Now, it could be a car, it was meant to be gender neutral, but I just happened to choose "I Love Lucy." That's what I did with the mandate for the frozen blood. I said, if you give us the money to get a frozen reserve you can keep your operating rooms open and look at the money you'll save. If we do universal leukoreduction, I can tell you will lower fevers, and you'll decrease money that you would have spent on increased--some people staying extra, certainly work-ups and so forth. It's the money I can save you if you give me money. So that paradigm we used.

Cost shifting we certainly used. We link advances to our peer institutions. I'm always asked what's Harvard doing? What's Penn doing? What's--major medical centers--what's NIH doing? Beth Israel? They want to know. And that helps. The institutions feel--certainly my chairman--also feels that we're keeping up with the appropriate other leaders in the field.

Dose management I've discussed ad nauseam. Linking advance to decreasing FTEs which is necessary either by attrition or if necessary, layoffs. We're getting to that point. You link the advance to a strong clinical service. We wanted this frozen reserve. I went to the head of the trauma program and he was all for it because he thought he was going to get to use all those units of blood. Well, the pediatricians had something to say about how this blood might be distributed if we ever needed it, as well as some of the other services, but at least it was helpful. And support from risk management.

So this is a program. It's not just one thing and it's not by brute force. So just my last two slides. How did we fund these things? Well, here are the strategies. For NAT testing I used regulatory help and I internally reallocated. For the Hemacare, we actually gave up FTEs by attrition. We discussed peers, that--everyone was moving to a computer system. For quality systems we needed to be there because we're a manufacturing plant now. We have to go under cGMPs. And it's a production. We need computers. So we got that. Our peers use it. We went through the capital budget process and also the regulatory.

For universal presource leukoreduction was primarily peers, cost shifting and an incremental increases by going relatively slowly, ratcheting up.

The frozen strategic reserve, I used the "Lucy" syndrome if you will, incremental increases, clinical links to trauma and internal reallocation.

For West Nile we'll use regulatory and internal reallocate paper towels again. I mean we just can't get enough paper towels. What can I tell you?

The minipool NAT, when that comes, will be regulatory if it comes, and internal reallocation if there's an increase in the price of blood.

Pathogen reduction is a big problem. Lucy's just not going to do it. Neither is our peers and internal reallocation. This is not the forum to discuss this, but pathogen reduction has the potential, from what I'm hearing, to raise the price of medical care at our institution--there's a lot of silence behind me here, folks--close to $4 million. I have absolutely no idea where that magnitude of dollars will come from. I have absolutely no idea. What I hope is that it doesn't arrive at the same time the bin Laden virus arrives. All of a sudden you look for a Patriot missile wherever you can. I use this stupid analogy all the time. But that's what I see.

I think we need to have good discussions with our corporate people who are looking to help to improve the quality of medical care, but as has been said over and over again, you've got very expensive technology coming with people that just can't afford it anymore, such as institutions such as ours.

A single donor to random donor switch, I would need to do that before I could get into pathogen reduction which may very well be required. And you could say it's better to do that then to go through 65 different tests for the next virus du jour that comes along. So that's not what we want to discuss here. That would be a big problem as well. Incremental increases, dollars shifting, reallocation.

Bacterial testing is facing us now. Regulatory, ABB has made it a standard by I believe March of 2004 for platelets. Peers, internal reallocation.

Automated cross-matching that I mentioned early on. We'd have to decrease FTEs. That's the only way we could sell this to our administration. by attrition we would not need an evening technologist on staff. We could have one less because the machine could do the work. I don't know if that would fly. We can always bring in Lucy, our peers, you know, blame it on Penn.

And SARS and the bin Laden, if those things come to pass we would be facing all of these. So you see, over and over again the same kinds of programs, the same projects. And this is just the blood bank, but we are recognized as being a major user of blood, user of money, and I think we are all making extremely strong efforts to be as helpful as we can.

And I appreciate the opportunity to address the Committee, and to tell you that Yale-New Haven I am sure is prepared to join with whatever other groups to try to make things a little more equitable for our patients. Thank you very much.

DR. BRECHER: Thank you, Ed. We're hoping to stick now to the questions. Go ahead.

DR. HOOTS: Thank you very much for what I think is an extraordinary and well elucidated and important observation about the impact of what we're talking about on particularly academic health care centers.

In that regard, and I think you answered the question I'm going to ask, but I propose it just in terms of perhaps getting collaborative data since you're only a cost center and not a reimbursement site, but you cited the reality of the situation which is comparing your own center to Jim Aubuchon's center and to Greenwich, that clearly all of us who work in academic health centers know that cherry picking and payer mix means everything to the survival of academic health centers, and in the context of our previous presentation about prospective payments and CMS, one of the thing that I think would be extraordinarily helpful if we could somehow show Congress, show ProPAC, show--or MedPac, and CMS, how much the rest of society is really paying for the load that we carry for federally reimbursed patients. We know it happens in every facet, but in blood we really don't know how much. It's clearly happening. But if we could show, you know, if a unit of blood costs $170, and we're getting $90, but in fact we have to charge $270 for somebody who has not managed care but regular fee for service insurance in order to even get even, I think that's important data that we could at least take to somebody to say, this is just not working. We clearly are reallocating, but we're reallocating in a downward spiral that will inevitably induce institutions like yours and mine to be having to make decisions about closing their doors essentially.

