DEPARTMENT OF HEALTH & HUMAN SERVICES 	 Office of Inspector General 
Washington, D.C.  20201 
OCT 222010 

TO: 	 Donald M. Berwick, M.D. 
Administrator 
Centers for Medicare & Medicaid Services 
FROM:  Stuart Wright 
Deputy Inspector General 
for Evaluation and Inspections 
SUBJECT: 	 Memorandum Report:  Paymentfor Drugs Under the Hospital Outpatient 
Prospective Payment System, OEI-03-09-00420 
This memorandum report presents the results ofour review comparing Medicare payment 
amounts for 32 selected separately payable drugs covered under the hospital Outpatient 
Prospective Payment System (OPPS) to hospital acquisition costs.  Certain stakeholders! have 
expressed concerns about the OPPS payments for separately payable drugs, including that 
(1) Medicare payment amounts may substantially exceed acquisition costs for 340B hospitals, 
and (2) Medicare payment amounts may be lower than acquisition costs for non-340B 
hospitals. 
We found that, in the aggregate, Medicare payments were 31 percent higher than acquisition 
costs among responding 340B hospitals and 1 percent higher than acquisition costs among 
responding non-340B hospitals for the selected separately payable drugs.  For the individual 
drugs, the Medicare payment amounts for more than half exceeded non-340B hospital 
acquisition costs.  The Medicare payment amounts for the remaining drugs purchased by 
non-340B hospitals were below average acquisition costs, albeit by a small amount (between 
0.6 percent and 11 percent). 
BACKGROUND 
Medicare Part B Coverage of Prescription Drugs 
Although Medicare Part D covers most outpatient prescription drugs, the Centers for 
Medicare and Medicaid Services (eMS) continues to cover a limited number of outpatient 
prescription drugs under its Part B benefit.  Part B-covered drugs generally fall into the 
I Examples of stakeholders expressing concern are:  the American Hospital Association, the Alliance of 
Dedicated Cancer Centers, the New Jersey Hospital Association, and the Plasma Protein Therapeutics 
Association. 
OEI-03-09-00420  Payment for Drugs Under the OPPS  Page 2  Donald M. Berwick, M.D. 
 
 
following categories:  drugs furnished incident to a physicians service (e.g., injectable drugs 
used in connection with the treatment of cancer); drugs explicitly covered by statute         
(e.g., some vaccines and oral anticancer drugs); and drugs used in conjunction with durable 
medical equipment (e.g., inhalation drugs).2  Medicare beneficiaries can receive                 
Part B-covered drugs in several settings, including physician offices and hospital outpatient 
departments.   
 
OPPS 
Prior to 2000, Medicare largely based payments for hospital outpatient services on reasonable 
costs.  Congress replaced the reasonable cost-based payment method with a prospective 
payment system in which Medicare pays a predetermined, fixed amount.3, 4  In 2000, CMS 
implemented OPPS to pay hospitals for Part B outpatient services including, but not limited 
to, certain Part B-covered drugs.   
 
OPPS Payment for Drugs 
The OPPS payment for drugs is generally divided into two categories:  separately payable 
drugs and packaged drugs.   
 
Separately payable drugs.  CMS makes a discrete payment for Part B-covered drugs when 
estimated per-drug, per-day costs are greater than $60 (for 2009).5  CMS also makes separate 
payments for drugs with pass-through status, regardless of whether they exceed the packaging 
threshold of $60 per day per drug.6, 7  Prior to 2010, CMS made separate payments for 
several antiemetic drugs (antinausea drugs typically administered to cancer patients) 
regardless of cost.8   
 
For the purposes of this review, separately payable drugs generally refer to any drugs that 
Medicare made a separate payment for under the OPPS in 2009; i.e., drugs that have per-day 
costs above the $60 threshold, pass-through drugs, and certain antiemetics.  Medicare and its 
beneficiaries paid approximately $3 billion for separately payable drugs provided in hospital 
outpatient departments in 2007.9   
 
Packaged drugs.  With certain exceptions, packaged drugs are inexpensive Part B-covered 
drugs that do not exceed the OPPS packaging threshold ($60 per day per drug in 2009) and 
                                                 