DR. SNYDER: Well, I think we have the institutions attention now, as I mentioned. And again I did not speak to Jim. I do not mean to imply anything about Mary Hitchcock and their financial status, other than it would appear that their payer mix is different from ours, but I think everyone would be willing to join, because these days it's expensive for various blood products, but in the old days they used to centralize major care. You went to the major medical institution. They treated you and then you went back to your community hospital, your local hospital for follow up. Well, these days you can be treated for major illnesses in local hospitals and even as you get transplanted in the center, you will go back to get follow up care which still has some fairly expensive aspects to it, so I think even community hospitals and smaller hospitals other than major medical centers, would want to share in this opportunity to have its voices be heard.

We need to get our act together. We need to be able to all bill appropriately. We need to do things because there's such a long lag time. So I agree, and I would hope that the various speakers that have been here would be able to pull together. Certainly AABB has taken a major leadership role and hopefully the Committee will have its voice heard as well.


DR. KLEIN: Ed, dose reduction is an interesting strategy and certainly in your case it does appear that the increasing cost of blood has resulted in your transfusing less. How do you assure that you're not compromising patient safety by reducing the safety margin that one gets with blood components?

DR. SNYDER: Well, that's an excellent question, Harvey. Two ways. Number one, we had set the limits so that we gave 5 units for outpatient because we felt that an outpatient getting platelets might need additional. And 4 units on an inpatient, they would be more likely to be monitored and we could see what the post transfusion platelet count was. If the house staff had any concern that the post count was not high enough or they're not very reticent about letting us know that it's not enough, and we do get requests for patients to get additional doses if they're bleeding or if there's a particular problem.

And the same thing for red cells. Though we have criteria set up for the one unit, that they have to be stable, nonbleeding and with a variety of other criteria, and their hematocrit has to be, basically it's the chronically transfused patients, like a postop orthopedic patient for example. We've limited it to several floors and we're testing it out. I don't have hard data on knowing if there's been any problems, but I do know that no one has come to my attention that has had an untoward outcome attributed to an insufficient dose of platelets or to a lack of red cell. You can say that's very soft data. You just have to roll it out slowly, monitor. We certainly let everyone know this was coming. This wasn't something I woke up one morning and had an epiphany and said, Let's do this. We put it in the hospital bulletin. We talked to the house staff at all the conferences. We notified the nursing staff and the medical staff that this was happening as part of an improvement of patient care, and if they had any questions to give us a call. I don't know what else I can do.

DR. KLEIN: I put that out as a caution because I think that that is something that's readily grabbed upon and certainly if there is over transfusion it's an appropriate approach, but I do send out that caution.

DR. BRECHER: I guess just for the record, there will be a study starting this summer with the Transfusion Medicine Hemostasis Network looking at lower doses of platelets in a prophylactic setting. So we should have some data within about a year or two.



DR. Snyder, thanks. I just wanted an observation. In what is obviously a very intensively, proactively managed transfusion center, your budget is 1.6 percent of the hospital budget, as opposed to the .875 percent budget dust figure that's thrown out. We were told how soft those figures were. Your figure, obviously I think is much harder, much better, and shows how soft that figure is.

The other question I had was when you used the "I Love Lucy" argument, are you held accountable at some point to show that you have actually saved the institution the amount that you said you were going to?

DR. SNYDER: That's a good point. We were able to, with the platelet pooling, to show that that happened. Now, I think that's a lot easier because when they ask for platelets they get a bag and they often don't actually look and see how many units of platelets are in it. The nursing staff may be aware, but the medical staff may not.

So if the post count goes up to 40,000, that's acceptable, they don't order any more. So we have control over what goes out. When it's red cells it a little different because they have to order and you put the blood bank technologist on the front lines as trying to negotiate with the house staff. That's an untenable position, which we said to them, if there's anyone saying that they demand 2 units and they look like there should only be one, give them the blood obviously and then let me know and I'll do follow up.

So we are waiting to see. When you have 20,000 units of red cells, it's a lot harder to see a drop of 3 units a day. What we don't want to see is a big rise, so I have a little baited breath as about how we'll be doing those, because it's also hard to know how many you've really saved. We keep numbers, and my lab manager tells me that we're somewhere near 3.

For some of the other issues, the frozen reserve, last month we had 30 units of O positive on the shelf because of a shortage in a couple of triple A's that ruptured. The staff was running around. We only have 30 units. I said, au contraire, we have 230 units available, although we can't thaw them all at once, which gave us a feeling--and I certainly let the administration know that we were not in danger of shutting down the operating room or the recovery or the emergency room or canceling elective surgery. So in a sense I have provided them with a little bit of help from that, although I couldn't take credit for the money we generated keeping the OR open that day.

So it's difficult. You try to be creative, and I think they understand that we're trying to do the right thing. Basically if we're within the budget pretty much that they gave us, however we reallocate, I think it's fine with them. They have other problems to deal with, other parts of the institution. But it's a daily issue.

DR. BRECHER: Two last questions. We'll do Rick and then Karen.

DR. DAVEY: Ed, one thing you didn't mention was kind of managing outdates. Maybe you've got that completely under control, but maybe a comment about that, and also you feel that extending platelets, especially since you knew it was random, to 7 days would be a major cost saving for you?

DR. SNYDER: Yes. We managed the outdates because we were able to have just one CMV safe group. We didn't have to split it up. So that everybody got that particular type of a product. And it did decrease our outdate. Along with the--I will admit an improved more intensive management of the inventory. I was told if we ordered 4 less platelets a day that we would be able to still have enough. Looking at the outdate, we're still wasting some and the Red Cross is only about an hour away. So we did decrease some of our ordering to do that, and at the cost of a unit of platelets, it's a fairly useful procedure to do. Of course now we're getting down to where we can't go much lower.

Single donor platelets in our state are several hundred dollars more than the equivalent amount of random donors. So that's a problem for us. And we're actually negotiating with our supplier to give us a certain number of random single donors which would only be used in the outpatient. And we went to the administration and to the bean counters, as Joe Bosey [ph] calls them, and said that the outpatient reimbursement is such that if we limit this only to outpatient and don't go into the DRG inpatient, we can get a better reimbursement and it was almost budget neutral. Then you get their attention.

One of the things I had up--I took out all my jokes because it was not appropriate for this group, but one of them was the number 11 way to do things is to get an MBA. If you learn how to deal financially and be able to talk to people in their language financially, which I am learning by fits and starts, you get much more attention, just as you would if someone was speaking to you medically and knew what they were talking about. So we have kept very close tabs with the financial people.

7-day platelets would be wonderful for us because I think we would be able to manage the inventory far better and we're looking forward to 7-day platelets as a way to decrease even further the outdating. I think it would be a major benefit for us, absolutely.


MS. LIPTON: I have just two comments. Just in light of all you've done in terms of increasing productivity, it does concern me sort of that CMS looks at things. They look at market basket but continue to rely on increased productivity because I do think at a certain level you do start cutting into infrastructure and it does affect patient safety.

The other thing I wanted to just comment, I think Yale-New Haven is remarkably lucky to have you there, and wondered if you could transfuse your enthusiasm for dealing with very negative situations? I just think that, as you said, trying to figure out a way out of the box rather than giving up is really great and I wish you could pass on that spirit to everybody else.

DR. SNYDER: Well, thank you. Regarding your first comment, I wonder how many people were thinking of the phrase "no good deed goes unpunished," and that's really what happens. When you increase efficiency, that's very nice. We'll just take the excess. Thank you. That can't be allowed to happen to the point where you're just so demoralized that it just isn't worth it any more.

And I appreciate the other comments. Thank you.

DR. BRECHER: Thank you, Ed. We're going to take a break. Why don't we reconvene at 3:50 and we will start again at 3:50.


DR. BRECHER: If everyone would take their seats, please. We're going to reconvene. The final talk of the day before we go into some committee discussions is Dennis Fallen. Where is he?

Okay. Here comes our speaker, so we can get started.

MR. FALLEN: Good afternoon. My name is Dennis Fallen, and originally the committee had invited my business partner and colleague,

DR. Dennis Smith, to make this presentation this afternoon. Unfortunately,

DR. Smith had an unexpected other appointment that came up that prohibited him from being here. So I'm delighted to be here to speak to the committee. Thank you very much.

The question or the topic that was posed to us to answer is: Is anyone managing their budget based on the cost of blood? And being the last speaker of the day--I know people are very tired--I have a reasonably brief presentation to address this.


MR. FALLEN: Thank you.

DR. BRECHER: Are we ready for questions now?

MR. FALLEN: Taking the question quite literally is what really drives this response. Let me tell you a little bit about myself and how it is that we may have some insight to this. I am president and CEO of a company called Transfusion Management Services. Transfusion Management Services works with hospitals and hospital systems to re-engineer their blood banks and help them find ways to save money and cut costs.

DR. Smith, my partner and co-founder of the company, is the chief medical officer and senior vice president--or executive vice president, excuse me,

DR. Smith--of AmeriPath. AmeriPath is a pathology practice management company, also has a clinical laboratory, and they provide very specifically medical directors to laboratories and blood banks in over 200 community hospitals around the country.

DR. Smith is also a past president of the American Association of Blood Banks.

My background, I've been in the blood bank field since about 1986. I was with the American Red Cross and with Baxter Healthcare just prior to starting this company.

We have a lot of anecdotal information about our clients that we've worked with in the United States and in Canada. I picked some random statistics that I thought might be pertinent and interesting to the discussion today.

On average, the overall blood bank budget is 75 percent consumed by blood costs, 17 percent labor, and 8 percent supplies, reagents and other. We found that this is generally very close. I've seen blood costs as low as 60 percent in some hospitals and as high as a little over 80 percent.

We've also seen blood costs specifically, as I think referenced in the AdvaMed study, increase by over 35 percent at some of our clients in the last three years. Blood costs alone are approximately second only to the overall cost of labor, which is the highest cost component of the total hospital laboratory. And in one institution, they're beginning to see that blood is just about ready to overtake that with any further increases.

What's the problem that hospitals are facing? Well, they have no control over the price. They really have no options in terms of where they go for the supply of blood. There is no pure competitive environment within the hospital supply community. Hospital suppliers are regionally based, and they pretty much have a monopolistic approach to the blood supply at a local level.

There is no separate reimbursement for blood, unlike other therapeutic components, and I think in answer--our feeling and the answer to an issue that has been raised throughout the day is we believe that blood is unique compared to pharmaceuticals and other medical supplies and devices. There is very specific reimbursement addressments for certain pharmaceuticals, and blood, being the unique therapeutic product that it is, should be treated very similarly.

In the face of rising costs, what choices do hospitals have? Well, really not many, and that's the point of our point in saying no, blood is a necessary therapeutic agent needed to provide medical services, and so based on the current environment, hospitals are pretty much going to pay what they have to pay to have blood.