2 68 Fed. Reg. 50428, 50429 (Aug. 20, 2003).   
3 Section 1833(t) of the Social Security Act (the Act), 42 U.S.C.  1395l(t); 42 CFR Part 419. 
4 Section 1833(t) of the Act, as added by the Balanced Budget Act of 1997, authorized OPPS.  The CMS final 
rule implementing OPPS is at 65 Fed. Reg. 18434 (Apr. 7, 2000).   
5 See 73 Fed. Reg. 68502, 68642 (Nov. 18, 2008) for CMSs methodology for setting the packaging threshold.  
6 Section 1833(t)(6) of the Act provides for temporary additional payments or transitional pass-through 
payments for certain new drugs.   
7 Section 1833(t)(6)(A) of the Act and 73 Fed. Reg. 68502, 68632 (Nov. 18, 2008).  
8 CMS removed this exemption from the packaging threshold in its rulemaking for 2010.  74 Fed. Reg. 60316, 
60487 (Nov. 20, 2009).     
9 Medicare Payment Advisory Commission.  A Data Book:  Healthcare Spending and the Medicare Program.  
June 2009.      
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 3  Donald M. Berwick, M.D. 
 
 
are not antiemetic or pass-through drugs.  CMS does not make separate payment for packaged 
drugs; it includes (i.e., packages) payment for these drugs as part of the payment for the 
treatment during which the drug is administered.   
 
OPPS Payment Methodology 
Since 2006, CMS has based the OPPS payment rate for separately payable drugs on average 
sales price (ASP).10  The ASP is a manufacturers sales of a drug to all purchasers in the 
United States in a calendar quarter divided by the total number of units of the drug sold by the 
manufacturer in that quarter.  The ASP is net of any price concessions, such as volume 
discounts, prompt pay discounts, cash discounts, free goods contingent on purchase 
requirements, chargebacks, and rebates other than those obtained through the Medicaid drug 
rebate program.11  Sales that are nominal in amount are exempted from the ASP calculation, 
as are sales excluded from the determination of best price in the Medicaid drug rebate 
program.12 
 
For drugs administered in a physicians office, the Medicare payment amount is set by the Act 
at 106 percent of the ASP.13  Although the OPPS also bases payment for separately payable 
drugs on ASP, the Act does not define a set payment methodology.  Rather, CMS annually 
updates the payment methodology (i.e., the percentage added to or subtracted from the ASP) 
for separately payable drugs that are not pass-through drugs through the rulemaking process.  
After examining Medicare claims data to gauge hospital acquisition costs for the drugs and 
overhead costs, CMS set the 2009 Medicare payment amount for non-pass-through separately 
payable drugs at 104 percent of the ASP (see Table 1).14  The payment amount for             
pass-through drugs paid under the OPPS is equal to the payment amount for drugs in the 
physician office setting (i.e., 106 percent of the ASP), according to CMS.15  The Medicare 
payment amount for the OPPS is meant to cover both acquisition costs for the drugs and 
related overhead costs.16   
 
In previous rulemakings, CMS proposed various approaches for gathering information on 
how overhead costs are allocated and accounted for among particular drugs in hospital 
                                                 
10 70 Fed. Reg. 68516, 68640 (Nov. 10, 2005); section 1833(t)(14)(A)(iii)(II) of the Act.     
11 Section 1847A(c) of the Act.   
12 See section 1847A(c)(2) of the Act.  Pursuant to section 1927(c)(1)(C)(i) of the Act, best price is the lowest 
price available from the manufacturer during the rebate period to any wholesaler, retailer, provider, health 
maintenance organization, nonprofit entity, or governmental entity within the United States, with certain 
exceptions. 
13 Section 1847A(b)(1) of the Act.   
14 The method used to calculate Medicare payment amounts for separately payable drugs under OPPS did not 
change for 2010.  See 73 Fed. Reg. 68502, 6865168659 (Nov. 18, 2008) for an explanation of how CMS 
determined payment rates for 2009. 
15 The payment methodology is updated annually.  However, Medicare payment amounts under OPPS are 
updated quarterly based on changes to the manufacturer-reported ASPs.   
16 73 Fed. Reg. 68502, 68656 (Nov. 18, 2008). 
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 4  Donald M. Berwick, M.D. 
 
 
outpatient pharmacies.17  Hospitals claimed that all of these approaches would be 
administratively burdensome, and CMS did not implement any of them.  Additionally, CMS 
does not specifically define what constitutes overhead costs. 
               
             Table 1:  Medicare Payment Amounts for Drugs Under OPPS in 2009 
Drug Type  OPPS Payment Amount for 2009 
Separately payable drugs (drugs that 
exceed the $60 threshold and some  104 percent of ASP  
antiemetics in 2009)  
Separately payable drugs (pass-through 
106 percent of ASP 
drugs) 
Packaged drugs  Not applicable; payment included in related service 
Source:  Office of Inspector General (OIG) analysis of Medicare payment under OPPS and                                         
73 Fed. Reg. 68502 (Nov. 18, 2008).   
 