There are certain things that they can do, and I think

DR. Snyder was very clear about ways in which they can manage their budget to address some of the rising costs of blood. But essentially what it comes down to, and as he elucidated about his own experience, you must do more with less. And you need to find ways to manage your overall costs by coming up with some unique ways to save money.

In addition to the rising cost of blood associated with the operation of a hospital blood bank, there are a number of other issues compounding the problems. There is a lack of available professional expertise generally in the community hospital area, and that's primarily our customer base, working with community hospitals. We've had some very small interface with some university hospitals, but principally, our clients have been community-based hospitals. And there is a limited pool of medical expertise, board-certified transfusion experts in the community to lead the direction on utilization of blood, on better blood management practices, much like DR. Snyder is able to do at Yale.

There is also a major decline in SBBs and medical technologists in the field, along with a lot of the other ancillary care providers, a major shortage of nurses as well. And so in trying to facilitate the needs of operating a blood bank with fewer and fewer available resources is more and more challenging.

To support DR. Snyder further, absolutely the hospital blood bank is a cost center. It is not a revenue center. They generate no revenue, generally speaking. There are certain services that can be done. Pheresis services can be--on an outpatient basis sometimes can generate revenue, but largely most hospital blood banks are cost centers. As a result of that, they get very little attention from hospital administration.

I think historically hospital blood banks have been looked at as a cost center, as an ancillary department that is almost a necessary component. If you go around and see as many hospitals as I have, you'll see blood banks that have been pushed to the basement, pushed to the corner. They have limited facilities. They have limited spaces. They're not attractive. And they have been supplanted by other programs that do generate revenue. They don't get the capital that they need to do automation. There is new technology out there that's available to offset the labor reduction in terms of serological testing. There's automation and IT capabilities that could make things more efficient in the blood bank. There are IT capabilities that could reduce the number of errors in transfusion at the hospital blood bank by tracking samples and units better. The hospitals are unwilling to spend that money based on the fact that there is no direct correlation to reimbursement or revenue associated with those expenses.

And, lastly, there's a lack of re-engineering experience at the hospital, and that's sort of the underriding reason why we are in this business, which is that hospital blood bankers are trained to be hospital blood bankers. They're laboratory technicians. They are not business people. They are not managers of a financial nature such that they're equipped and have the skills to re-evaluate and redesign their facilities to meet rising costs and lower reimbursement. Our approach as a company is to try to provide services to help hospitals do more with less, and that has facilitated us to gain a lot of good insight to the operation of a hospital. Sort of our internal mantra in trying to work with hospitals--and we've worked with a number of hospital systems--is consolidation, centralization, automation, standardization, management, and lastly, something that escaped my slide, was utilization, better utilization of blood products as well.

When we go to a new hospital or hospital system, the first thing that we do is basically a benchmark baseline assessment of their operation so that we know exactly where they are today. What are their costs? What are their utilization rates? What are their transfusion triggers, labor component issues, et cetera? We try to collect as much information as we can to understand their operation to discern whether or not they're efficient today or not or whether there's possibilities that they can improve their economics.

We look at leveraging their personnel. We look at the professional expertise that they've got. We look at the basic case mix and the service mix that the overall hospital is providing. We try to leverage management expertise and have in the past even provided certain capital underwriting based on a return on that to help hospitals move forward.

Some specific experience for us in dealing with some clients, we put together a program for a six-hospital system that used the fundamental issues of consolidation, centralization, and standardization, implemented a new automated serological testing program, and based against the benchmark data, that hospital over the course of the following year was able to reduce their overall operational costs by $300,000.

In addition to that, this hospital elected to--at the time that we started with this hospital, they were up for renewal with their blood supplier contract, and this hospital elected to not participate in a 100-percent leukoreduced program, which was something that the blood center was trying to suggest that they wanted to move forward with. The hospital didn't feel that there was adequate data--this was a decision that was made two years ago, by the way. There was not adequate clinical data out there to support moving to 100-percent leukoreduced blood. And the important point is that this hospital has been able to save nearly $1 million a year or avoid $1 million a year additional increase in expense for their overall blood costs by not moving to 100-percent leukoreduced blood.

They also have not seen a significant change in the overall outcome of their patient transfusions either.

Now, I think what's important--and I have discussed this very recently again with both the general manager of their laboratory system as well as the medical director. What are we going to do to measure what the patient outcomes are? Because I'm very concerned about this in light of some of the recent data.

Here, again, in light of some of the discussion today, the hospital is very reluctant to even bother to go through that in that there is no significant change in the outcome of the patients based on the transfusions that they're seeing, and they're realizing that if they move to 100-percent leukoreduced blood, there's going to be a $1 million hit to the bottom line of their blood bank. So are decisions being made based on the cost of blood? Yes, absolutely, they are. And is it good medicine? That's questionable. I'll move on.

In another hospital system, some recent data that we were able to put together, one of the things that we do also related to the baseline information is that we've put together a cost structure collecting a lot of different cost information from the hospital to come up with an average cost per patient transfused. This allows us to take a look at all of the expenses in the hospital--blood costs, labor costs, supply costs, and otherwise--and analyze those costs against the number of patients transfused, the number of products transfused, and baseline that and benchmark that and compare it from one time element to another.

In the most recent quarter analysis that we've done for this hospital based on improvements--consolidation, centralization, standardization, some change in some utilization practices, some change in utilization in terms of transfusion triggers--this hospital has reduced their overall average cost per patient transfused by 14 percent compared to the baseline period, or about $168 per patient. That's a $168 difference between what the average cost was a year ago.