340B Program 
The Medicare payment amounts for drugs under the OPPS are the same for all types of 
hospital outpatient departments.  However, hospital acquisition costs vary widely and certain 
hospitals are able to purchase drugs at reduced prices.   
 
The 340B Drug Pricing Program (340B Program), overseen by the Health Resources and 
Services Administration (HRSA), was created to assist entities that provide services to 
disproportionately low-income, uninsured, and underinsured populations and allow them to 
purchase drugs at reduced prices.  Under the 340B Program, pharmaceutical manufacturers 
agree to charge at or below statutorily defined prices, known as the 340B ceiling prices, for 
certain sales to certain covered entities.18  Therefore, eligible entities that participate in the 
340B Program should have lower acquisition costs for many drugs.  Eligible 340B entities 
include disproportionate share hospitals, Ryan White grantees, State-operated AIDS drug 
assistance programs, and black lung clinics, among others.  As of March 2010, approximately 
14,500 entities were enrolled in the 340B Program.19, 20   
 
                                                 
17 See 74 Fed. Reg. 60316, 6049960501 (Nov. 20, 2009) for a discussion of CMSs proposals for accurately 
paying overhead costs.  
18 The Veterans Health Care Act of 1992, P.L. No. 102-585,  602, which is codified as section 340B of the 
Public Health Service (PHS) Act, established the 340B Program.  See 42 U.S.C.  256b. 
19 HRSA, Covered Entity Database.  Accessed at http://www.hrsa.gov on April 29, 2010. 
20 Because the 340B Program requires each location to be registered individually in HRSAs Covered Entity 
database, and a 340B entity may have several satellite sites, the database includes multiple entity listings 
associated with the same organization. 
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 5  Donald M. Berwick, M.D. 
 
 
Drugs purchased under the 340B Program by disproportionate share hospitals (hereinafter 
referred to as 340B hospitals) are paid for under the OPPS when administered to Medicare 
beneficiaries in an outpatient setting.21  A 340B hospital is defined as:  
 
  being owned or operated by a unit of State or local government, a public or private 
nonprofit corporation which is formally granted governmental powers by a unit of State or 
local government, or a private nonprofit hospital which has a contract with a State or local 
government to provide services to low-income individuals;  
 
  having a disproportionate share adjustment percentage22 greater than 11.75 percent or 
being described in section 1886(d)(5)(F)(i)(II) of the Act; and  
 
  not obtaining covered outpatient drugs through a group purchasing arrangement.23   
 
Sales to covered entities through the 340B Program are not included in the calculation of the 
ASP.24  If 340B sales were included, the ASPs would be lower because of 340B entities 
eligibility for substantially lower drug prices.  Medicare claims data from 340B hospitals are 
included when CMS determines the Medicare payment amount for separately payable  
non-pass-through drugs under the OPPS each year. 
 
METHODOLOGY 
 
Scope 
We compared first-quarter 2009 Medicare payment amounts to first-quarter 2009 hospital 
acquisition costs for 33 separately payable drugs from 2 separate random samples of hospitals 
in the United States that participate in Medicare:  1 sample of 99 340B hospitals and another 
sample of 110 non-340B hospitals.  This study includes only separately payable drugs; i.e., 
we excluded packaged drugs from our analysis because CMS does not calculate a separate 
Medicare payment amount.  See Appendix A for a list of the drugs under review.   
 
Data Sources and Collection 
Drugs and Medicare payment amounts.  Separately payable drugs are identified and billed 
using Healthcare Common Procedure Coding System (HCPCS) codes.  Each HCPCS code 
defines the drug name and the dosage amount represented by the HCPCS code but does not 
specify manufacturer or package size information.  We obtained a list of the top 30 separately  
                                                 
21 Section 7101 of the Affordable Care Act extended participation in the 340B program to certain childrens 
hospitals, cancer hospitals, critical access and sole community hospitals, and rural referral centers.  However, 
these changes took effect after the time period covered by this review.   
22 See section 1886(d)(5)(F) of the Act for the definition and calculation of the disproportionate share adjustment 
percentage.  
23 HRSA, Introduction to 340B Drug Pricing Program.  Accessed at http://www.hrsa.gov on March 16, 2010.      
42 U.S.C.  256b(a)(4)(L). 
24 Sections 1847A(c)(2)(A) and 1927(c)(1)(C)(i)(I) of the Act.   
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 6  Donald M. Berwick, M.D. 
 
 
payable HCPCS codes by Medicare expenditures in 2008 from CMS.  We included                
3 additional HCPCS codes at CMSs request for a total of 33 drugs.25  We obtained                 
first-quarter 2009 Medicare payment amounts under the OPPS for the selected drugs from 
CMSs Web site.   
 