Adjusting for blood product prices, what we did was we actually took the current period data and, because we knew that there was a blood cost increase, we actually took a net cost to the previous period, and the average cost per patient transfused using the same blood cost would have been reduced by 22 percent, or $218 per patient. So you can see the impact of what the cost of blood is having even when you have a very aggressive program to reduce your overall operational expenses.

One of the other things that we did--and we have recent data for this hospital system to compare the report here--is that we embarked on an analysis of what their charges and their billing procedures were last year, and we sat down with the hospital CFO and looked at what charges were, and this hospital, hospital system actually, had not been aggressively increasing or keeping up with the costs in terms of their charges. They also were not charging for everything, as has been reported. Indeed, that's a very common fact that we find as we work with hospitals. They don't charge completely for everything that's there. It's either they charge for blood or they don't charge for the administration fee, or they charge for the administration fee and they don't charge for blood.

We sat down with the hospital and said we think that you need to increase your charges, and we used two components. One was the hospital, I think--as mentioned earlier, the hospital has a standard markup. They have a standard percentage of which they mark up basic fees and services. And so we applied that to their current costs.

At the time we did that, the costs would have jumped by--or their charges would have jumped by something like 60 percent, and when I sat down with the CFO, we said 60 percent is a little perhaps eye-catching, and so we elected to incrementally increase those charges and did it over a six-month period. And so they did a 30-percent increase in charges, and then followed it up another six months later at the beginning of their next fiscal year with another 30-percent increase.

But it was predicated based on what their average markup was and based on information that we had from other facilities around the country in terms of what their average charges were for blood products and services.

When we compared one quarter to the next after the complete markup, they increased their charges for essentially the same volume of service by $2.7 million for one quarter. We thought that that was really impressive. We were really excited about that for the hospital, until I sat down with the CFO and said, "This is pretty neat, you're going to get $2 million more." And he said, "Oh, yeah?" He said, "That translates to mean maybe a 3-percent net return." So maybe $80,000 back to them based on a $2 million increase in charges.

A possible outcome, by improving efficiencies and decreasing costs, will hospitals be able to pay more for blood? Well, you know, yeah, to a certain degree. I don't think that you can reduce costs at the rate that blood costs are going up enough to basically underwrite increased costs in blood. Based on things that have been talked about here today and that have been talked about for months in terms of things like pathogen reduction, those kinds of costs will be impossible to keep up with changes in the blood bank at the operational level.

What I think is important, though, is that we should not lose sight of the larger issue, which is the total health care cost and reimbursement. You know, as has been mentioned, blood is a very small proportion of the cost of the overall health care, and so when hospital administrators look at costs, you know, they are focused really on their total operational costs. They're focused on revenue-producing programs, and though blood is very important, it is not as important as other issues.

Now, I will contradict myself and tell you that, as we get calls from hospitals, as we talk to other people, blood is becoming more and more and more the most important issue on their minds because I think it is the fastest escalating cost in their hospitals, as near as I can tell. Last week, I talked to the CEO of one hospital--a state hospital society as a representative of all of the hospitals in the community. He was talking to me about what can we do collectively as an agency to help our hospitals reduce their costs. This comes on the heels of the discussions that this hospital association has had with their state blood supplier about throwing them out and building their own blood center. I think that there is enough concern out there among hospitals about these costs of hospitals and communities trying to build their own blood centers to supplant the existing structure that's there. And though I think, by and large, most blood centers provide very good service and do a pretty good job, I think that some of them are in potential jeopardy of being displaced by alternative programs. I'm not sure that that's necessarily good.

I think that the programs that are there have a lot of history. I think that creating the number of hospital-based collection programs, although they can offset certain costs, it's going to put an added regulatory burden on the system. And I'm not sure it's the most efficient way to address the issue of cost.

Lastly, I'd just like to address the question that's on the agenda for tomorrow, which is, Can blood centers just charge more? Yes, and they do, and they will continue to. I don't see anything that would prevent them from doing that.

In defense of my blood center friends--and I did work for the Red Cross at one time so I've been there--in 1997 I conducted a study to try to understand what the costs were at the blood center, and, again, this is a little bit dated. It's 1997 data. But what we concluded, on average hospital blood centers, hospital collectors, net margin was 3 percent. Three percent on average. So on average, somebody was less than 3 percent, somebody was a little bit higher.

I think the industry as a total has done itself a great disservice over a long period of time in that I don't believe we've kept up with costs appropriately since the HIV crisis. And I think that it's almost a little bit the horse out of the barn scenario in that we're now trying to catch up on added costs that have been added to the system based on a system that was trying to be very due diligent about the costs to the health care system overall. Blood centers I think were very, very--should be commended for decades, years of service, and providing blood products at a very fair and reasonable price. And they hurt themselves by not capturing increasing costs at a rapid enough incremental rate. And now we're faced with a real problem because now, in order to keep up, that cost is being passed along to the hospitals.

I think that this committee really should look at recommending that blood is treated more uniquely, it should be treated more like a therapeutic pharmaceutical, and that it get a higher level of reimbursement.

Thank you very much.

DR. BRECHER: Thank you. Now we have time for a few questions. Karen?

MS. LIPTON: Dennis, thank you. That was actually very interesting. You said two things that I thought originally were contradictory, but maybe not. First you said, well, you know, if you could bring in more revenue, that would make a difference to an administration, but now essentially you're saying it really--even if we increase the amount, that they really don't have a tremendous interest in trying to do that because the return is so low. Is that right? So that even if you get to them and say you should be correctly billing, they don't really see this as being something that's going to help them.