Hospital acquisition costs.  We selected two random samples:  one for 340B hospitals and one 
for non-340B hospitals.  We obtained a list of 340B hospitals from HRSAs Covered Entity 
database in July 2009.  This database contains the name and contact information for all 340B 
hospitals.  From this list we selected a random sample of 100 340B hospitals.26  We removed 
1 of the selected hospitals because of an ongoing OIG investigation for a sample size of 99.   
To select the sample of non-340B hospitals, we obtained the Online Survey, Certification, and 
Reporting database.  This database contains the names and contact information of hospitals 
participating in Medicare nationwide.  We first removed 340B hospitals (as identified in the 
HRSA database) from this list and selected a random sample of 110 non-340B hospitals from 
the remaining facilities.27  
 
In September 2009, we sent written surveys to the hospitals in our two samples.  For each of 
the 33 drugs under review, we asked the hospitals to provide their first-quarter 2009 
acquisition costs, any discounts or rebates for these purchases, the number of units purchased, 
and whether the purchases were made through the 340B Program.  In addition, we asked 
hospitals to indicate whether the drugs were for outpatient use.  We sent up to two written 
followup surveys to nonresponding hospitals in our samples between October and            
November 2009.  Additionally, we conducted multiple followup phone calls with 
nonresponding hospitals to elicit a higher response rate.  See Appendix B for a detailed 
methodology.   
 
Between October and December 2009, 94 340B and 110 non-340B hospitals responded to our 
survey and 90 340B and 77 non-340B hospitals provided some acquisition cost data.  Not all 
hospitals in the sample purchased all of the drugs under review.  Therefore, the number of 
hospitals with acquisition cost data for each drug varied widely.  For example, less than  
10 hospitals in each sample reported any purchases for 6 of the drugs.  See Appendix C for 
the number of hospitals providing data per drug.  
 
We also asked hospitals to provide data on their pharmacy overhead costs.  Per CMSs 
recommendation, we did not include a specific definition of overhead costs in our survey.  
Based on public comment, CMS believed that if OIG were to provide examples of overhead 
costs in its survey, responding hospitals might interpret the examples as legal definitions of 
overhead costs.  Given that CMS itself has not explicitly defined these costs for individual 
                                                 
25 Two of the thirty-three drugs had pass-through status in the first quarter of 2009.  See Appendix A.   
26 As of July 2009, there were 2,541 340B hospitals listed in HRSAs Covered Entity Database.  We identified 
and linked related entities into units we refer to as purchasing agents because we wanted our sampling units to 
be entities that purchase drugs either for themselves or on behalf of affiliated entities.  This sample was drawn 
from a universe of 851 hospital purchasing agents.   
27 This sample was drawn from a universe of 5,305 hospitals.  
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 7  Donald M. Berwick, M.D. 
 
 
drugs, we did not want to establish a definition that could be the source of future conflict 
between the agency and hospitals.  Therefore, hospitals had minimal guidance in providing 
these data.  Absent a consistent definition of overhead costs, we were not able to determine 
how these self-reported figures relate to any additional costs that are meant to be reimbursed 
under the payment amount for each individual drug. 
 
Data Analysis 
From the list of hospitals that provided acquisition cost data, we removed 1 340B hospital and       
29 non-340B hospitals that did not participate in the OPPS.28  Our subsequent analysis was 
based on these data reported by the remaining 89 340B hospitals and 48 non-340B hospitals.  
We excluded 1 drug (Q4101) from our analysis because of low reported utilization  
(one 340B and one non-340B hospitals reported purchasing Q4101), resulting in a total of     
32 separately payable drugs under review. 
 
For both hospital types (i.e., 340B and non-340B), we aggregated the hospitals acquisition 
costs data by the appropriate HCPCS code.  We then calculated volume-weighted average 
acquisition costs (hereinafter referred to as average acquisition costs) by totaling the 
acquisition costs, net of any discounts and rebates, for each drug and dividing them by the 
total units purchased among all facilities for each drug.  We determined the percentage 
difference between CMSs first-quarter 2009 ASP-based Medicare payment amount for each 
drug and the average acquisition costs for both hospital types.  To determine the aggregate 
difference between CMSs first-quarter 2009 ASP-based Medicare payment amounts and total 
acquisition costs among all 32 drugs for both 340B and non-340B hospitals, we:  
 
  determined the total acquisition costs for the 32 drugs among each hospital type by 
summing the data reported by all respondents; 
 
  multiplied the total units purchased for each drug, as reported by hospitals, by the drugs 
Medicare payment amount to calculate the total amount that hospitals would have paid for 
all selected drugs if their acquisition costs equaled Medicare payment amounts; and 
 
  calculated the percentage difference between the total amount that would have been paid 
had the acquisition cost equaled Medicare payment amounts and the total amount paid for 
the 32 drugs, as reported by 340B and non-340B hospitals. 
 
Limitations 
The analysis and results in this report are based only on self-reported data received from 
responding hospitals in our sample.  We were unable to make projections to the universe of 
hospitals because of the limited number of hospitals that purchased certain drugs as well as 
the large number of hospitals removed from our analysis. 
 
                                                 
28 Examples of non-340B hospitals that are not paid under OPPS include critical access hospitals and hospitals in 
Maryland.  42 CFR  419.20(b).   
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 8  Donald M. Berwick, M.D. 
 
 
Standards 
This study was conducted in accordance with the Quality Standards for Inspections approved 
by the Council of the Inspectors General on Integrity and Efficiency. 
 
RESULTS 
 
Medicare Payments to Responding 340B Hospitals for Separately Payable Drugs Were  
31 Percent Higher Than Their Aggregate Acquisition Costs 
In the first quarter of 2009, the aggregate Medicare payment amount was 31 percent higher 
than drug acquisition costs for 340B hospitals providing data.  Despite stakeholder concerns, 
this is an expected result given the purpose of the 340B Program.  In fact, for the 32 drugs 
under review, the Medicare payment amount exceeded acquisition costs for 89 percent of the 
drug purchases (by dollars) made by responding 340B hospitals.  Medicare payment amounts 
for 28 drugs were between 1 percent and 222 percent higher than average acquisition costs.  
For the remaining four drugs, Medicare payment amounts were between 0.5 percent and         
8 percent below acquisition costs.  Chart 1 illustrates the range of differences between average 
acquisition costs and Medicare payment amounts for 340B hospitals.  See Table D-1 in 
Appendix D for a comparison of Medicare payment amounts to average acquisition costs 
among 340B hospitals for each of the 32 drugs. 
 
Chart 1.  Comparison of Medicare Payment Amounts to Average Acquisition Costs 
for 340B Hospitals 
240%
230%
220%
210%
200%
190%
180%
170%
160%  
150%
Medicare payment amounts for 28 of 32 drugs were greater 
140%
ence 112300%% than average acquisition costs 
Differ 110100%%
ge  90%
a
nt 80%
ce 70%
Per 60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40% Average Acquisition Cost 
-50%
J1566 J1572 J1568 J1459 J1561 J1569 J9055 J1745 J9035 J2778 J2357 J1785 J9263 J3487 J3488 J9264 J9305 J2505 J0885 J0881 J9355 J9170 J9041 J9310 J9217 J9001 J2323 J0152 J0256 J2353 J9201 J9206
Source:  OIG analysis of 340B hospital acquisition cost data and first-quarter 2009 Medicare payment amounts. 2010. 
 
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 9  Donald M. Berwick, M.D. 
 
 
A substantial majority of the drugs under review29 have Medicare payment amounts that are 
higher than average acquisition costs because the 340B Program enables eligible entities        
(e.g., 340B hospitals) to purchase drugs at reduced prices based on the fact that the 
populations served by these entities are disproportionately low-income, uninsured, and 
underinsured.    Furthermore, the lower sales prices to 340B entities are not included when 
manufacturers calculate ASPs (i.e., the basis of hospital payment for separately payable drugs 
is not reduced by the inclusion of 340B prices).   
 
Medicare Payments to Responding Non-340B Hospitals for Separately Payable Drugs 
Were 1 Percent Higher Than Their Aggregate Acquisition Costs 
In the first quarter of 2009, the aggregate Medicare payment amount was 1 percent higher 
than drug acquisition costs for non-340B hospitals providing data.  For the 32 drugs under 
review, the Medicare payment amount exceeded acquisition costs for slightly more than half 
of the drug purchases (by dollars) by responding non-340B hospitals (54 percent).   
 