MR. FALLEN: Yes, I think the problem--it's a Catch-22. There's not a lot of revenue-generating opportunities for the blood bank in the first place. To create a new revenue-generating program for a hospital blood bank, it requires them to spend money. It's going to cost them. And they're already looking at incremental increases. And so much like

DR. Snyder was saying, how do I sell, you know, new ideas, new devices, I've got to cut costs someplace to justify that or I need to come up with the Lucy syndrome to justify that in some way.

So I think it's really problematic. It's a problem that we face as a business. As a commercial business, we're trying to make money. We charge fees to hospitals for our efforts to come in, and we offset that by saying--by basically a bet. I sit down with hospital CEOs and say, "I bet you I can save you money. How much money do you want to put on the table and pay me to determine whether I can save you money?"

Well, I'm 100 percent successful so far, so, you know, it's not an issue. And it gets to be less of an issue every time we save hospitals money. But that's a concern.

DR. BRECHER: Okay. Thank you very much.

We are now going to move into somewhat of an abbreviated committee discussion because we're behind schedule. However, I just want to point out to the committee that we have left abundant time tomorrow afternoon for an extensive discussion, and we will certainly be out of here by 4 o'clock at the latest tomorrow, even with a lengthy discussion.

I have had two documents circulated to you that I want to call to your attention. One is the new guidance for industry on West Nile virus, which I guess just came out yesterday. Maybe I could twist Jay's arm to say a word or two about that. And the second is a letter from DR. Carmona responding to our recommendations from our last meeting in January, and I think that a lot of our time is going to go into discussing how are we as a committee going to respond to this letter.

What I would suggest is that people take this letter, read it tonight and think about it, because I think we're going to have a very lengthy discussion about this letter tomorrow. I think there are problems on multiple levels in this letter. I don't want to rush into it today, unless other committee members feel very strongly that we have to start on it today.

But why don't we start with Jay. Maybe you can say a few words about the West Nile virus.

DR. EPSTEIN: Well, the guidance that issued today is an update to guidance that was issued in October of 2002 to address the problem, which initially was theoretical, whether there might be transfusion transmission of West Nile virus and which has proven actually to be the case with, I believe, currently 24 demonstrated instances of transfusion-transmitted West Nile.

The earlier guidance addressed several points, which are unchanged, including emphasis on careful history taking to avoid collections from donors who may be symptomatic at the time of donation, to pay attention to post-donation information of illnesses suggestive of West Nile, and to act accordingly with regard to product retrievals and potentially notification of prior transfusion recipients through the physicians.

What we have done in this update to the guidance based on data that were gathered by the Centers for Disease Control in the case investigations of transfusion-transmitted West Nile virus, we have learned more about illnesses antecedent to the donation and recognizing that although screening tests based on NAT technologies are in the pipeline and hopefully will become available under INDs in the fairly near future--they're not here yet. But, on the other hand, we're starting to have reports of epizootic activity with the West Nile virus based on positive mosquito pools, infections in birds, and possibly the first human case already in one state, that we felt that we should, as an additional safeguard, introduce a donor question related to symptoms potentially consistent with West Nile virus infection in a donor antecedent to the donation.

So the current guidance recommends that if a donor has a history of headache with fever in the week before donation, that that donor should be deferred for a period of 28 days, and that that question should be asked annually starting no later than June 1st and potentially ending on November 30, with the following caveats:

We have additionally recommended that if the medical directors are aware of epizootic activity of West Nile virus in their local region and/or human transmissions of West Nile virus, they may elect to start asking the question sooner. Additionally, we're recommending that if there are cases of human infection reported in the state where blood collection is occurring in November, that the question not be discontinued on November 30 but that it be continued until there are at least two consecutive weeks with the absence of reporting West Nile virus transmission to humans. So that's the essence of the revised guidance. This guidance is being issued for implementation as well as comment. That's to say that it is effective today, and we are calling for actual implementation of the additional donor question by June 1, 2003. But as I explained, the current guidance recommends that that then be an annually recurring event, that each year the question be asked, at least from June 1st through November 30.

Data from the CDC did indicate that the period from July 1st through October 30 would capture--would have captured 99 percent of the human West Nile epidemic reported cases in 2002. We have added a margin of safety, recognizing that with the deep penetration of the virus into the animal reservoirs, there might be earlier and later outbreaks in 2003 and potentially successive years.

And let me note that there was a publication from the CDC to the effect that when there are early epizootic outbreaks, it is suggested that there will be human infections in that region. That's not to say there's a one-to-one correspondence, which there is not, between the epizootic and the human outbreak. But early epizootic activity is an indicator for likely human activity.

And so that's the basis of this guidance. I need, just so that everyone is clear, to remind everyone that 80 percent of these infections are asymptomatic, so we do not expect these donor questions to capture a large percent of the infections that may be present in donors who are, of course, asymptomatic. But, on the other hand, augmenting the post-donation information with questions about pre-donation illness may help to reduce some cases of transmission.

The plan, however, is for that question to be continued at least in 2003 while the screening tests for West Nile are under development in clinical investigations, and of course, we may need to revisit this guidance based on what we learn.

DR. BRECHER: Jay, do we have any idea what percent of donors will be deferred based on fever and headache?