The Medicare payment amount for more than half of the selected drugs (18 of 32) exceeded 
hospitals acquisition costs by between 0.3 percent and 130 percent.  The Medicare payment 
amounts for the remaining drugs (14 of 32) were below average acquisition costs, albeit by a 
small amount (between 0.6 percent and 11 percent).  For non-340B hospitals, the difference 
between Medicare payment amounts and average acquisition costs was less than 5 percent for 
22 of the 32 drugs under review.  The lack of substantial differences is an expected result 
given that these hospitals do not have access to the reduced prices of the 340B program.  
Chart 2 illustrates the range of differences between average acquisition costs and Medicare 
payment amounts for non-340B hospitals.  See Table D-2 in Appendix D for a comparison of 
Medicare payment amounts to average acquisition costs for non-340B hospitals for each of 
the 32 drugs.  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                 
29 The four drugs with Medicare payment amounts below average acquisition costs are intravenous immune 
globulin products.  According to hospital responses, a substantial majority of the purchases for these drugs were 
not made through the 340B Program.   
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 10  Donald M. Berwick, M.D. 
 
 
Chart 2.  Comparison of Medicare Payment Amounts to Average Acquisition Costs 
for Non-340B Hospitals 
140%
130%
120%
110%
 
100%
Medicare payment amounts for 22 of 32 drugs were within  
90% 5 percent of average acquisition costs 
80%
nce 70%
e
Differ 60%
ge  50%
a
nt 40%
ce
Per 30%
20%
10%
0%
-10%
-20%
Average Acquisition Cost 
-30%
-40%
J2505J1569J1785J9170J1566J1745J1568J1572J2357J2323J1459J0152J1561J9041J0256J9263J9305J9201J9264J9001J9055J3487J2778J9355J9310J2353J9035J3488J0885J9217J0881J9206
Source:  OIG analysis of non-340B hospital acquisition cost data and first-quarter 2009 Medicare payment amounts, 2010. 
 
 
CONCLUSION 
 
In this report, we compared Medicare payment amounts under the OPPS to hospital 
acquisition costs.  We found that, in the aggregate, Medicare payment amounts were             
(1) substantially higher than acquisition costs for 340B hospitals and (2) similar to acquisition 
costs for non-340B hospitals.  This is an expected result given the purpose of the 340B 
Program.   
 
The Medicare payment amount for separately payable drugs under the OPPS is based on 
manufacturer-reported ASPs.  Because ASPs do not reflect 340B prices (which are generally 
lower than other sales prices), a substantial majority of the drugs purchased by 340B hospitals 
have Medicare payment amounts that are higher than average acquisition costs.  Similarly, 
because non-340B hospitals do not have access to reduced prices, the ASP-based Medicare 
payment amounts are closer to their acquisition costs.  Although for some individual drugs the 
Medicare payment amount was slightly below average acquisition costs at non-340B 
hospitals, the fact that overall payment levels exceeded costs leads us to conclude that 
stakeholder concerns about underpayment were unfounded.   
 
This report is being issued directly in final form because it contains no recommendations.  If 
you have comments or questions about this report, please provide them within 60 days.  
Please refer to report number OEI-03-09-00420 in all correspondence. 
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 11  Donald M. Berwick, M.D. 
 
 
APPENDIX A 
Table A-1.  Drugs Under Review 
HCPCS Code1  Short Description  HCPCS Code Dosage 
J0152  Adenosine injection  30 mg2 
J0256  Alpha 1 proteinase inhibitor  10 mg 
J0881  Darbepoetin alfa, non-ESRD3  1 mcg2 
J0885  Epoetin alfa, non-ESRD  1000 units 
J14594, 5  Privigen injection  500 mg 
J1561  Gamunex injection  500 mg 
J1566  Immune globulin, powder  500 mg 
J15684  Octagam injection  500 mg 
J1569  Gammagard liquid injection  500 mg 
J1572  Flebogamma injection  500 mg 
J1745  Infliximab injection  10 mg 
J1785  Injection Imiglucerase /unit  1 unit 
J2323  Natalizumab injection  1 mg 
J2353  Octreotide injection, depot  1 mg 
J2357  Omalizumab injection  5 mg 
J2505  Injection, pegfilgrastim  6 mg 
J2778  Ranibizumab injection  0.1 mg 
J3487  Zoledronic acid  1 mg 
J34885  Reclast injection  1 mg 
Doxorubicin HCl liposome 
J9001  injection  10 mg 
J9035  Bevacizumab injection  10 mg 
J9041  Bortezomib injection  0.1 mg 
J9055  Cetuximab injection  10 mg 
J9170  Docetaxel  20 mg 
J9201  Gemcitabine HCl  200 mg 
J9206  Irinotecan injection  20 mg 
J9217  Leuprolide Acetate suspension  7.5 mg 
J9263  Oxaliplatin  0.5 mg 
J9264  Paclitaxel protein bound  1 mg 
J9305  Pemetrexed injection  10 mg 
J9310  Rituximab injection  100 mg 
J9355  Trastuzumab  10 mg 
Q41014, 6  Apligraf skin sub  1 sq cm2 
Source:  Centers for Medicare & Medicaid Services (CMS) first-quarter 2009 Addendum B pricing file. 
1
 Healthcare Common Procedure Coding System. 
2
 mg=milligram; mcg=microgram; cm=centimeter.   
3
 ESRD is end stage renal disease.   
4
 Denotes HCPCS codes included in the review at CMSs request.   
5
 Denotes HCPCS codes for pass-through drugs.   
6 This code was excluded from our analysis because of the low response rate.   
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 12  Donald M. Berwick, M.D. 
 