DR. EPSTEIN: Yes. We did request that a survey be done by industry, and feedback to the FDA has indicated that the donor loss would be below 1 percent. We did toy with the idea of deferrals based on other individual symptoms or symptom complexes, and this is the group of symptoms that gives us the highest capture for West Nile at the minimal donor loss.

Basically, among symptomatic cases studied in 2002, fever presented in 100 percent, and headache was less common. It was in about 90 percent. So the combination then catches about 90 percent of those who are symptomatic, but in the aggregate it captures only about 57 percent of all those who might donate because only about--in those studies, I think it was nine out of 14 donors were ever symptomatic in the course of their illness in relation to donation that transmitted.

So this is not perfection, but it is an added safeguard that we feel is a prudent measure.


DR. BIANCO: Jay, I have a comment and a question, or two comments. One, this guidance--I read it very quickly--asked for two questions, not one question. You have Item A is diagnosis of acute West Nile infection, so we have to ask every donor if they had West Nile. The second question is the question: In the past week, have you had fever with headache?

The second comment is that if I recall of the 14 cases, nine had symptoms, but six of those nine had symptoms after their donation, not prior to donation, six or seven. Two of the 14 or three--I don't recall exactly--appeared to have symptoms before the donation, so that was 25 percent of those that were associated with transfusion.

We know that those that have symptoms represents a very small fraction of the people that are infected. The ratio for encephalitis is one in 150, and for just West Nile fever, not more than 20 percent of the people have some symptoms. So the effectiveness of the measure is something that I'm concerned about.

But my major question to you, Jay, is the surprise. We added in one week five questions to donor history, and I would like to know why couldn't those guidances be discussed in a public forum so that there could be more thinking and more input from outside the agency.

DR. EPSTEIN: Well, first, let me just clarify that the question on West Nile illness, in other words, were you diagnosed with West Nile, then leading to a deferral for 28 days after resolution of illness is not a new recommendation. That was in the October guidance. There's only a recommendation for one new question, which is fever with headache in the week before donation, although we are still talking about two donor questions on West Nile. I agree to that extent.

And I agree with your statement that the data from CDC indicated that among the nine donors who were symptomatic with West Nile, only three reported their symptoms prior to the donation. However, the experts at CDC have cautioned us that the time of symptoms and its relation to the time of donation were ascertained in the CDC's studies weeks to months after an implicated case was concluded. And so that those are, in fact, inaccurate time periods. They are what was reported by the donors, but how much faith can be put in the exact time intervals is unclear.

So the way the FDA looked at it is that the proportion with symptoms and the distribution of symptoms in the donor cases were not different than in cases in the general population. And we don't really know what the exact yield would be based on symptoms prior to donation. We have Lyle's data and I don't dispute it, but it has that uncertainty layered onto it which we cannot resolve.

On the question of why not wait for comment, well, I think that the sense of urgency within the agency was that we only learned a couple of weeks ago about the onset of epizootic activity in two and possibly three states and only learned today about a possible human case. The sense was that we wanted to act promptly and that we wanted to give the industry sufficient time to implement any recommendation that we might make.

So the extent that we felt that donor questions would have some preventive value, we wanted to be able to recommend that they be implemented by June because of the recognition that the outbreak may already be initiating, and that we simply had to make a decision whether to publish for comment and then be unable to give the industry time to implement or publish for implementation, take comments post-implementation, which we always do, but then give the industry adequate time to deal with the recommendations.

So it's a difficult position to have found ourselves in, and I fully understand your concern that it's vastly preferable to have a comment period. We understand that and that is the general paradigm under good guidance practice. But we did feel that we had a situation of urgency here with an unexpectedly early epizootic.


DR. DAVEY: Yes, Jay, just another comment. While we have the option for both the SARS questions and West Nile questions to use a pamphlet, that is clearly a temporary measure, and I know you recommend and we are implementing those questions be put right into the donor history questionnaire. But one challenge for this particular guidance, which I think is new, is that this is going to be a question that is only going to be asked--or recommended to be asked in certain months. And I think it will be a challenge to manage the donor history questionnaire where questions are going to be implemented--or required and then not required during certain periods of the year. We'll have to deal with it, but it is a challenge.

DR. EPSTEIN: Well, we thought it was progress not to ask a question out of season when it's not useful. But I can't dispute that it adds logistic complexity. We tried to keep it simple. It's approximately half the year.

DR. BRECHER: Harvey?

DR. KLEIN: Jay, I noticed in the draft guidance that the issue of 1 percent donors is mentioned, and you just mentioned feedback from industry, but there's no reference. Do you have any data on that at all?

And, second, what was the thinking behind continuing what's going to be certainly a very insensitive and non-specific screen at the time that you have NAT testing introduced?

DR. EPSTEIN: Well, yes, the agency did receive data. We queried two major blood organizations that collectively represent approximately 90 percent of blood collection, and we do have numbers. It was sorted out by symptom and by period--in other words, one week, two weeks, three weeks prior to donation. We were able to estimate a donor loss for individual questions, alternative questions, and combinations of symptom complexes.

I'm sorry. Your second question?

DR. KLEIN: This is obviously going to be a terribly insensitive and non-specific--

DR. EPSTEIN: On NAT. I'm sorry, NAT.

DR. KLEIN: Yes. When NAT testing is introduced, we think 1st of July?

DR. EPSTEIN: Yes. Well, I would like to believe that at some point we could make a decision to remove the recommendation for questions based on data establishing adequate sensitivity of the NAT. But the concern at this point is that we cannot control when NAT screening may start.