 
APPENDIX B  Detailed Methodology 
 
340B Sample Selection 
We obtained a complete list of 340B hospitals from the Health Resources and Services 
Administrations (HRSA) Covered Entity database.  Because the 340B Program requires each 
location to be registered individually in HRSAs Covered Entity database, and a 340B entity 
may have several satellite sites, the database includes multiple entity listings associated with 
the same organization.  We identified and linked related entities into units we refer to as 
purchasing agents because we wanted our sampling units to be entities that purchase drugs 
either for themselves or on behalf of affiliated entities.   
 
We used the HRSA-assigned unique 340B identification number to group affiliated entities by 
purchasing agent.  This identification number consists of three segments:  first, a letter prefix 
that indicates the entity type; second, numbers assigned at HRSAs discretion; and third, if a 
site is related to another site, a terminal letter suffix.  An example of the unique identification 
number would be DSH1234A.  Using this number, we grouped entities together if their 
HRSA identification numbers differed only by letter suffix and counted each grouping as one 
purchasing agent.  For example, to link DSH1234A to other entities, we would have grouped 
it with DSH1234B and DSH1234C.  Each group of entities was counted as one purchasing 
agent.  Entities with no listed affiliates were each counted as one purchasing agent.  We 
selected a random sample of 100 340B purchasing agents.30, 31  For the purposes of this 
report, we refer to the purchasing agent and related satellite sites as a single 340B hospital.  
We removed 1 340B purchasing agent because of an ongoing OIG investigation for a sample 
size of 99. 
 
Data Collection and Analysis 
Prior to calculating and aggregating average acquisition cost figures for each of the sampled 
drugs, we examined the national drug codes (NDC), which are 11-digit drug identifiers, 
reported by the hospitals for each Healthcare Common Procedure Coding System (HCPCS) 
code to determine whether they were valid and associated with the correct code.  We used the 
Centers for Medicare & Medicaid Services HCPCS crosswalk file (a file that links NDCs to 
their associated HCPCS codes) to make this determination.  We excluded all NDCs (and the 
associated cost data) that were not associated with a HCPCS code under review.  In 
calculating the average acquisition cost, we identified any outliers among the costs reported 
by hospitals and removed them from our analysis.  We defined an outlier as an average 
acquisition cost reported by a facility that fell more than three standard deviations from the 
mean.   
 
 
                                                 
30 As of July 2009, there were 2,541 340B hospitals listed in HRSAs Covered Entity Database.  There are a total 
of 851 purchasing agents. 
31 This sampling method for the selection of purchasing agents for 340B entities has been used previously by the 
Office of Inspector General (OIG).  See Review of 340B Prices, OEI-05-02-00073, July 2006.  
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 13  Donald M. Berwick, M.D. 
 
 
APPENDIX C 
 
Table C-1.  Number of Hospitals Providing Data per Drug 
HCPCS Code1  340B Hospitals  Non-340B Hospitals 
J0152  37  22 
J0256  7  6 
J0881  44  20 
J0885  69  35 
J1459  8  3 
J1561  14  8 
J1566  18  10 
J1568  6  2 
J1569  25  8 
J1572  12  9 
J1745  64  28 
J1785  8  3 
J2323  25  8 
J2353  33  14 
J2357  26  6 
J2505  60  25 
J2778  3  2 
J3487  54  22 
J3488  44  24 
J9001  36  11 
J9035  54  18 
J9041  39  13 
J9055  48  12 
J9170  59  14 
J9201  56  17 
J9206  50  14 
J9217  41  11 
J9263  55  19 
J9264  28  4 
J9305  42  11 
J9310  62  22 
J9355  51  17 
Q41012  1  1 
Source:  Office of Inspector General analysis of hospital responses.   
1 Healthcare Common Procedure Coding System. 
2
 Denotes the HCPCS code excluded from the analysis.   
Note:  Outliers and other invalid data were excluded from these figures. 
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 14  Donald M. Berwick, M.D. 
 