Of course, we would like the test to be targeted to the areas where outbreaks may be occurring, but that may be difficult to control also. And in the final analysis, we're not yet sure what the sensitivity of the NAT test may be.

So I think that the position that we've taken is that we, too, are optimistic that questions may prove to be redundant and unnecessary once screening is in place, but we would like to get clinical data first on how well the tests perform.


DR. SKINNER: Jay, I don't know if you were prepared to do this today, if you're in a position. Since this committee met last time, the BPAC committee has met and considered a couple questions related to West Nile virus. And I guess I'm curious if you can update us as to the status of those.

One of those was, I understand the FDA is currently evaluating whether or not to accept as conclusive the inactivation data of West Nile from the fractionation manufacturers and whether you've reached a conclusion whether their data is conclusionary.

And the second would be in terms of the rollout of the NAT testing, whether or not you've yet reached a conclusion whether that would be implemented across the board for both recovered and source plasma.

DR. EPSTEIN: Well, I'm not exactly sure I've understood your question. With respect to inactivation, the issue, as it has been posed to us by the fractionation industry, is whether we can accept data on other Flaviviruses as adequate to assure safety with regard to the West Nile virus.

Now, the FDA's position is that we're seeking validation on the comparability of alternative viruses such as BVDV to West Nile obtained through direct spiking experiments with West Nile. And we have not yet reached a conclusion that we can accept a model of comparability, that is to say, utilized BVDV or other Flaviviruses as marker viruses.

On the other hand, we have stated in the October 2002 guidance and in the current revised guidance that we do believe that the products are currently safe based on the available knowledge on clearance of other Flaviviruses. But we are pursuing that matter and are in very active dialogue with the fractionation industry and their trade organization over what would constitute adequate demonstration of comparability for clearance of West Nile versus other Flaviviruses. And then we'll act accordingly.

So we haven't reached a conclusion, I think is the answer to your question, but we consider the query itself to be legitimate, and the industry is beginning to provide the agency with data that could resolve the matter.

Your second question I believe is whether--are you asking whether the questions apply, or are you asking whether screening would apply? I didn't quite understand.

DR. SKINNER: No, and perhaps your answer to the first question of whether or not the data is--you know, whether you have good clearance data will answer the second question. But if the first question would result in a high level of confidence that there's an activation of West Nile virus, is it possible that the NAT testing would only be required for the blood community and not for the plasma community?

DR. EPSTEIN: Yes, well, that question has been posed, and I think that it's premature to conjecture an answer until we're convinced of adequate clearance through inactivation and physical removal or partition of the virus. And our concept at the moment is that studies are needed in the source plasma arena to clarify such things as the prevalence of infections in that donor population, the viral titer in donors found positive, the impact of those findings on the likelihood of presence of detectable virus in a plasma pool were there not to be screening, and then to compare that to the margin of safety achievable through viral clearance.

So I think we are willing to entertain that dialogue, but I think that the data to reach a conclusion are not yet at hand. But the agency, again, has actively engaged the issue. We've heard it. And we will come to closure when we feel that we have had adequate data provided.


COLONEL FITZPATRICK: Jay, last year the industry had a voluntary withdrawal of frozen products that were produced during the endemic period, and I don't see a reference in the document to the production of frozen products. Or is the implication that once we are--if we perform the screening, that it is considered appropriate to go ahead and freeze as we normally would? Or is there in FDA thought that we would suspend freezing in an endemic period?

DR. EPSTEIN: Well, FDA, as you know from your quick read, has not taken a position on that issue right now, and I think that we will have to address it down the road.

You may or may not be aware that in Canada there was a very highly proactive program to over-collect and freeze plasma for transfusion use, and for better or for worse, that was not the case in the U.S. that I'm aware of.

So I think that we may have to take action again in 2003, but we're not in a position today to know whether that's necessary.

DR. BRECHER: Jay, I want to thank you for spending the time on this. I think the committee appreciates the time spent on the guidance.

I would like to recommend to the committee that they take the letter from

DR. Carmona, read it carefully tonight, and we're going to have--I'm pretty sure we're going to have some serious discussion about that. John?


MR. Chairman, while it's still fresh in our mind, I'd like to move for the adoption of the IgIV resolution as presented with background materials this morning. As a motion, I'd propose the following: The Advisory Committee recognizes that intravenous immunoglobulin, IgIV, is derived from pooled human plasma, IgIV is fractionated from the same source material used to produce human-derived clotting factor for the treatment of hemophilia; therefore, the Advisory Committee recommends that CMS amend the definition of blood and blood products to include IgIV and reflect the need to provide continuing access to plasma-based therapies used to treat chronic diseases and life-threatening conditions. The Advisory Committee further recommends that CMS establish parity of payment rates across different billing dosages while at the same time assuring payment rates that adequately reflect the unique costs of safety associated with the production of plasma therapies.

DR. BRECHER: I'm going to take the Chair's prerogative in that I think in general the committee is in favor of this, but as with all recommendations, we like to put it on the screen and wordsmith it a little bit, and so I would suggest that we hold this until tomorrow.

So if everyone would agree with that, I'd like to hold it for tomorrow and we'll adjourn for now.

Okay. A couple other housekeeping announcements. One is, of course, the affidavits from when we were sworn in. Please get those to Mac today.

That's it. Okay. Now we're adjourned.

[Whereupon, at 4:48 p.m., the committee was adjourned, to reconvene at 8:55 a.m., Friday, May 2, 2003.]