 
APPENDIX D 
 
Table D-1.  Comparison of Medicare Payment Amounts to Average Acquisition  
Costs for 340B Hospitals 
Percentage Difference 
HCPCS Code*  Medicare Payment  Average Acquisition  Between Medicare 
Amount  Cost Point Estimate  Payment Amount and 
Acquisition Cost 
J1566  $28.87  $31.21  -7.50% 
J1572  $34.92  $36.34  -3.92% 
J1568  $36.18  $36.52  -0.93% 
J1459**  $34.16  $34.33  -0.49% 
J1561  $34.86  $34.42  1.28% 
J1569  $34.71  $32.75  5.97% 
J9055  $48.80  $41.04  18.91% 
J1745  $55.85  $46.95  18.95% 
J9035  $56.30  $47.10  19.53% 
J2778  $398.92  $330.09  20.85% 
J2357  $17.88  $14.62  22.29% 
J1785  $4.02  $3.25  23.57% 
J9263  $9.39  $7.59  23.75% 
J3487  $211.15  $170.62  23.75% 
J3488**  $218.51  $175.01  24.86% 
J9264  $8.90  $7.12  24.98% 
J9305  $47.31  $36.97  27.95% 
J2505  $2,135.09  $1,633.68  30.69% 
J0885  $9.03  $6.86  31.54% 
J0881  $3.00  $2.23  34.78% 
J9355  $60.48  $43.79  38.12% 
J9170  $330.59  $230.16  43.63% 
J9041  $35.59  $24.63  44.52% 
J9310  $525.21  $362.08  45.06% 
J9217  $206.11  $136.96  50.49% 
J9001  $432.93  $274.37  57.79% 
J2323  $7.76  $4.90  58.32% 
J0152  $69.09  $41.93  64.77% 
J0256  $3.64  $2.06  76.41% 
J2353  $103.83  $56.72  83.06% 
J9201  $135.58  $53.06  155.52% 
J9206  $21.31  $6.62  221.76% 
Source:  Office of Inspector General (OIG) analysis of first-quarter 2009 Medicare payment amounts and 340B acquisition cost data. 
* Healthcare Common Procedure Coding System.   
** Denotes HCPCS codes for pass-through drugs.   
OEI-03-09-00420          Payment for Drugs Under the OPPS   Page 15  Donald M. Berwick, M.D. 
 
 
Table D-2.  Comparison of Medicare Payment Amounts to Average Acquisition                       
Costs for Non-340B Hospitals 
Percentage Difference 
Medicare Payment  Average Acquisition  Between Medicare 
HCPCS Code 
Amount  Cost Point Estimate  Payment Amount and 
Acquisition Cost 
J2505  $2,135.09  $2,389.83  -10.66% 
J1569  $34.71  $38.26  -9.28% 
J1785  $4.02  $4.42  -9.13% 
J9170  $330.59  $355.19  -6.92% 
J1566  $28.87  $30.34  -4.86% 
J1745  $55.85  $58.68  -4.82% 
J1568  $36.18  $37.42  -3.32% 
J1572  $34.92  $36.04  -3.10% 
J2357  $17.88  $18.34  -2.52% 
J2323  $7.76  $7.88  -1.55% 
J1459*  $34.16  $34.67  -1.48% 
J0152  $69.09  $70.00  -1.31% 
J1561  $34.86  $35.20  -0.96% 
J9041  $35.59  $35.79  -0.55% 
J0256  $3.64  $3.63  0.25% 
J9263  $9.39  $9.32  0.77% 
J9305  $47.31  $46.78  1.14% 
J9201  $135.58  $133.67  1.43% 
J9264  $8.90  $8.76  1.56% 
J9001  $432.93  $425.90  1.65% 
J9055  $48.80  $47.96  1.75% 
J3487  $211.15  $207.43  1.79% 
J2778  $398.92  $390.00  2.29% 
J9355  $60.48  $59.03  2.45% 
J9310  $525.21  $510.47  2.89% 
J2353  $103.83  $99.37  4.49% 
J9035  $56.30  $53.39  5.45% 
J3488*  $218.51  $206.27  5.93% 
J0885  $9.03  $7.69  17.48% 
J9217  $206.11  $160.27  28.60% 
J0881  $3.00  $2.13  41.17% 
J9206  $21.31  $9.27  129.80% 
Source:  OIG analysis of first-quarter 2009 Medicare payment amounts and non-340B acquisition cost data. 
* Denotes HCPCS codes for pass-through drugs.   
 
OEI-03-09-00420          Payment for Drugs Under the OPPS